1.
Asia Pacific Equity Research 19 July 2020
China's Digital Currency
Answers to 10 key questions to demystify PBOC's digital currency
· ​10 key questions on DC​: As China’s central bank digital currency (DC) enters into pilot trial stage, we note there is
rising interest in and misunderstanding of the topic. In this note, we provide background knowledge by comparing key
features of the PBOC’s DC vs cryptocurrencies and major stablecoins. We also offer our answers to 10 key questions
including those related to: a) the central bank’s goal behind developing DC, b) potential disruption from DC for banks,
major ePayment providers (i.e., Alipay and Tenpay), cross-border payments and monetary policy; and c) potential
evolution of DC.
· ​Our conclusion​ is that the PBOC’s DC is fundamentally different to crypto currencies and stablecoins. Its main
function, is to partially replace paper cash (M0) and supplement retail ePayments (C2C or C2B) in China. We also
conclude that at the initial stage, DC’s disruption for banks and existing payment providers will be immaterial as DC can
be integrated into the infrastructure of the incumbent players. There will be no impact on monetary policy and
cross-border payments as DC is not able to facilitate interbank payment at this point.
· ​Potential game changer when technologies supporting DC are mature and tested; then one potential evolution in
the long run is that DC will be expanded from partly replacing M0 to M1 & M2 – ​at that stage DC would facilitate
B2B, institutional and interbank transactions in the longer term. This could have a positive and far-reaching impact on
banks. In addition, international collaboration on DC may lead to a breakthrough in cross-border payments.
· ​For digital payment operators, particularly Tencent and Ant Financial, we expect negligible impact in the near
term as long as the scope of China’s digital currency remains M0 (cash in circulation)​. While the potential impact
will become much more complicated if the scope of China’s digital currency extends to M1 and M2 in the long term, our
analysis suggests Tenpay and Alipay’s dominance in China’s digital payment market is unlikely to be disrupted by such
developments. A more likely scenario, in our view, is that extension of DC to M1 and M2 will create a complementary
form of payment to the current payment solution such that it 1) mitigates the systemic risk of digital payment
concentration in two privately owned enterprises, 2) maximizes potential adoption by leveraging the existing digital
payment ecosystem, and 3) improves user experience and efficiency in use cases that current digital payment solutions
fail to address.

2.
Comparing China’s DC with cryptocurrencies and stablecoins
We find that there is a lot of misunderstanding about China’s digital currency development among investors. We
believe the investment community tends to overestimate the near-term implications of this development while
underestimating its long-term implications. As DC is only at a closed-system trial stage, there is limited
information on the nature of DC. But based on media reports (e.g., Caixin) and public comments by PBOC
officials, here are some basics:
· ​Collateralization​: DC is issued by China’s central bank, and it is part of M0 in China. Thus, unlike
asset-backed stablecoins, it does not need to be backed by financial assets, the way Libra does.
· ​Usage​: As China’s central bank DC is to substitute paper cash notes, thus it is part of M0. Therefore, it is not a
medium for interbank or institutional transactions. This means, at least at the initial stage, it will be mainly
used for C2C or C2B transactions. The primary goal of China’s DC is to facilitate retail payment transactions,
as it is not interest-bearing (similar to paper notes); wealth creation/enhancement is not one of its key
functions. DC is legal tender, so users in China cannot refuse to accept DC, when circumstances allow (i.e.,
having access to a smartphone with a DC wallet), indicating potential for a higher level of usage in China than
other cryptocurrencies and stablecoins.
· ​Technology​: The media (e.g., Sina) has reported that one of the technologies supporting the PBOC’s DC could
be distributed ledger technology (DLT) such as blockchain. We believe PBOC’s DC will also leverage other
technology. For example, the PBOC’s DC can work offline, likely supported by near-field communication
(NFC), in our view. Other technologies include 4G technology like LTE (long-term evolution), as China’s
major telecom service providers are also key participants in the trial program for DC. And media reports on
ABC (one of the big 4 banks) trialed version of DC suggests it also uses QR code technology.
