Sebastian Sinclair

<div id="highlights-block_62009ed1d6876" class="highlights">
 <ul>
 <li>China has debuted its digital yuan to foreign visitors and athletes during the 2022 Winter Olympic Games in Beijing</li>
 <li>Senator Pat Toomey is asking policymakers to keep a watchful eye on the performance of the eCNY, labeling it as a means to &#8220;facilitate illicit money flows,&#8221; and its capacity to enhance &#8220;China’s surveillance capabilities&#8221;</li>
 </ul>
 
</div>



China has debuted an international trial for its central bank digital currency (CBDC) at the 2022 Beijing Winter Olympics amid concerns from US Senator Pat Toomey (R-Pa.) over the potential for the digital yuan to circumvent US sanctions.



Digital yuan trials, which have been ongoing domestically since 2019, were introduced to athletes and foreign visitors on Thursday as a means to pay for goods inside the Olympic Village alongside Visa payments and cash. 



China is hoping to boost the digital yuan&#8217;s presence throughout the country with the Winter Olympics as its platform to showcase to the rest of the world.



The trial follows China&#8217;s recently announced list of <a href="https://coingeek.com/china-intensive-blockchain-trial-involves-164-entities-in-beijing-shanghai/" target="_blank" rel="noreferrer noopener">164 national blockchain</a> entities to join domestic retail CBDC tests that will examine the feasibility of its product across a wide range of industries. Crypto is banned in the communist state, but China is a strong proponent of blockchain technology, albeit in a much more private, centralized and censored form.



In a <a href="https://www.banking.senate.gov/imo/media/doc/toomey_letter_to_yellen_and_blinken_on_digital_yuan.pdf" target="_blank" rel="noreferrer noopener">letter</a> penned by the senator to Treasury Secretary Janet Yellen and Secretary of State Antony Blinken on Wednesday, Toomey asked policymakers to &#8220;closely examine Beijing’s CBDC rollout&#8221; during the games and to provide his office with a briefing by Mar. 7.



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">&#8220;Analysts have raised the eCNY’s potential to subvert US sanctions, facilitate illicit money flows, enhance China’s surveillance capabilities and provide Beijing with “first mover” advantages, such as setting standards in cross-border digital payments,&#8221; Toomey wrote.</blockquote>



Toomey is requesting knowledge on the CBDC rollout, including its distribution, user experience and the underlying source code to determine &#8220;ulterior motives,&#8221; censorship features or security flaws, according to the letter.



The senator is also seeking answers regarding the extent to which non-Chinese government officials, including the US, transacted in the digital yuan, among other requests. He said China’s crackdown on crypto presents an opportunity for the US to be the &#8220;forerunner&#8221; of crypto innovation, &#8220;grounded in individual freedom, and other American and democratic principles.&#8221;



Toomey, who is a member of the US Senate Committee on Banking, Housing and Urban Affairs, has long advocated for crypto regulation with a “do no harm” mindset and has previously asked the Securities and Exchange Commission to avoid hindering innovation as the US continues to figure out how to best approach fintech innovation.



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CBDC

China Debuts Digital Yuan at Winter Olympics Amid Warnings From US Senator

Macauley Peterson

<div id="highlights-block_61d465da7eee2" class="highlights">
 <ul>
 <li>Government attempts to marginalize open public blockchains were a theme of 2021</li>
 <li>Government attempts to marginalize open public blockchains were a theme of 2021 New wallet is available for both iOS and Android</li>
 </ul>
 
</div>



Chinese efforts to roll out a digital yuan got a boost on Tuesday with the availability of a digital wallet for iOS and Android, according to the China blockchain news service <a href="https://twitter.com/BlockBeatsChina/status/1478213772288622595?s=20" target="_blank" rel="noreferrer noopener">Blockbeats</a> and <a href="https://www.reuters.com/markets/currencies/china-cbank-launches-digital-yuan-wallet-apps-android-ios-2022-01-04/" target="_blank" rel="noreferrer noopener">Reuters</a>.



