Richard (Rich) Turrin is the international best-selling author of “Cashless – China’s Digital Currency Revolution” and “Innovation Lab Excellence.” He is an Onalytica Top 100 Fintech Influencer and an award-winning executive previously heading fintech teams at IBM following a twenty-year career in investment banking. Living in Shanghai for the last decade, Rich experienced China going cashless first-hand. Hear about:
What is the Chinese digital yuan, and why it is different from cryptocurrencies;
What are the different levels of anonymity the digital yuan offers;
Will the Chinese digital yuan help break the duopoly of the Alibaba and Wechat mobile payments in China;
How will the Chinese digital yuan impact the world;
Rich’s personal experience using the digital yuan in Shanghai;
How does PBOC enable the digital yuan to be used without internet access?
Find Rich on LinkedIn, Twitter, and check out his book Cashless – China’s Digital Currency Revolution on apple books, Amazon, and any other digital bookstores across the planet.
[00:00:00] Rui: Hey Richard, thanks so much for joining us from Shanghai. I think I’ve seen you use this background before.
[00:00:06] Rich: I confess, this is one of my favorites. I live in Shanghai and I’ve been here for 11 years now.
[00:00:11] Rui: Yes, that’s right. Well, maybe that’s our first question. Why don’t you tell us about your background?
[00:00:17] Rich: Sure. Right. My name is Rich Turin, and I started my career out in investment banking for 18 years. I was on a trading floor, and because of my work in computers, eventually, after the financial crash in 2008, I came to China and I became an MBA school professor.
[00:00:34] And eventually got picked up to work for IBM, where I eventually headed their FinTech innovation space down in Singapore, and also here in China. Basically my career has been this combination of mathematics and computers. And in the 1990s, we called it structured products. But really we were building the foundations of what you would call modern FinTech.
Today, I’ve been here in China now [00:01:00] for 11 years. I’ve had the ability to see China go from a place that had big wads of cash to a place that is cashless. And that’s how I got the name of my book —- Cashless: China’s digital currency revolution.
[00:01:15] Rui: Thanks for that. We actually did an episode on the digital RMB at the beginning of 2021. It was with my friend Yang, who was at the World Economic Forum on the digital currency working group. And at the time the digital RMB had been announced, but experiments hadn’t really started rolling out yet. And we were just trying to figure out what it was.
So I want to get everyone started on the right foot. The first question I have for you is if you had to condense it into just one sentence, what is the digital RMB?
[00:01:51] Rich: Sure. In one sentence, the digital RMB is the digitization of cash. It takes paper money and turns it into a digital currency to a digital product. That’s it. Now one critical I think to add, it is not a crypto.
[00:02:11] Rui: So that’s perfect, because that’s one of the things we discussed actually in the first podcast, the digital RMB is not a fully decentralized system. It’s not a cryptocurrency. And at the time, based on the plans unveiled by the PBOC, it seemed to be a hybrid technology. Has that been updated now that it’s pushed out into the wild? Do you have any more information and insight you can give us on the technical aspects?
[00:02:37] Rich: Absolutely. That’s really what my book Cashless is about, and your friend is correct. The China central bank digital currency is based on a system that is inspired by crypto in many ways, but it does not fundamentally use blockchain technology.
[00:02:56] The people’s bank of China was very clear as to [00:03:00] why they were unable to use blockchain. And if you look at the throughput in transactions per second, in China, you can look to Alipay as the best example. During the singles’ day rush, they process around 500,000 transactions per sec.
Now to put that in context, the visa, MasterCard network in the United States or EU, they’re coming in and around 50,000 transactions per second. [00:03:29] Blockchain systems are incapable of giving the PBOC the speed it needs, and its minimum build speed was 300,000 transactions per second. So no blockchain is used in central bank digital currency. And the major reason is.
[00:03:45] Rui: I did not know that. That’s really interesting. Aside from that, though, I do want to talk about obviously one of the most commonly cited advantages of a blockchain based cryptocurrency, and that is the level of anonymity you can get. And we [00:04:00] see that that’s not really the case with China’s digital RMB, right?
[00:04:02] Because we see that below a certain transaction level. It’s relatively anonymous, but above that level, then you may trigger all sorts of protections.
[00:04:15] Rich: Absolutely right. The first thing to understand about China’s central bank digital currency is that it has tiered levels of anonymity.
[00:04:24] If you’re making a small purchase, you should have anonymity on that nobody should care or know if you’re buying dumplings from somebody on the street.
However, if you’re spending large sums of money, that should be subject to KYC and AML. Just like we have in the west, there are different tiers of AML KYC, and there are different kinds of wallets.
Let’s just imagine you are a poor person who lives out in rural China and you do not have a smartphone. All right. So these people can have a newly [00:05:00] designed credit card sized device. It is not a credit card, but it’s got a keypad on it. And some of them even have thumb print recognition, and you can use that with digital currency, and you don’t need a bank account. And you have pretty much complete anonymity with using small amounts up to probably around 400 or 500 RMB. You can use that to make these payments. Nobody cares.
