Bankless 77 - China's Digital Currency Revolution | Richard Turrin
Primer: Richard Turrin has a background in finance and has spent his last decade in Shanghai. In his book titled Cashless, he demystifies common Western misconceptions of China's Central Bank Digital Currency (CDBC). In this episode of Bankless, he sheds light on China's CBDC and goes deep into the details.
Origins
Best-selling author
Former Fintech executive at IBM
20-year career with a global investment bank
Spent the last decade in Shanghai
Wrote a book called Cashless which describes the digital currency revolution happening in China right now
China's Central Bank Digital Currency (CBDC)
China has a digital currency strategy for the past 10 years
They are currently moving from phase 1 to phase 2 of their digital currency system
However, the West remains uninformed about it
China is a big user of digital currency through WeChat and Alipay. It is not a central bank digital currency. It is a corporatized system that is made into an easy mobile payment system
"And that's why I often say and I know it's controversial, I often say that FinTech in the West, US and EU is a lie. Yeah, they made the interface better. But underneath it all they are stuck on this rails, on the credit card rails, which basically are taking your money." - Richard Turrin
Total amount of mobile payments in 2020 is 3.7 times the GDP of China. This is due to payment flows in cyclic fashion (e.g. person A paying for coffee to the coffee vendor; person B paying back person A; cash flow from coffee vendor to the bank)
China's digital GDP is 37.8% while US and UK are 9% and 7.7%, respectively
Digital payment version 1.0 introduced free payments for all. Enables the economy to digitize to a much deeper level
Digital payment version 2.0:
Make cash digital
Do not need credit card issuers (e.g. Visa, Mastercard) and third-party companies (e.g. Alipay) to handle payment
A Regular Day Of Someone Living In China
In US, people just use Google Pay and Apple Pay for payments
However, in China, digital payment is only a very small sliver of what WeChat and Alipay deliver. What they deliver is this concept of a 360 degree lifestyle platform
Social media service; WhatsApp on steroids
A little bit of Facebook rolled into it
Alipay
Killer feature is selling stuff like Amazon
Has complete banking services, investment services, and life insurance, etc
What Happens On A Regular Day
Start the day texting people with WeChat
Sending money to the landlord using WeChat
In 2014, People's Bank of China (PBOC) licensed the first private digital banks
Subsequently, digital banks are allowed to handle payments and money management (e.g. buying stocks, bonds, etc)
Other banks have their banking apps on WeChat and Alipay
Can use it to pay for your subway trip
Difference Between The East And The West
People in the West rather trust banks than big tech
Tech in the West copying China (Facebook copying QR codes)
In 2014, when their central bank and banking regulator licensed the first private banks, the banks were already ready
Alibaba is the equivalent of Amazon
Tencent/WeChat is the equivalent of Twitter/Facebook
Baidu is the equivalent to Google
Suning is China's largest electronics retailer
China has a massive unbanked population and the way to reach them was through digital means
Fintech companies in the West are not allowed to have a banking license. They are all built on top of a bank. Only a few of them are allowed banking licenses
"And by giving a banking licenses to these digital players, they [Chinese government] cracked open the ability of big tech to reach people and increase the quality of life and the GDP coming out of tiny little villages where there's never going to be a brick and mortar bank ever, because they're just too small." - Richard Turrin
Closing of the banking system to big tech in order to maintain the monopolies of the incumbent banks
Banks VS Tech Firms In The US
"The US banking system is complacent, and has been allowed to become complacent because of regulatory protection, which has essentially shielded it from the digital revolution that's happening everywhere else." - Richard Turrin
Regulatory paradigm of banks and tech firms on the opposing ends of the spectrum
Office of the Comptroller of the Currency (OCC) tried to have a Fintech banking charter but the big banks challenged the concept and the idea is now stuck in limbo
People in the West have low trust of big tech
When the PBOC granted digital licenses to the four big digital players in China, they knew that it would take away revenue from state-owned banks
Were The Banking Licenses Meant To Bring Chinese Big Tech Firms Closer To The Government?