The new app will link users&#8217; phone numbers to payment services provided by commercial banks using the Chinese central bank digital currency (CBDC). The eCNY is expected to eventually replace the payment rails offered by WeChat Pay and AliPay, the leading digital payment services in the country, <a href="https://cms.blockworks.co/china-isnt-replacing-wechat-pay-and-alipay-payment-rails-yet/">Blockworks previously reported</a>.



Coinciding with the digital wallet release, the People’s Bank of China unveiled its <a href="http://www.pbc.gov.cn/goutongjiaoliu/113456/113469/4438627/index.html" target="_blank" rel="noreferrer noopener">&#8220;FinTech Development Plan (2022-2025)&#8221;</a> today, which shows the importance financial planners place on the digitization of the economy. In the roughly 700-word document, the PBoC mentions “digital” (数字) 14 times.



Although neither blockchain technology, nor cryptocurrency is specifically discussed in the high-level overview, the trend has been toward exerting greater control over the trajectory of the country’s digital economy to ensure government access to financial data.



“What China is doing should be framed as less a currency issue…and more of a data issue,” <a href="https://twitter.com/SALTConference/status/1450568979005779982?s=20" target="_blank" rel="noreferrer noopener">said Yaya J. Fanusie</a>, adjunct Sr. Fellow at the Center for a New American Security at the SALT Conference in October 2021.



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“We assess that China’s playing a different game or strategy with this project. It’s really trying to develop a digitized economy, and it’s trying to lay down infrastructure where the government can capture financial data,&#8221; said Fanusie.</blockquote>



Last year saw Chinese officials successfully expel most of the country’s Bitcoin mining operations over the Summer, <a href="https://cms.blockworks.co/chinas-global-bitcoin-hash-power-slips-to-0-heres-why/" target="_blank" rel="noreferrer noopener">effectively crushing</a> the contribution to the Bitcoin network&#8217;s hashing power within the country, and pushing the miners that remain <a href="https://www.cnbc.com/2021/12/18/chinas-underground-bitcoin-miners-.html" target="_blank" rel="noreferrer noopener">further underground</a>.



In November, officials moved to <a href="https://cms.blockworks.co/huobi-turns-off-derivatives-desk-in-china/" target="_blank" rel="noreferrer noopener">curtail derivatives trading</a> on the mainland and <a href="https://cms.blockworks.co/chinas-tech-giants-yes-on-nfts-no-on-cryptocurrencies/" target="_blank" rel="noreferrer noopener">set ground rules</a> for NFT marketplaces.



In its FinTech Development Plan, the PBoC laid out ​​”eight key tasks,” including accelerating the application of regulatory technology and capabilities, and building “a financial and technological risk firewall.”



Among US politicians, there is a clear <a href="https://cms.blockworks.co/senators-cant-agree-on-path-for-stablecoin-regulation-during-hearing/" target="_blank" rel="noreferrer noopener">lack of consensus</a> on how best to proceed with a government-issued digital dollar, as well as the specific contours of private stablecoin regulation. 



Some, like Rep. Brad Sherman (D-CA), have advocated following China’s lead in taking a hard line against all crypto assets. Other members of Congress argue for allowing room for innovation to develop, more in line with industry experts who warn that companies <a href="https://cms.blockworks.co/crypto-industry-will-move-offshore-if-congress-doesnt-act-executives-warn/" target="_blank" rel="noreferrer noopener">may be pushed overseas</a> if the regulatory situation in the US is not clarified.



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<hr class="wp-block-separator"/>

China Pilots Mobile Digital Wallet for eCNY Push

Sam Reynolds

<div id="highlights-block_61bc6ea326563" class="highlights">
 <ul>
 <li>Russia is accelerating efforts to develop a CBDC in light of possible sanctions on its financial industry from the US and EU</li>
 <li>At the same time, the country is preparing a bill for lawmakers that would have a “zero tolerance” approach to cryptocurrency</li>
 </ul>
 
</div>



With the threat of Russian banks being possibly disconnected from the global financial system, Moscow is working to develop a central bank digital currency (CBDC) in an effort to give its domestic banks international liquidity should this happen. 