· ​Valuation and stability​: The valuation or exchange rate of the PBOC’s DC will be the same as the RMB’s.
Thus, DC’s stability and liquidity would be better than that of asset-backed stablecoins and cryptocurrencies.
Note that JPM analyst Joshua Younger tracked one-year volatility of major cryptocurrencies (CC) and
stablecoins vs USD; he notes that daily volatility is 4-6% for major CC and 0.5% for major stablecoins; this is
much higher than daily volatility of CNY of 0.3%. For details about stablecoins, please refer to the section
“The market implications of Libra and other stablecoins” by Joshua Younger on page 41-50 of the report ​J.P.
Morgan Perspectives: Blockchain, digital currency and cryptocurrency: Moving into the mainstream? by
Joyce Chang and team.

3.
Please refer to Table 1 and Table 2 for key differences between China’s DC, CC and SC.
Table 1: Key difference among DCEP, stablecoins and cryptocurrencies on collateralization, technology, users and
primary use cases
Cryptocurrencies
(Bitcoin, Litecoin,
etc.)
Asset-backed
Stablecoins (Libra,
USDC, etc.)
Sponsored
Stablecoins
(JPM coin) PBOC’s digital currency (DCEP)
Collater
alizatio
n
o Uncollateralized
o Value is intrinsic to
the coin
o Reserves held at a
bank
o Transparency about
adequacy of collateral
varies by stablecoins
o Most stablecoins
claim to have a 1:1 fiat
collateral
o 1:1 redeemable
in fiat currency
held by J.P.
Morgan (e.g.,
US$)
o Uncollateralized
o It is legal tender, DC as M0 (cash in circulation), issued
by the PBOC and central government
Technol
ogy
o Uses blockchain
technology
o Public – open
access
o Uses blockchain
technology
o Public – open access
o In case of some
stablecoins (e.g.,
USDC) only exchange
customers can mint
(buy with USD) or
redeem (sell for USD)
stablecoins but anyone
can own or trade in
them
o Sponsor's
technology, for
JPM coin,
primary
technology is
Quorum, JPM's
blockchain
technology
o Permissioned
(i.e. enterprise
grade secure
blockchain
solutions built by
J.P. Morgan
and/or partners)
o Two layer of operations: 1st layer operator is PBOC
only; 2nd layer operators refer to infrastructure providers,
including telecom companies, ePayment companies and
banks
o In the 1st layer, the PBOC will adapt all relevant
technologies, and standardize network interfaces.
Technologies used include but not exclusive to
Blockchain, NFC, LTE, QR code, etc.
o Transactions of DC can be done offline, though
recording of transactions needs to be online
Users o Primarily retail
o Limited wholesale
investor base
o Retail
o Limited wholesale
investor base
o Exclusively for
institutional
customers
passing J.P.
Morgan KYC can
transact with
these coins (e.g.,
Banks, Broker
Dealers,
Corporates)
o Retail and corporate customers in C2C and C2B
payment transaction
Primary
use
cases
o Investment o Investment o Blockchain use
cases involving
payments
o it is mainly
used to facilitate
transactions
o C2C and C2B payment transaction
o As DC is M0, not M1, it will not be used to facilitate
transactions among financial institutions, including banks
Source: PBOC, J.P. Morgan.

4.
Table 2: Key differences among DCEP, stablecoins and cryptocurrencies on valuation, liquidity, regulation and their
latest status
Cryptocurrencies (Bitcoin, Litecoin, etc.)
Asset-backed stablecoins (Libra,
USDC, etc.)
