China has been pushing forward its plans to launch a digital yuan, with the aim of becoming the first country in the world to offer a digital sovereign currency.
After launching trials of the Centralized Bank Digital Currency, or CBDC, in four Chinese cities—Shenzhen, Suzhou, Chengdu and Xiong’an—in May, China’s central bank, the People’s Bank of China, is now in talks with private companies to expand its test run. Major firms such as China’s largest ride-hailing company Didi Chuxing and food delivery giant Meituan Dianping are among the candidates to roll out the digital yuan on a large scale through their wide-reaching platforms.
“Trial needs to be underway,” said Lucy Gazamarian, an expert on mobile payments and co-chair of the blockchain committee of the FinTech Association of Hong Kong. Thorough testing of the digital currency is key, she says, because financial stability is at stake.
“You’re looking at rolling out a new digital currency, it’s a leap in innovation,” she said. “[I]t’s the first time we’re going to have money that we program to do things automatically; that has functionality.”
In an Eastworld Spotlight conversation with Fortune’s Clay Chandler, Gazmararian discusses Beijing’s digital yuan ambition and the challenges presented by the initiative, as well as the CBDC’s potential to elevate the renminbi to a reserve currency. The conversation below has been edited for length and clarity.
Fortune: What is DCEP and what has triggered the development of the Centralized Bank Digital Currency?
Lucy Gazararian: The DCEP, Digital Currency Electronic Payment, is China’s version of the CBDC. Many central banks have been looking at this for over five years. China was the first mover into this space [in 2013]. They’ve acknowledged themselves that it was the rise of Bitcoin that spurred a call to action to really take control of the money supply and different currencies that were coming into our world. That was a real trigger because central banks realized and appreciated that the technology that underpinned Bitcoin, for example, could be modified for the fiat world. Central banks have appreciated that this is an exceptional new innovation; that it’s a very exciting pool payments and payment systems [that has] the ability to really upgrade our payments infrastructure.
Tell us a bit about the trials in China.
It’s entirely reasonable that [Beijing] should be conducting pilot programs. You’re looking at rolling out a new digital currency, it’s a leap in innovation. It’s the first time we’re going to have money that we program to do things automatically; that has functionality. It’s natural that you [will] want to test that out very rigorously because you don’t want to roll out a digital currency that fails when you’re talking about financial stability of the whole country. But let’s not forget there are 680-plus cities in China. We’re talking about four [in the pilot], so it’s a way to go.
PBOC is taking a step back and looking at companies like DiDi. It got 90% of the ride-hailing business in China and has hundreds of millions of customers. Didi is an example of these Internet giants that China is so famous for—[such as] Alibaba and Tencent—that have incredible ecosystems that offers a whole range of products and services. You could order a taxi, get food delivery, send a parcel, book theatre tickets, go on a holiday, it’s all in one space, it’s a platform.
The trial needs to be underway. There’s a whole digital wallet integration that needs to be thought through…They are making sure they’re optimizing the functionality and ensuring integration.
Why is Beijing pushing for digital currency development? What can the government obtain from this?
It’s become, as China itself has said, a technical inevitability. It’s not about whether they should embark on this undertaking, it’s an absolute necessity. And it makes sense because look at our lives, increasingly we live our lives online. We have tech-enabled lives and are moving towards a digital economy; a digital economy which includes tokenization.
The new digital economy needs digital money. It needs fiat money in a digital format. Otherwise you’re having the threat of Bitcoin or Libra coins, or other coins that have the technology that can integrate into the new digital economy. So it’s an absolute necessity that China, as well as every other central bank, upgrades their currency.
When will we see a large-scale roll out of CBDC?
As I said earlier, we know about testing in four cities, and you know arguably there’s still 600 to go. Whether they’re gonna need to test it right across, or they will then just roll out, let’s wait and see. But we are expecting certainly phase one of this rollout to happen, I would say before the end of this year or certainly next year.
How will data be used by central banks and how will the central bank reassure people about the privacy of their data?
The data you are going to collect, there are two sides to it. On one side, the data that they’re going to collect, given they are going to be able to engage the complete economic activity of a country in realtime, that data will be recorded on a blockchain-type network, distributed ledger, we don’t know exactly. So the government will have access to all of that. On the [other] hand, it will enable the central bank to do their job more effectively. Because rather than having a lag in economic data, they’re monitoring all the spending, the transactions, money supply, inflation implications, all in realtime… Tracking where people go in the world, because CBDC will be available to Chinese as they do business in other countries. It’s almost a sort of a way to track an individual. So there are big alarming questions that need to be properly considered when it comes to privacy and anonymity.
The technology is there to enforce anonymity, but it’s a question of are they going to implement it? Is that something that they’re going to build into their currency? Time will only tell if different central banks come up with their versions of digital currency, as they say there is no one-size-fits-all, they’re all going to be different and likely to reflect the values and culture of their citizens. Are we just going to accept that all governments get to have this data like we’ve kind of accepted with tech giants like Facebook? No one has really done anything about it.
Could renminbi rise up as the world’s reserve currency through CBDC?
If [China] wants its currency to flow more freely outside of its own borders, it has the technological capability to do that. There’s so much trade happening in the Belt and Road [Initiative], 60-plus cities, and there is not a universal currency. The U.S. dollar is still the currency that needs to be translated, most huge transactions need to flow through the U.S. dollar. So there is a case for the CBDC to become a universal payment instrument in emerging countries as part of the Belt and Road, then [maybe] it could rise up as the world’s reserve currency for emerging countries.
We are [still] so early in this journey. At the end of the day, user adoption of any currency is going to take time. We need all these currencies to be developed and launched. It’s very difficult to say that a digital currency from China is going to be the new world reserve currency because the others have not launched yet. The U.S. dollar has dominated global trade since the end of World War II. It is so integral to our world economy, I don’t see that changing anytime soon.
The U.S. now has a digital dollar project; they are very aware of what is necessary. They know for a digital economy, you need a digital currency. So it’s a matter of time.
Does the pandemic in a way provide a kind of boost to the effort to move to a digital currency?
Absolutely. In the U.S., [House Speaker] Nancy Pelosi mentioned the digital dollar in her speech, and it was sadly tied to coronavirus, COVID-19. Suddenly, there was an absolute apparent use case. How do you get money immediately overnight into the hands of those that most need it? It is not by posting checks in the mail, it’s really not. If [people] had a digital wallet, they wouldn’t even need a bank account. They just need to use their smartphone and the Fed could theoretically directly deposit funds into their digital wallet. And that was so powerful.
I think for America, it was Libra and coronavirus that really triggered action [to develop CBDC]. And China, they’ve said it themselves, it was the threat of Bitcoin.
This story is part of Eastworld Spotlight, a series of conversations on matters of business, tech, and finance with executives, experts, entrepreneurs, and investors in Asia. Subscribe to Fortune’s Eastworld newsletter to get them in your inbox.