As the world waits to see if Moscow intends to invade Ukraine, American officials are reportedly talking to their counterparts in Europe about preparing a broad sanctions package, which could include banning Russian banks from using the<a href="https://www.bloomberg.com/news/articles/2021-12-16/u-s-pushes-eu-to-ready-russia-sanctions-hitting-energy-banks" target="_blank" rel="noreferrer noopener"> SWIFT interbank system</a>. Such a move would curtail Russian banks&#8217; access to foreign liquidity in the form of the world’s major currencies such as dollars, euros or yen. 



The Bank of Russia is cognizant of the risks this presents to the broader stability of the Russian banking system should this occur and is accelerating efforts on <a href="https://www.cbr.ru/eng/press/event/?id=12523" target="_blank" rel="noreferrer noopener">developing a CBDC</a>. According to a white paper published by the bank, a prototype is due by the end of December, with trials expected to begin in January. In the second stage of trials, expected by mid-2022, the Bank of Russia is expected to invite non-banking partners such as exchanges and credit institutions to the network. 



In addition, the bank is expected to make the digital ruble freely convertible to foreign currencies and is encouraging foreigners to own the CBDC. Its whitepaper mentions smart contract-like vehicles to automatically convert the digital ruble into foreign currencies. 



This contrasts with China’s approach to its CBDC, the eCNY, which is not meant to internationalize China’s currency, the CNY, but rather to <a href="https://cms.blockworks.co/experts-chinas-cbdc-is-all-about-finance-control/" target="_blank" rel="noreferrer noopener">wrest control of payments</a> and money supply away from AliPay and WeChat Pay while improving the efficiency of ‘cross-border’ flows of capital between mainland China and its territories of Hong Kong and Macu. 



In addition, the Russian ruble is <a href="https://www.cbr.ru/eng/dkp/exchange_rate/" target="_blank" rel="noreferrer noopener">freely convertible</a> with foreign currencies, a policy first <a href="https://www.aljazeera.com/news/2006/7/1/russia-makes-rouble-fully-convertible" target="_blank" rel="noreferrer noopener">implemented in the mid-2000s</a> to make it easier for foreign companies to invest in Russia and for Russian companies to invest globally. China’s currency is not freely convertible, thus Chinese firms use Hong Kong as a <a href="https://www.deacons.com/2016/03/31/chinese-companies-going-outbound-will-continue-to-use-hong-kong-as-an-investment-platform/" target="_blank" rel="noreferrer noopener">launchpad for foreign investment</a>.   



The effort comes as authorities in Russia are preparing to present a bill to lawmakers that would push for a zero tolerance, total ban of crypto in the country.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">12:40:00 &#8211; RUSSIAN CENTRAL BANK TO SEEK BAN ON INVESTMENT IN CRYPTOCURRENCIES IN RUSSIA &#8211; TWO FINANCIAL MARKET SOURCES&mdash; db (@tier10k) <a href="https://twitter.com/tier10k/status/1471460198665666564?ref_src=twsrc%5Etfw">December 16, 2021</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



The Bank of Russia recently <a href="https://cbr.ru/press/event/?id=12526">banned mutual funds</a> from investing in crypto or creating listed digital asset macro proxies.&nbsp;



It’s not yet known how extensive this ban on crypto would be, or if it would be eventually watered down like India’s supposed ban. In India, what was first called a ban on all “private cryptocurrency” <a href="https://cms.blockworks.co/cabinet-note-says-no-crypto-ban-in-india-only-regulation/" target="_blank" rel="noreferrer noopener">eventually morphed into a ban on private crypto wallets</a>, requiring traders to only use registered accounts on exchanges for KYC/AML and tax compliance reasons.&nbsp;



The other option would be for the digital ruble to become the required on-ramp for crypto, which is something that India is said to be considering for its CBDC. This would satisfy KYC/AML requirements while also giving Russia’s CBDC liquidity via interest from crypto traders living in-country. It would also curb the use of Tether for <a href="https://www.coindesk.com/business/2019/07/30/millions-in-crypto-is-crossing-the-russia-china-border-daily-there-tether-is-king/" target="_blank" rel="noreferrer noopener">cross-border transactions</a> between Russia and China, which is said to have daily volume in the tens of millions because of the lack of international liquidity of either currency abroad. 