PBOC’s digital currency
(DCEP)
V
al
u
at
io
n
v
ol
at
ilit
y
to
U
S
D
o Average one-year daily volatility by token for XRP,
ETH and BTC is ~5%
o 1-year daily volatility by major
stablecoins (Dai, True USD, USD coin,
Tether) is 0.5%
o DC is M0, its volatility is
same as RMB. Average
1-year daily volatility for
CNY is 0.3%
Li
q
ui
di
ty
o Bitcoin: 18.5mn in existence; total valuation is
equivalent to US$170bn as of July 15, 2020
o Litecoin: 65.5mn in existence; total valuation is
equivalent to US$2.8bn as of July 15, 2020
o Libra: NA (not released as of July 15,
2020)
o USDC: 1.1bn in circulation; total
valuation is equivalent to US$1.1bn
o DCEP: M0 in circulation
in China is RMB8.0trn
(US$1.1trn) as of end
May, but it is uncertain at
this stage what portion of
M0 be replaced by DC
R
e
g
ul
at
io
n
s
o The regulations vary by country and range from
apprehensive to full-scale acceptance:
a) The U.S. Federal government gives the right to
each state to make its own rules
b) Europe has taken an attentive stance towards
cryptocurrency. Switzerland has embraced
cryptocurrency in a non-regulatory manner. In
Germany, Bitcoin, which is regarded as a "unit of
account", is free to trade. Additionally, Bitcoin is
taxable when it comes to trade with Euros
o Stablecoins may comply with the
following regulations:
a) Regulations of money services
business
b) Regulations of securities or
commodities
c) Regulations of banking such as
deposit-taking and bank registration
d) Virtual currency specific regulations
(e.g., New York's BitLicense)
o It is regulated by PBOC
L
at
e
st
st
at
u
s
o Since the launch of Bitcoin in 2009, over 6,000
altcoins (alternative variants of Bitcoin, or other
cryptocurrencies) have been created.
Cryptocurrencies have also been used as an
investment, although several regulatory agencies
have issued investor alerts about Bitcoin
o Facebook has changed its plan for
the Libra project from making the Libra
token to support existing
government-backed currencies, such
us USD. The launch is planned to be in
2020
o USDC was launched in Oct 2018 and
is the fastest-growing, fully reserved
digital dollar stablecoin, issued by
regulated financial institutions, backed
by fully reserved assets, redeemable
on 1:1 basis for USD
o Currently at internal
testing stage in Shenzhen,
Suzhou, Xiong'an, and
Chengdu
Source: Various news source, PBOC, J.P. Morgan.

5.
Top 10 questions on China’s central bank digital currency
(CBDC)
Q 1: What is China’s goal behind developing DC?
· ​Mr ZHOU Xiaochuan, the former governor of the PBOC who first commissioned central bank DC research,
has commented in a media conference that the goal of PBOC’s DC is to support retail electronic payments.
He elaborated that there are two major directions for central bank digital currency: a) to support retail
electronic payments; b) for international payments and remittances, with international financial institutions as
the target users. And China’s CBDC is mainly focusing on supporting retail transactions.
· ​China’s central bank digital currency (CBDC) is M0, which is an alternative to paper cash. We expect key use
cases will be C2C or C2B transactions. Note that China’s small-ticket C2C and C2B ePayments are mainly
facilitated by private companies, namely, Alipay and Tenpay. We believe PBOC’s DC project aims to
supplement the ePayment market by offering users the option of an ePayment channel provided by the State.
In a way, this would be a contingency plan if services offered by private companies are disrupted in an
extreme case scenario.
· ​We expect the technology to be compatible with major ePayment providers such as Alipay and TenPay and
major banks. Its goal is to supplement the current ePayment network instead of replacing or disintermediating
current players.
· ​One example is that the PBOC’s DC can be transacted offline, as DC can be stored on mobile phones as a
virtual form of fiat currency. This supplements current ePayment providers which require a stable network to
facilitate transactions.
Q 2: Will DC be expanded to facilitate B2B and interbank transactions?
· ​Not at the initial stage according to Mr. ZHOU’s comments. However, Mr ZHOU also commented on the
same occasion that once DC can provide stable support to retail transactions in China, its usage may be
expanded.
· ​In our view, the launch of DC for C2C and C2B payments can serve as a test of concept and test of
technology. Once mature, DC could be used to support interbank or B2B transactions.
