China Tech Giants Face New Challenges from Utilizing Digital Yuan

In the past few years, Tencent Holdings Ltd and Ant Group Co. have digitized the Chinese currency. In addition, the companies have set up substantial private payment networks and cryptocurrency mining operations that have led to the global bitcoin boom.

The two companies broke from the aggressive Chinese financial centralization, which has been in China’s history for years.

The issue comes as China is focused on distributing the digital currency before the 2022 Beijing Winter Olympics. According to Chinese officials, the initiative aims to strengthen the Chinese monetary system.

Why do Tech Companies Feel Threatened?

In the past, the Chinese government has taken a strong stand against cryptocurrency mining. The move consequently drove away major tech companies to flee to Russia, Canada, and other countries. Now, the government aims at exerting more pressure. According to reports, the government will be requiring payment businesses to submit to traditional banking regulations.

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According to the head of the digital currency research wing of the People’s Bank of China, Mu Changchun, the Chinese Yuan can provide a backup to the inherently unpredictable private systems. “If something bad happens to them, financially or technically, that could bring a negative impact on the financial system’s stability in China,” he said.

The two tech companies will have to cooperate. Without sharing details, both have noted they’re working with the government on the e-CNY. Mu also notes that digital Yuan won’t replace WeChat Pay or Alipay, which make up about 90% of China’s $35 trillion mobile payment market. 

Experts believe that once the digital Yuan is in wide circulation, it is likely to strike the digital-payments operations of China’s largest e-commerce and fintech companies such as Tencent Holdings and Alibaba Group Holding. 

Problems that Could Face the Chinese Digital Yuan

Bloomberg believes that China will have a hard time persuading the world to use e-CNY if need be. China has been testing cross-border e-CNY payments with Hong Kong, Thailand, and the United Arab Emirates. These efforts have drawn criticism from the U.S government, who suspect the digital Yuan could undermine the dollar as the global reserve currency.

However, the Chinese government refuted such concerns.

However, state-backed research groups have proposed issuing the digital Yuan to countries engaged in China’s “Belt and Road” initiative. According to Wilson Chow, the cross-border use of the e-CNY could be attractive for mundane practical reasons. 

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Wilson Chow is the global technology, media, and telecommunications leader at consultants PwC. Chow believes that such benefits could lead to more countries minting their digital currencies. “The U.S. won’t be left behind. “There will be a race,” says Chow.