The sense of urgency in Russia’s CBDC development might fade should the US not use a SWIFT ban as a deterrent for invading Ukraine. While it is reportedly being considered, there’s also <a href="https://www.ft.com/content/21a9b239-f68c-4821-9586-8d60b8c044f0" target="_blank" rel="noreferrer noopener">concern that this ‘nuclear option’</a> would have undesirable downstream effects — including potentially decreasing the dollar’s global dominance. 



The Bank of Russia did not respond to Blockworks’ requests for comment.



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<hr class="wp-block-separator">

Russia Accelerates CBDC Efforts as US, EU Ponder SWIFT Ban of Russian Banks

<div id="highlights-block_6182a703a8a51" class="highlights">
 <ul>
 <li>China’s PBoC stands up for user privacy vs. big tech</li>
 <li>140 million people have used China&#8217;s CBDC</li>
 </ul>
 
</div>



Hong Kong Fintech Week — As Hong Kong is China’s outward-facing financial center, Hong Kong Fintech Week serves as a sort of state of the union for developments in China’s fintech space.



Given that Hong Kong is <a href="https://www.bbc.com/news/business-59059092" target="_blank" rel="noreferrer noopener">sacrificing its connections with the world with hopes that Beijing opens up a quarantine-free path</a> to mainland China, the event continues to take a very China-specific theme — and one that business alignment authorities in both Hong Kong and Beijing seem to prefer. It was at Hong Kong Fintech Week 2019 that China <a href="https://cms.blockworks.co/analysis-what-exactly-is-chinas-cbdc/" target="_blank" rel="noreferrer noopener">fleshed out the plan for its CBDC</a>, and where Hong Kong’s security regulator, the Securities and Futures Commission (SFC), announced its first legal guidance for crypto custody. 



<h3 class="wp-block-heading">PBoC chief warns big tech about privacy</h3>



The Day 1 opening keynote speech, delivered by People’s Bank of China (PBoC) Governor Yi Gang, wasn’t about developments in China’s digital yuan — one of the most-watched topics by the foreign press — but rather about strengthening China’s digital privacy laws to keep big tech’s demand for data in line. 



“Big data is at the heart of the above-mentioned technologies. The companies that have large data traffic could accumulate data, and acquire new customers,” Yi said in remarks streamed from Beijing. “They could enjoy steady data flow if customers remain loyal. As a result, big techs have increasingly gained an upper hand in assessing, using and storing data.”



Even though Yi did not name Ant Group, it’s important to view these remarks in context to Beijing’s <a href="https://www.bloomberg.com/news/features/2020-12-22/jack-ma-s-empire-in-crisis-after-china-halts-ant-group-ipo" target="_blank" rel="noreferrer noopener">annoyance with Ant Group and Jack Ma</a>. Ant Group’s ubiquitous super-app commands a considerable amount of retail payment volume within the country, so much so that some experts have argued that China’s push to introduce a CBDC i<a href="https://cms.blockworks.co/experts-chinas-cbdc-is-all-about-finance-control/" target="_blank" rel="noreferrer noopener">s about wrestling away control of the nation’s money supply</a> from the company.



Ma himself has been a vocal critic of China’s “<a href="https://www.bloomberg.com/news/articles/2021-10-19/ant-s-record-ipo-remains-in-limbo-a-year-after-china-crackdown">anachronistic</a>” regulations while Chinese antitrust cops debate behind closed doors if the company needs to be carved up into smaller firms.&nbsp;



But, again, at the core of this, is data — the lifeblood that Ant Group runs on — which is something the PBoC can regulate without a fight that spooks investors.&nbsp;



“Protection of personal privacy is a must, when each and every one of us has a record in data. Some big techs have either collected data without permission or misused them,” Yi said, citing the success of the EU’s General Data Protection Regulation (GDPR) regime. “There are also cases of customer data leakage. Therefore, it is urgent to strengthen personal data protection.”