· ​However, in the medium to long term, one potential evolution is that the technologies and infrastructure
supporting DC can be used to digitalize deposits into banks’ sponsored stablecoins. Then, in a way, it will be
a digitalized form of M1 and M2 that will be able to facilitate interbank and B2B transactions. To achieve
this, the PBOC can create a platform for a consortium of banks to issue sponsored stablecoins (similar to JPM
coin), which will be backed by banks’ deposits. The underlying collateral for such a sponsored coin would be
RMB deposits, the value of such a coin would be the same as RMB, and the PBOC would be able to provide
liquidity if necessary to avoid gridlock scenarios. Then, this sponsored coin can be used to facilitate domestic
B2B, interbank and the commercial paper transactions.

6.
Q 3: Is DC a key tool to reduce China’s plan B to rival SWIFT?
· ​Our simple answer is “No”. DC is M0 and thus it will not be used in interbank transactions. Thus, it will not
be competing with SWIFT, at least not in the near term.
· ​In the medium to long term, even if the PBOC decides to expand the use of DC from M0 to M1 and M2 and
DC gains international acceptance, it will only reduce RMB-denominated transactions via SWIFT. There is
a lack of data on the progress of the pilot trial of DC in China, so it is difficult to assess the technological
competence of DC. But, if underlying technology supporting DC can transform cross-border interbank
transactions from a centralized process via a payment system (i.e., SWIFT) to a decentralized point-to-point
payment method and offer a good user experience, this may reduce the number of SWIFT messages whose
transactional currency is denominated in RMB.
· ​But DC is unlikely to be game changer​: As DC is a virtual form of RMB, and RMB-denominated SWIFT
payment transactions only accounted for 1.66% of total SWIFT payment transactions in April 2020. Without
a push for wider use of RMB internationally, DC is unlikely to rival SWIFT. A few points to consider:
o ​DC is legal tender issued by the PBOC and thus a digitalized form of RMB. While the PBOC can
digitalize RMB, it does not have the jurisdiction to digitalize foreign currencies issued by other central
banks. Note that 85.42% of international trades were transacted in USD in April 2020.
o ​Technological competence is not a key barrier to cross-border interbank payments.
o ​We have seen a rise in transaction volume and value involving correspondent banks in recent years.
Thus, even if DC has the technological ability to settle payments on a point-to-point basis, it is unlikely to
transform the international payment system from a centralized process to a de-centralized process, in our
view.
· ​International cooperation on central bank digital currencies (CBDC) could make a difference​: While the
PBOC’s DC alone is unlikely to rival SWIFT, international cooperation leading to multi-lateral recognition of
CBDC issued by central banks of major economies could make a difference. Based on a survey by Bank of
International Settlement (BIS), 40% of the 65 central banks that responded to the survey have progressed
from conceptual research on CBDC to experiments or proof-of-concept; another 10% have developed pilot
projects. Key questions including technological compatibility, security, convertibility of CBDC and capital
control, will be key challenges in international cooperation, in our view. Thus, while it is possible for such
cooperation, we believe it would be a long and bumpy road.
Q 4: Will DC disintermediate banks? What will be the impact on banks in the medium
term?
· ​Unlikely in the near term. At the current stage, DC is designed to be an alternative to paper cash, and users are
unlikely to keep a material balance of cash in their e-wallets as cash does not generate any return. Thus, users
of DC will need to convert the virtual cash into yield-earning assets (i.e., bank deposits, money market funds,
etc.) through banks. Note that the existing balance of M0 is RMB8trn, only a portion of this will be replaced
by DC, and the balance will be materially lower than total system RMB deposits of RMB203trn as at the end
of May 2020.
· ​But the impact could be far-reaching if DC is rolled out to M1 and M2​: We discussed in Q2 the possibility of
digitalizing banks’ deposits into banks’ sponsored coins, as a way to expand DC from M0 to M1 and M2. The

7.