[00:05:23] Then you get payments over 400 or 500 RMB. And there you have a level of KYC and AML. That’s either built into the device or because you are connected to a bank, and the bank provides the KYC to know who it is. So there’s this concept of tiers based on how much you’re spending.
Now I’m going to change and go in a different direction [00:05:46] a little bit. The concept of privacy in the crypto world is somewhat, we have the concept particularly with Bitcoin, of not anonymous transactions. It is not. If you believe your transactions are anonymous, [00:06:00] that’s a mistaken belief. They are pseudo anonymous, meaning that the transactions you can figure out with a lot of work who’s behind.
[00:06:08] So what is trying to do with the data? China has basically one set of servers where it has pseudo anonymous transactions, and it has another set of servers that are not connected in that those servers have KYC data on.
[00:06:24] So basically with a warrant in a legal justification, the PBOC or law enforcement can say, we need to know who is behind that transaction and they can connect the name on the KYC server with the pseudo anonymous transactions on the other server, which you don’t know who’s who. So there is a separation between KYC and the pseudo anonymous transactions on two servers.
[00:06:53] Rui: And do you know if this is a feature that’s unique to China central bank digital currency, or is this something that we can pretty much expect that every CBDC coming out is going to have, because everyone’s going to need some sort of KYC, AML procedures.
[00:07:10] Rich: I love that question, Rui. It’s precious, and it’s the question of our time. The EU is looking at building the CBDC. The U.S. has started to look at it. And of course, all of the Asian countries are in various stages of actually launching CBDC. And it’s the design that China has this concept of one server’s got the names on it and the other servers got the pseudo anonymous transactions where [00:07:37] you’re going to see with virtually every CBDC in.
The question is who keeps the names. So if you look at Sweden’s version of CBDC they’re in trials, what they did is the commercial banks hold the names. So the government never holds the name. Some people and countries will feel more comfortable with the design [00:08:00] where the state does not have access to that server.
Other countries [00:08:04] and CBDC designers will say, we trust the state to have access to that server, provided that server has laws for how you access it. And that’s not dissimilar to what you have right now in the U.S. with credit cards.
If you look at the U.S. system with credit cards, you’ve got credit card companies who have a list with a not so separated list. [00:08:24] It’s just a list with your name and your transactions. And how does the state get access to that? They ask for it nicely. And if you believe Edward Snowden and the NSA, the NSA grabs access to that list without asking so nicely, there is the fundamental problem that we have.
[00:08:41] Rui: Well, it seems pretty obvious that for China, the state is definitely going to be in control of this. I don’t think there’s any question of that, ever.
Anyway, on to another topic in the first podcast that we did on the digital RMB. [00:08:57] Yang had mentioned that she [00:09:00] thought maybe part of the intention behind the CBDC was to help break up the duopoly of mobile payments that we see basically in China. Right now Wechat pay and Alipay these two companies alone, have over 90% of the market share in the country.
[00:09:18] Anyway, we were both skeptical that the CBDC would do much to break the duopoly. And I have also seen the government actually come out and say, hey guys, that’s not our intention. So I’m curious, what is your personal opinion on that? [00:09:34] And what do you think the impact is to Alipay and Wechat pay?
[00:09:39] Rich: That’s a wonderful question. And it is commonly reported and commonly believed China’s central bank digital currency is a vendetta against Wechat pay and Alipay. We really want to destroy them. So that’s why we’re launching the central bank digital currency.
And it’s very easy [00:10:00] to refute this falsehood. Very simple. WeChat pay was launched in early 2014, and the people’s bank of China launched its digital currency research Institute also in the same year in 2014.
[00:10:17] And the reality is, China has been pumping out press releases about its progress on CBDC since 2014, when they launched the research institute. It was long, planned, long reported.
Now, next part of this, it will be very hard for the central bank digital currency to eliminate or bust up the Wechat pay and Alipay. These are lifestyle platforms. They are wonderful. And even if you use central bank digital currency on that platform, you’re still going to transact over the platform because that’s where you’ve got your bills. [00:10:51] That’s where you’ve got your friends.
So the PBOC recognizes that in order for central bank digital currency to be a success, [00:11:00] it has to be usable on the platforms. So again, another reason why PBOC doesn’t want to destroy Alipay, Wechat pay, but it does want to have central bank digital currency be an alternative to payment systems to control 94% of mobile payment in China.
[00:11:19] Rui: So basically you think that the impact on Wechat pay and Alipay will not be significant, because the products in general are addressing different customer needs, to be honest.
[00:11:28] Rich: I think that there will certainly be an impact to Wechat pay and Alipay payment revenue. They get small fees from their vendors, even though Wechat pay and Alipay are free for me, the user to use. There’s a small fee to the vendors.
