A library of snippets
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“Alipay now controls 70% of China’s mobile payment market, while Yu’e Bao, which serves as a repository for cash leftover from online spending, emerged as the world’s largest money market fund this year with $165.6 billion of assets under management.”
Ant Financial seen becoming world’s top consumer bank- Nikkei Asian Review
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As I wrote a while ago, the Chinese were first with the great transition from commodity money to paper money. They had the necessary technologies (you can’t have paper money without paper and you can’t do it at scale without printing) and, more importantly, they had the bureaucracy.
“In 1260, Genghis’ grandson Kublai Khan became Emporer and determined that it was a burden to commerce and taxation to have all sorts of currencies in use, ranging from copper ‘cash’ to iron bars, to pearls to salt to specie, so he decided to implement a new currency. The Khan decided to replace copper, iron, commodity and specie cash with a paper currency. A paper currency! Imagine how crazy that must have sounded! Replacing stuff with printing!”
Just as Marco Polo and other medieval travellers returned along the Silk Road breathless with astonishing tales of paper money, so commentators (e.g., me) began tumbling off of flights from Beijing and Shanghai with equally astonishing tales of a land of mobile payments, where paper money is vanishing and consumers pay for everything with smartphones. China is well on the way to becoming a cashless society, with the end of its thousand year experiment with paper money in sight.
“14% of China’s population relies on mobile payments to get around, carrying no cash, according to a survey conducted by (link in Chinese) Renmin University of China”
Alibaba’s (BABA) “cashless week” to boost mobile payments is angering China’s central bank — Quartz
The natural step from here is to create digital currency so that settlement is in central bank money and there are no credit risks. Now, the People’s Bank of China (PBoC) is run by smart people and as you might imagine they have been looking at this strategy for some time. It looks as if Facebook’s Libra initiative has stimulated or accelerated their tactics as well. I read in Central Banking [PBoC sounds alarm over Facebook’s Libra] that PBoC officials had “voiced worries” that [Libra] could have destabilising effects on the financial system and further stated that the bank would step up its own efforts to create an e-currency.
This is no knee-jerk reaction. Way back in 2016, the then-Governor of PBoC, Zhou Xiaochuan, very clearly set out their thinking about digital currency, saying that “it is an irresistible trend that paper money will be replaced by new products and new technologies”. He went on to say that as a legal tender, digital currency should be issued by the central bank (my emphasis) and after noting that he thought it would take a decade or so for digital currency to completely replace cash in cash went to state clearly that “he has plans how to gradually phase out paper money”.
(As I have written before, I don’t think a “cashless society” means a society in which notes and coins are outlawed, but a society in which they are irrelevant. Under this definition the PBoC could easily achieve this goal for China.)
What would be the impact of phasing out paper money? Yao Qian, from the PBOC technology department wrote on this subject back in 2017, noting (as I have done) that a central bank digital currency (CBDC) would have some consequences for commercial banks, so that it might be better to keep those banks as part of the new monetary arrangement. He described what has been called the “two tier” approach, noting that to offset the shock to the current banking system imposed by an independent digital currency system (and to protect the investment made by commercial banks on infrastructure), it is possible to incorporate digital currency wallet attributes into the existing commercial bank account system “so that electronic currency and digital currency are managed under the same account“.
I understand the rationale completely. The Chinese central bank wants the efficiencies that come from having a digital currency but also understands the implications of removing the exorbitant privilege of money creation from the commercial banks. If the commercial banks cannot create money by creating credit, then they can only provide loans from their deposits. Imagine if Bitcoin were the only currency in the world: I’d still need to borrow a few of them to buy a new car, but since Barclays can’t create Bitcoins they can only lend me Bitcoins that they have taken in deposit from other people. Fair enough. But here, as in so many other things, China is a window into the future.
Whether you think CBDC is a good idea or not, you can see that it’s a big step to take and therefore understand the PBoC position. There is a significant potential problem with digital currency created by the central bank. If commercial banks lose deposits and the privilege of creating money, then their functionality and role in the economy is much reduced. We already see this happening because “Alipay, WeChat Wallet, and other Chinese third party payment platforms use financial incentives to encourage users to take money out of their bank accounts and temporarily store it on the platform itself” [China’s Future is Definitely Cashless].