PBOC can enable this process by either standardizing the format of various banks’ sponsored coins and
facilitating interbank transections, or by endorsing one single sponsored coin issued by various banks.
o ​Applications: First, banks’ sponsored coins can be used to facilitate intra-bank and interbank
transactions. This includes B2B transactions involving multiple banks, interbank transactions and
commercial paper and trade bills transactions. Second, if such coins are interest-bearing, they will also
constitute investment products. Third, international collaboration in banks’ sponsored coins may lead to a
breakthrough in cross-border interbank payments.
o ​Potential benefit to banks: a) improvement in efficiency in interbank transactions, commercial paper or
trade bills business; and b) reduced operational and fraud risks to banks.
Q 5: Will digital currency take market share from incumbent third-party payment
providers (i.e., Tenpay and Alipay)?
· ​Not really, at least not in the near term​. Digital currency is a form of M0 and it will substitute a portion of
paper cash note based transactions. Third-party payment providers facilitate transactions of M1 and M2 as
paper cash notes are not a source of funds for digital payments. Therefore, the real question to ask, in our
view, is whether the introduction of digital currency will lead to M0 gaining usage share from M1 and M2.
Our answer is ‘no’ because a rational consumer or corporate would only keep enough/minimum paper cash
notes for peace of mind as paper cash notes do not generate interest.
· ​One could also argue that introduction of digital currency could slow down the volume gain for digital
payments from cash-based transactions given that paper cash note based transactions was one of the largest
sources of volume gain by digital payments in the past few years. We believe the negative impact on digital
payment industry TPV growth will be insignificant as most of the portable paper cash note based use cases
have already been migrated to digital payments operated by third-party payment operators (J.P. Morgan
estimates penetration of China’s digital consumption payments in 2019 exceeded 80%).
Q 6: What could be the impact on Tenpay/Alipay if the scope of China’s digital currency
expands to M1 and M2 in the medium to longer term?
· ​We believe it’s possible that the scope of China’s digital currency will expand to M1 and M2 in the mid to
longer term once the current M0-based digital currency proves the concept. One of the key differences
between M0 and M1/M2 is that M0 is an obligation of a central bank while M1/M2 are obligations of
commercial banks. As such, a central-bank-led digital currency development minimizes commercial banks’
risk given the importance and complexity of payments in the economy.
· ​We think infrastructure of the PBOC digital currency will be compatible but not exclusive to Tenpay/Alipay’s
infrastructure – meaning users of banks’ sponsored coins would be able to transact via Alipay or Tenpay, or
via other channels, such as point-to-point transactions or via banks’ apps. The introduction of alternative
infrastructure would mitigate systemic risk as China’s digital payments are highly concentrated in 2 privately
owned enterprises (i.e., Tencent and Ant Financial).
· ​In Q2 and Q4 above, we discussed the possibility that in the long run China’s commercial banks may issue
bank-sponsored digital currency (i.e., obligation of the commercial banks) as an alternative to current
payment solutions. The introduction of banks’ sponsored coins would expand the usage of ePayments, in our
view. In the case of commercial-bank sponsored digital currency substituting a portion of M1 and M2, we
think the infrastructure must remain open to any third-party payment provider. This means the consumer’s

8.
physical wallet would be completely digitized into a digital wallet including both paper cash note (M0), bank
deposits and bank credit line (M1 and M0). Nonetheless, we do not believe the commercial-bank-issued
digital currency will necessarily disrupt Tencent and Alipay’s dominance in digital payments for the
following reasons:
o ​A change in the underlying asset for digital payments does not change the value proposition that the
digital payment’s operator creates for consumers and merchants. If we were to put it another way, how
banks settle a transaction is one thing while how the consumer and the merchant settle the payment
transaction is quite another.
o ​We expect Tenpay and Alipay to be able to incorporate the commercial-bank-issued digital currency
into their digital wallet, which would make their digital wallet more attractive to consumers.
o ​Any potential disruption to Tenpay and Alipay’s dominance in digital payments would require the
following: 1) introduction of commercial-bank-issued digital currency; 2) large-scale consumer and
merchant adoption; and 3) Tenpay and Alipay are not involved in the value chain of the digital currency
payment (i.e., Tenpay and Alipay cannot play the role of issuing party or merchant acquirer). We believe it
is highly unlikely that all of the 3 pre-requisites would be met even in the long run.