Yi didn’t introduce new legislation on stage or set a timeline for when to expect something. Instead he said, “Going forward, we will continue to improve the legal framework for personal data protection in the financial sector and strengthen regulation accordingly.”&nbsp;



<h3 class="wp-block-heading">Hong Kong bitcoin ETF?</h3>



Given the success of <a href="https://cms.blockworks.co/how-the-first-north-american-bitcoin-etf-made-it-across-the-finish-line/" target="_blank" rel="noreferrer noopener">bitcoin ETFs in Canada</a>, Europe, <a href="https://cms.blockworks.co/proshares-bitcoin-futures-based-etf-to-begin-trading-tuesday/" target="_blank" rel="noreferrer noopener">and now the US</a>, the question on everyone’s mind is will Hong Kong’s securities regulators allow for a Hong Kong-listed bitcoin ETF?



The short answer is that the Hong Kong SFC doesn’t have an answer yet for investors eager for a listed local crypto product.



As of now the SFC is reviewing its crypto legislation to see if it&#8217;s compatible with the concept of a bitcoin ETF, Julia Leung, the SFC’s Deputy Chief Executive Officer said on stage. Hong Kong limits the sale of cryptocurrency to professional investors, which would severely limit the market for a bitcoin ETF in the territory.



Indeed, the whole appeal of bitcoin ETFs is for retail investors to get exposure to crypto via a regulated structure.&nbsp;



While Leung didn’t have an answer as to when a bitcoin ETF might be approved — or formally denied — in Hong Kong, she did say that the SFC has received multiple requests from large ETF issuers on the possibility of a bitcoin ETF on Hong Kong’s exchange. But until the SFC releases more concise guidance on the topic, it’s impossible to say if there will be a Hong Kong bitcoin ETF.&nbsp;



<h3 class="wp-block-heading">140 million wallets</h3>



One hundred and forty million wallets — 10 million of those from retailers or other corporations — have been created to use China’s eCNY, the world’s first functional CBDC, according to Mu Changchun, director-general of digital currency research at the PBoC.&nbsp;



Of the 10 million corporate accounts created, there are 1.55 million merchants currently on the platform including retailers, utilities, government services and transportation providers. China’s vast train network has accepted the eCNY since late last year as have many city’s subway systems.&nbsp;



But Mu didn’t give an official launch date for China’s eCNY. It is widely expected to make its debut at the 2022 Winter Olympics Beijing and surrounding areas in February because PBoC officials and event organizers were hoping to first introduce it to foreign visitors as a way to save on international currency exchange fees or the uncertainty of foreign-issued credit cards not working in-country.



However, due to Covid-19, <a href="https://www.scmp.com/news/world/europe/article/3150649/no-overseas-fans-beijing-olympics-organisers-unveil-coronavirus" target="_blank" rel="noreferrer noopener">international visitors will not be allowed</a> at the games, making it uncertain if it will be the venue for the technology’s grand debut.

Hong Kong Fintech Week: User Privacy, Bitcoin ETFs and CBDCs

<div id="highlights-block_60f706c171afe" class="highlights">
 <ul>
 <li>The People’s Bank of China released a whitepaper outlining its progress on the eCNY and clarifying some important points </li>
 <li>This comes as the PBoC reports that the eCNY has surpassed 34.5 billion yuan ($5.3 billion) in transaction value during its tests</li>
 </ul>
 
</div>



Interoperability with current digital payment systems, a domestic retail focus, and co-existence with physical cash are some of the key themes of China’s Central Bank Digital Currency, the eCNY, <a href="http://www.pbc.gov.cn/en/3688110/3688172/4157443/4293696/2021071614584691871.pdf">according to a new white paper</a> released by the People’s Bank of China.&nbsp;



Since <a href="https://cms.blockworks.co/analysis-what-exactly-is-chinas-cbdc/">China’s eCNY</a> was <a href="https://www.theasset.com/treasury/39173/pbocs-new-digital-currency-will-accelerate-chinas-cashless-journey">thrust into the spotlight</a> in 2019, a lot has been said about the project with some calling it “China’s bitcoin”.



Although bitcoin is mentioned in the report, as a prelude when introducing the current era of digital payments, there’s no correlation between the two in the report.



In fact, if anything, the opposite: “Given their lack of intrinsic value, acute price fluctuations, low trading efficiencies and huge energy consumption, they can hardly serve as currencies used in daily economic activities. In addition, cryptocurrencies are mostly speculative instruments, and therefore pose potential risks to financial security and social stability,” the report read.