No, it was meant to reduce the unbanked population as many people live in a rural environment
People in rural environments do not have access to banking services
By opening the banking system to big tech, they could bring these people into the banking system
Big tech grew until they became too big to fail and are larger than some of the largest banks in China
Chinese government decided that there needs to be some regulations in place. Hence, the recent crackdowns on them
Seriousness Of China's CBDC
China is serious about it
In 2014, China not only started issuing banking licenses, but also embarked on a digital currency project on their own. This was the direct result of finding crypto interesting
The CBDC is not designed to eliminate WeChat and Alipay
PBOC has been investigating digital currencies since 2014, with the goal of understanding how to make digital payment part of a central bank function
Started the first trials in the city of Shenzhen in September 2020 and have been continuing trials in other cities ever since
It will be integrated with everything (e.g. electric company, subway, online retailers), for all age groups (e.g. elderly who do not have cell phones), and different mediums (e.g. gadgets, cards, phone-to-phone transfers without a signal)
Will be probably be launched in 2022 during the 2022 Olympics or shortly after
Difference Between Digital Cash and CBDC
For digital cash (such as WeChat/Alipay), the money is not on the phone itself, but in an account somewhere. It is transferred from one account to another using a 3rd party system. An account-based monetary system
CBDC and crypto is a digital representation of money. Money is on the phone. The long digital string that is a representation of money resides in the digital wallet and on the phone. Can transfer the money from party to party without the need for 3rd party services
"And it's a facility that the Fed is uncomfortable handing out, because it means a fundamental change in the banking system and a releasing of power from the banks, from Visa and MasterCard, from these third party entities, and it empowers people." - Richard Turrin
The Fed is just starting their research now. EU is further down the road than the Fed is as they have made a commitment to CBDCs
Benefits of CBDCs
Improved tax collection, AML enforcement
Financial inclusion
22% of American adults are classified as either unbanked or underbanked. If they are given immediate access to banking services through digital currencies, it would improve their lives
Ample evidence that digital services have improved the lives of people living in small villages in China
Design Of China's CBDC
Token based, not account based
It's not disrupting the banks. It's a 2-tier system that preserves the role of banks
It's not blockchain technology, but blockchain-inspired
Uses a UTXO model, which allows asynchronous transactions (e.g. putting 2 cell phones next to each other and using NFC to transfer money when they are offline). Once they go online, the transactions will be sent for verification
Wallets with private keys
Chinese government considering incorporating smart contracts into it
Blockchain is not used as it cannot handle the transactions per second. During the peak of Singles' Day, Alipay processed 500,000 transactions per second. This is beyond what a blockchain can handle
Can use CBDC without having a bank account. Rolling out credit card-style devices for the elderly to use
For large amounts of money, people will still be using bank accounts
Won't have a bank run. It's like a credit card where there is spending limits
Two forms of intelligence built into CBDCs
Big data. There are certain things you can do/cannot do with it
Smart contracts. Will be rolled out in the later stages
Identity Verification in China's CBDC
Each phone is registered to a person
Will have an app that is linked to a bank or WeChat/Alipay
Apps have security such as facial recognition and/or passwords
When a transaction is made from one phone to another while online, the transfer is sent for verification in the verification center
Verification center checks whether the hash strings are valid
Verification center does not know user identity
The Big Data center is responsible for monitoring AML. Once they confirm an account is laundering money, they will produce their evidence to the police and the KYC center where action will be taken
CBDC offers a higher level of privacy to users than WeChat/Alipay
Every country looking into building their own CBDC will have to tackle the privacy and anonymity problem
Will China Export Its CBDC And Implications For The US Dollar
CBDC will eventually be used in international markets
Hong Kong Monetary Authority-PBOC research platform looking into an interoperability platform that's based between UAE and the Thai Central Bank
Every country that intends to use China's CBDC will have to have an agreement with them and be approved before being allowed to use it
Will be a slow rollout. First, to Belt and Road countries that are doing a lot of businesses with China. Second, to Regional Comprehensive Economic Partnership (RCEP) countries that all have a deal with China to promote their respective economies
Will be a threat to the US dollar. It reduces China's dependence on the dollar
Impact Of CBDCs On Crypto
Predict that CBDCs would not impact crypto
There's a lot of reasons why people like cryptocurrencies
Will arrive at a peaceful balance where everything coexist together
Crypto without KYC/AML is coming to a close. US Project Hidden Treasure is using Palantir to go after crypto whales
US' Eventual Response To China's CBDC
Will eventually be forced to look at crypto
Will figure out how to regulate stablecoins within the next 6 months
Will look at building their own CBDC, but CBDCs cannot be rushed out. China already has a 7-year headstart
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