Q 7: How will the digital currency payment value chain evolve over time?
· ​Similar to the existing payment systems, the value chain of digital currency includes issuing party, clearance
house, and merchant acquirers. The issuing party is responsible for acquiring users in the form of “digital
wallet”. We think it’s likely that incumbent issuing parties will continue to play their role, given the big four
banks (ICBC, ABC, CCB and BOC) and the two largest third-party payment operators (Tencent and Ant
Financial) are all involved in the trial of the PBOC digital currency. This means the PBOC digital currency is
likely to be integrated into these issuing parties’ digital wallets to jump-start consumer adoption. This also
indicates the incumbent merchant acquirers (i.e., Huifu, Lakala, etc.) will continue to play their role as well.
What is unclear to us is who will play the clearing role for the PBOC digital currency.
Q 8: Could digital currency be potentially complementary and positive to incumbents
Tenpay and Alipay?
· ​Yes. Technically speaking, digital currency can be integrated into current digital wallets as a complementary
payment form (i.e. in the case of no network connection) such that an Alipay user carries both M0 and
M1/M2 in his/her digital wallet. In this case, the potential downside risk to Tenpay and Alipay is a disruption
in payment value chain and economics (i.e., high processing cost, high clearing cost, low fee rate, etc.)
Q 9: What does “DCEP is part of M0” mean?
· ​Money supply is an important instrument in the PBOC’s monetary policy operations. There are various
definitions of money supply, from narrow to broad concepts, including M0, M1 and M2. M0 refers to cash in
circulation, the most liquid form of money. M1 includes M0 and demand deposits in commercial banks. Both
M0 and M1 are referred to as narrow money supply in practice. M2 includes M1 plus quasi-money in the
banking system, such as time deposits, savings deposits and other deposits.
· ​For a long time, M2 has been an important monetary policy instrument for the PBOC, and it is closely related
to credit growth in the banking system (loan growth) as it represents the liability and asset sides of banks’
balance sheets. Historically, M2 is an important indicator of the monetary policy stance in China: stronger M2

9.
growth indicates a more accommodative monetary policy, leading to cyclical upturns in economic activity and
inflation dynamics. Moreover, the gap between M1 and M2 growth has served as a good leading indicator of
business cycle expansion. The underling mechanism is as follows: during a business upturn, corporates
become more optimistic about business outlook and will shift from less liquidity time deposits to more liquid
demand deposits (from M2 to M1) for working capital investment, leading to a wider gap between M1 and
M2 growth. By contrast, M0 growth has been less meaningful in monetary policy transmission, and has
exhibited much higher seasonal volatility, especially during the Lunar New Year holidays when the demand
for cash increases notably (and the moving holiday effect drives the seasonal volatility). In recent years,
however, the importance of M2 growth and the gap between M1 and M2 growth has diminished in China, due
to rapid increase in non-loan components (e.g., shadow credit, capital market financing) in credit extension
activity. Accordingly, the PBOC has developed a broad credit concept, total social financing, which has
replaced M2 as an important indicator of the PBOC’s monetary policy stance.
· ​By design, DCEP is developed as a substitute to M0 (cash notes or coins). It is backed by the credibility of the
central bank, same as cash in circulation, to be a legal tender in transactions. DCEP issuance would be
reflected in the central bank’s balance sheet. This is an important difference from demand deposits (non-M0
component in M1) that is reflected in commercial banks’ balance sheets. In addition, DCEP does not generate
any interest income, which is very different from e-payment instruments, which are often linked to money
market funds that can pay interest to users. This could be a potential obstacle in promoting the usage of
DCEP.
Q 10. Will DCEP affect the monetary policy transmission?
· ​Our short answer is ‘no’.