<h3 class="wp-block-heading">Reality check</h3>



The reality is a bit more bland. China’s central bank knows that cash usage is declining because physical cash is bulky and not as convenient as digital payment via a mobile phone. But at the same time, relying on intermediaries like digital wallets means that control of cash — and the economy — is now in the hands of big tech.



As a result, People’s Bank of China officials are more concerned about stablecoins than bitcoin.&nbsp;



Stablecoins are digitized money tied to fiat currency. The People’s Bank of China is watching the rise of stablecoins and seeing parallels to the popularity of mobile payments apps like Alipay — which boasts <a href="https://www.statista.com/statistics/1211923/china-leading-payment-apps-based-on-monthly-active-users/">676 million</a> monthly active users.&nbsp;



Both involve using a digital representation of money that’s stored in a commercial bank account. While the growth of stablecoins is impressive, coming in at a market cap of $108 billion with volume of $45 trillion, they are relegated to one part of the economy. Stablecoins are primarily used for digital assets trading, and occasionally for remittances, but they are firewalled to one section.&nbsp;



Mobile payments in China, however, effectively are retail payments. According to a People’s Bank of China survey cited in the white paper, in 2019 during a measured period 66% of retail transactions occurred by mobile payments while 7% occurred via card.



In total, cash was passed over by 46% of people who chose a combination of mobile payments, card or stored value card instead.&nbsp;



From the end of 2016 to the end of 2020, cash in circulation (M0) only rose from RMB 6.83 trillion in 2016 to RMB 8.43 trillion. This hasn’t kept pace with the supply of commercial bank money (M2) which ended 2020 at just over RMB 220 trillion, from around 150 trillion in 2016.&nbsp;



In a 2019 column, China-based VC and Coindesk columnist Dovey Wan pointed out that the supply of M2 money has led to an annual growth rate of this money supply at around 15%, faster than the year-on-year GDP growth rate of 10%. This is mostly due to the digitization of currency because of the popularity of mobile payments like Alipay, and other drivers like commercial bank loans as well as P2P lending.



“To get ahead of it requires a new financial system altogether. That’s what’s intended with the Digital RMB, a project that’s conceived of as a means of reasserting monetary control in the interests of financial stability,” she wrote.&nbsp;



Of course mobile wallets like Alipay are not going away anytime soon. It’s just that the payment rails will be replaced.&nbsp;



“eCNY will provide the public with a new interoperable way of payment, which will further diversify payment instruments and make the payment system more efficient and safer. The Chinese authorities support coordinated development of various payment methods,” the People’s Bank of China paper reads.



<h3 class="wp-block-heading">Not challenging the US dollar</h3>



A popular narrative is that the success of the eCNY will finally give the Chinese currency enough liquidity to take on the US dollar in the global economy. But this isn’t something that the eCNY is intended to do, according to the paper.



Instead, People’s Bank of China delineates that there are two versions of the eCNY: one, issued to commercial banks for large-value settlement, and another issued for retail transactions. And one to replace the US dollar? Not quite.&nbsp;



“The internationalization of a currency is a natural result of market selection. The international status of a country’s currency depends on its economic fundamentals and the depth, efficiency and openness of its financial markets,” the paper reads. “Though technically ready for cross-border use, eCNY is still designed mainly for domestic retail payments at present.”



But despite some thinking that the eCNY will instantly mean the internationalization of China’s currency, it seems the People’s Bank of China has acknowledged the barriers that its strict control of the CNY’s liquidity place on its potential for internationalization — namely the capital controls of currency leaving the country, and a pegged exchange rate.



Crypto investor Tim Draper pointed out <a href="https://forkast.news/tim-draper-predicts-us-digital-dollar-chinese-dcep-will-bomb/">during a podcast</a> that a digital version of a fiat currency is still one and the same, subjected to political whims and guided by “the politician on the top.”&nbsp;&nbsp;



“I wouldn’t want to take Chinese digital currency anymore than I’d want to take renminbi,” Draper has been quoted as saying. “If you digitize [the] renminbi, you are still stuck with most of the problems that you have with current political currency, with fiat currency.”