In summary, then, a couple of year ago I wrote that the PBoC were not going to issue cryptocurrencies and they were not going to issue digital currencies either (at least in the foreseeable future). What I said was that what they might do is to allow commercial banks to create digital currency under central bank control. And this indeed what seems to be happening. According to the South China Morning Post, the new Chinese digital currency “would be centrally controlled by the PBoC, with commercial banks having to hold reserves at the central bank for assets valued in the digital yuan“.
How will this work? Well, you could have the central bank provide commercial banks with some sort of cryptographic doodah that would allow them swap electronic money for digital currency under the control of the central bank. Wait a moment, that reminds me of something…
Yep, that’s how Mondex was structured 25 years ago. (If you don’t know what Mondex was, here’s something I wrote about it 20 years on.) There was one big different between Mondex and other electronic money schemes of the time, which was that Mondex would allow offline transfers, chip to chip, without bank (or central bank) intermediation. Would a central bank go for this today? Some form of digital cash that can be passed directly from person to person like Bitcoin rather than some form of electronic money like M-PESA, using hardware rather than proof of work to prevent double spending? Well, it was being tried in Uruguay, but I’m not sure how that pilot is going, although is was not quite the same thing as Mondex because the phones would not be exchanging fungible value but tokens that could ultimately be traced and tracked and monitored, but it’s interesting nonetheless.
When I wrote about this back in 2018, I said that I thought it was unlikely that the PBoC would allow anonymous peer-to-peer transfers, so I was very surprised to see a Reuters report [6th September 2019] quoting Mu Changchun, deputy director of the PBoC’s payments department, saying about the proposed Chinese digital currency that “its ability to be used without an internet connection would also allow transactions to continue in situations in which communications have broken down, such as an earthquake”.
This would seem to mean that the system will allow offline transactions, which means that value can be transferred from one phone to another via local interfaces such as NFC or Bluetooth. If so, this would be truly radical. I wondered if something was mistranslated in the Reuter’s piece so I went to the source speech
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“Other users assumed that because the roll-out of the new cards introduced contactless technology, the key fobs would too. However, the key fobs don’t have any contactless functionality, so those who have tried to use them as contactless cards, assumed they were broken, and missed out on the points.”
New Tesco Clubcards cause nightmares for shoppers – AOL UK Money
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“Scams of this type are becoming fairly common on the ‘killer’ P2P payments app, leading others on Twitter to question its reliability as a payment method, especially when other online transaction routes exist—like cryptocurrencies such as bitcoin, for instance.”
Bitcoin vs Venmo: Lessons Learned from ‘Craigslist Jeff’ | Bank Innovation
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“A German appeals court on Wednesday rejected the pleas from a dead girl’s parents who wanted access to the 15-year-old’s Facebook account. The social networking site fought the parents, claiming that opening the account would breach the privacy of the girl’s contacts.”
Court: Dead daughter’s parents have no right to access her Facebook account | Ars Technica
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“14% of China’s population relies on mobile payments to get around, carrying no cash, according to a survey conducted by (link in Chinese) Renmin University of China”
Alibaba’s (BABA) “cashless week” to boost mobile payments is angering China’s central bank — Quartz
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“The judge agreed and Gideon sent the documents to Santander’s court orders team, which faxed over the fraudster’s bank statements, postal addresses, email addresses and phone numbers.”
Hero who tracked bank fraudsters to win back £20k | Daily Mail Online
Unfortunately, there’s nothing in the story to suggest that the police were able to use these details to collar the fraudsters.
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“A year 8 student was bragging to her friends that she’s been earning money by opening bank accounts at all the high street banks and given £25 to give the details and send internet banking login details/key pads to someone.”
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“‘These small charges can really add up and this change will mean shoppers across the country have that bit of extra cash to spend on the things that matter to them.’”
August • Future of Retail – Credit card payment fees to be scrapped
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“The motoring organisation’s survey of 16,000 members suggests seven out of 10 would look for parking elsewhere rather than use the ‘pay by phone’ meters.”
via Drivers avoid pay-by-phone parking bays, says the AA – BBC News
Who are these people? I sign with relief when I pull into a car park and see the signs that I can pay with my phone instead of rummaging around on my hands in knees to try to find a couple of quid in coins.
I love RingGo. It works great. One minor plea though: even Arriva buses have managed to add ApplePay to their in-app payment options, so please can you? I forget my CVV about one in every three times I use the app and I’d like to be able to switch between personal and business cards on the fly.
Snippings