· ​Money supply depends on two factors, the monetary base and the money multiplier. The monetary base (also
known as reserve money or high-powered money) includes currency in circulation (M0) and commercial
banks’ reserves held in the central bank, while money multiplier is defined as the ratio of M2 and the
monetary base.
· ​DCEP is part of M0 and thus part of the monetary base. However, by design, DCEP is to be an alternative of
physical cash notes or coins rather than a way to boost M0 supply. As long as this is true, DCEP issuance will
only lead to the change of format of the monetary base, but will not affect the size of the monetary base.
· ​The money multiplier has nothing to do with DCEP issuance. In China’s monetary policy operations, the
PBOC can adjust the reserve requirement ratio (RRR) to affect the money multiplier, and by extension affect
credit supply to the economy. In recent years, the PBOC has continued to lower the RRR in the banking
system (average RRR in the banking system fell from 14.9% at the beginning of 2018 to 9.4% in April 2020),
and the money multiplier increased from 5.4 in 1Q18 to 6.8 in 2Q20.

10.
Figure 1: China: M0 growth
Source: PBOC, J.P. Morgan.
Figure 2: China: M1 and M2 growth
Source: PBOC, J.P. Morgan.
Figure 3: China: M1 and M2 growth gap as a business
cycle indicator
Source: PBOC, J.P. Morgan.
Figure 4: China’s money multiplier
Source: PBOC, J.P. Morgan.
Appendix I: A refresher on DC/EP development in China
A brief history of China’s digital currency (DC)
· ​China’s central bank, the People’s Bank of China (PBOC), has been studying the development of a state digital
currency since 2014. After China’s State Council included Blockchain technology in its 13th Five Year Plan
in 2016, the central bank established a Digital Currency Research Institute for the development of Digital
Currency/Electronic Payment (DC/EP) in 2017.
· ​In June 2018, the PBOC’s Digital Currency Research Institute formed a wholly owned subsidiary, Shenzhen
Fintech Co. Ltd., with the business scope of Fintech-related technological development. In March 2019, the
Shenzhen Company formed a Fintech joint venture in Suzhou, with Di Gang, deputy head of the PBOC’s
research institute, as its legal representative. Both companies are aggressively recruiting tech talent, indicating
that the DC/EP program is accelerating.
· ​According to the media (Caixin), research work is progressing steadily and the digital currency has completed
its top-level design, standard formulation, functional research and alignment and testing. Based on the news
reports, the PBOC is conducting closed-system trials in Suzhou, Xiong’an, Chengdu and Shenzhen, as well as

11.
testing hypothetical scenarios for the 2022 Winter Olympics, to optimize and improve the currency’s
functionality.
· ​China’s big four commercial banks (ABC, BOC, CCB and ICBC), three telecommunication carriers (China
Telecom, China Unicom and China Mobile), and two leading internet players (Tencent and Alibaba) have
participated in PBOC’s DC trial program, according to the media reports (Caixin).
· ​Based on the Caixin news reports, screenshots of a pilot wallet app for China’s DC/EP have been circulating
on social media. The mobile app, tested internally by Agricultural Bank of China (ABC), displays new digital
currency features, including allowing people to make payments using a QR code and sending and receiving
funds simply by touching another phone.
Key facts about China’s ePayment (EP)
Banks’ ePayment
· ​Total electronic payments (including B2B transactions) via banks reached RMB2,607trn in 2019, +3% y/y. Of
this, 82% was through online banking and 13% via mobile banking. Online banking payment transactions
were flat y/y, while the mobile banking transaction amount went up by 25% y/y. Average ticket size of banks’
online payments is RMB27.3k and for mobile payments it is RMB3.5k, significantly higher than the average
ticket size for third-party payment transactions of RMB347.
Third-party payment
· ​China’s third-party payment value expanded by 5x in the last five years, from RMB49tn in 2015 to RMB250tn
in 2019, accounting for 7% of China’s total non-cash payments. The rapid industry development was driven
mainly by exponential growth of mobile payments, which represent approximately 90% of the total
third-party payment value. We expect the market size to post a CAGR of 13% over 2020-23, representing
10% of China’s non-cash payments in 2023.
· ​From a consumer penetration perspective, China’s mobile payment users have reached the 1bn milestone with
an adoption rate of more than 95%, according to IPSOS. From a merchant penetration perspective, Tencent
had penetrated 50m+ merchants by the end of 2019, which should be more or less in line with Alipay’s
merchant coverage. This number is already higher than: (1) the number of merchants that connect to the
UnionPay network (25mn); (2) the number of POS terminals in China (33mn); and (3) the number of
registered private enterprises in China (31mn).
· ​Similar to the value chain of the traditional payment industry, payment service fees in China’s third-party
payment value chain are split among issuing parties (e.g., Alipay and Tenpay), payment networks (e.g.,
NetsUnion and Union Pay) and merchant acquirers (e.g., China UMS and Huifu; in some cases, Alipay and
Tenpay also play the role of merchant acquirers). The overall take rate of third-party payments has trended
down in the past few years due mainly to industry competition.

12.
Appendix II: A brief history of cryptocurrency development in
China
China has a clear stance on CC: it’s a virtual commodity, not money
The PBOC has made it clear that it views cryptocurrencies (CCs) as a virtual commodity, not legal tender. This
was highlighted in an announcement (Notice on Risk Prevention related to Bitcoin) by PBOC in December 2013.
The Notice was mainly regarding the regulation of Bitcoin, but we believe PBOC was referring to all CCs, and
not only to Bitcoin. Two key points from the Notice:
· ​The nature of CCs​: Bitcoin is not a currency, and thus not a legal tender. Instead, it is a form of virtual
commodity transacted on an internet platform.
· ​Financial services related to CCs are banned​: All financial institutions (banks, trust, insurance companies,
asset managers, etc.) and payment providers are prohibited from providing services for or products
denominated in Bitcoin. This ban includes but is not limited to financial services such as market making,
guarantee, insurance, client registration, transaction, settlement, and custodian services. Financial institutions
are not allowed to accept Bitcoin as a means of payment and settlement. Any issuance of financial products,
such as trusts or funds with Bitcoin as the underlying investment, is strictly prohibited.
With such a clear stance, we believe financial institutions’ involvement in CCs will be extremely limited.
Nonetheless, the development of CCs has been rapidly increasing the risk that regulators could find themselves
behind the curve. For example, instead of directly providing financial services, or issuing products denominated in
CCs, money could find its way, indirectly, to funding investors of initial coin offerings (ICO). For more details,
please refer to our note ​China Financials - Cryptocurrencies in China​ published in February 2018.
Intensifying regulatory tightening on CCs since 2017
CC mining activities and ICOs have gained momentum in China in recent years; Xinhua reported that from
January to July 2017, ICOs completed in China raised the equivalent of Rmb2.6bn. Although the amount is still
small against, for example, the Rmb141bn raised from IPOs in the equity markets in China over the same period,
the rapid growth has put regulators on alert and prompted a round of regulatory tightening.
The Chinese government has taken actions to clampdown on CCs. Measures mainly involve an increasing number
of inspections of CC exchanges and trading platforms and the banning of ICOs.
· ​Increased onsite inspections of major CC trading platforms in January and February 2017​, resulting in
the closure of several of such platforms (according to the platforms’ websites). The inspections focused on
identifying any business operations that were out-of-scope, any unlicensed business practices (including
financing, payment and exchange), any market manipulation, and any financial security risks. Major
deviations and non-compliant activities led to enforced platform shutdowns. As a result, RMB-denominated
CC trading dropped from more than 90% of transaction volumes in Jan 2017 to less than 20% in March 2017.
· ​Ban on ICOs in September 2017​: In addition to banning ICOs and restricting CC trading activity, the PBOC
reiterated its stance that CCs are not recognized as legal currency, and FIs were banned from providing
services to related activities. In this instance, PBOC used the term CCs instead of Bitcoin specifically in its
regulatory announcement, eliminating any potential room for regulatory arbitrage.