[00:11:46] And yes, they’re going to be impacted by that. No question about it. But it will not destroy and it will not remove their societal relevance.
[00:11:55] Rui: And just to clarify for everyone, the CBDC is [00:12:00] free to use. There are no transaction fees.
[00:12:02] Rich: Absolutely. And that’s the fundamental revolution that Wechat pay and Alipay brought to payment in China. There is a fee for commercial use and businesses. But the payment is free for people in China with Wechat pay and Alipay, which is mind blowing.
[00:12:18] When you consider that in the west, we’re paying interchange and other bank fees of anywhere between 2% and 4%, or 5% for using a credit card. And when we switched to central bank digital currency, or as we switched to central bank digital currency, all payments for everyone within the country, both commercial and [00:12:38] private, we’ll all be free, no fee to anyone anywhere, whether commercial or private.
[00:12:44] Rui: And just to push on that a little bit more, the reason why the CBDC is free while Wechat pay and Alipay do have a small transaction fee is because this is a cash equivalent. You wouldn’t charge someone for giving you cash, right? So [00:13:00] you can’t really charge someone a transaction fee for receiving digital cash.
[00:13:04] And the savings presumably is going to come from the fact that handling cash is actually expensive, right? For the banks, there are maintenance costs around handling the paper money. But once it’s all converted to digital, that cost goes down and a lot of it maybe even just goes away. So basically there is an even in out of the transaction costs and the maintenance costs.
[00:13:31] Rich: Absolutely. You have to think about the existing cash transfer system. So now the PBOC prints money, they put it in trucks, they take it out to the banks. The banks run ATM machines. There’s this entire cost to running a cash network that will slowly go away, as it has already due to Wechat and Alipay, right?
[00:13:51] So that cost of running that cash network will go down and the savings that will go toward paying for [00:14:00] a central bank digital currency network, which will again continue that trend to reduce cash payments, which is a major societal driver. In the sense that even from the store owner’s perspective.
There was a great study done in the United States and Canada showing how many billions it costs stores in man hours and labor, just to count all the cash and bring it to the bank and save it and do all [00:14:24] physical things that you need to do with cash. So all of those savings will go into running the network, but there’s something else really critical that has to be acknowledged.
As China goes forward, yes CBDC is a cash replacement. It is free. But the important thing is that we’re going to a future where connected devices are going to pay, machines are going to pay, [00:14:49] AI is going to pay.
We think in terms of personal payments, China’s going to the next step and saying, well, someday all of these connected devices are going to make payments. Those payments must [00:15:00] be free in order to connect machines to the network and allow them to make these payments. So it’s not just a cash replacement. That’s why I always call CBDC digital infrastructure because it’s building the infrastructure for a digital future.
[00:15:16] Rui: That’s interesting. I hadn’t thought of that before. Basically one it’s these smart machines paying each other. It would really behoove society for these transactions to be as frictionless as possible.
[00:15:28] And that actually brings me to my next point. It’s been my sort of mantra these days. As the Chinese and U.S. governments govern the financial systems very differently, so maybe I’m oversimplifying a bit here, but it seems that China has basically one goal, which is to grow the real economy. [00:15:48] And it doesn’t really care that much about these private transaction platforms, like Wechat pay and Alipay making money, right?
Because the government makes it very clear that they want to put [00:16:00] caps on payment limits. You can not charge above a certain amount, for example, in China just for comparison, that amount is actually very little. It’s as low as 0.38% for Wechat pay. It goes up to 1%, I believe, but on average, is something like 0.6% and that’s just a whole lot lower than what we see here in the U.S..
[00:16:23] And I think because of the government’s attitude that obviously impacts business models and it impacts what happens in the broader innovation ecosystem, right? In China, FinTech is consistently a bottom three investment category in the last five plus years.
[00:16:42] And the U.S., on the other hand, it’s consistently a top three, maybe the top investment category. You just can’t make that much money in Chinese FinTech. It’s highly regulated. And again, a lot of the regulations make it so that most of the [00:17:00] value isn’t captured by these payment platforms, et cetera, but are passed on to merchants, to users and basically makes the real economy flow better.
[00:17:12] So, what do you think is the end of a state of society and economy where you have one that’s space on a very low cost payment system? So sure, it is not generating a lot of, you know, FinTech, unicorns. What does that enable though versus one where there are lots of FinTech unicorns, but it’s effectively based on what I think are probably high margin, high cost payment rails? I guess that’s sort of a leading question.
[00:17:44] Rich: It’s so simple. It allows for digital payment to become an integral part of society and built more deeply in society than the credit cards and payment systems that you are used [00:18:00] to today. And that’s what China is showing.
Here’s a great example. All of the refunds for airline tickets and train tickets, I haven’t done it in a while, but it was something that in the west you waited for months for what all of that stuff is immediate [00:18:14] now in China. Payment becomes more deeply integrated into society in every possible place. And that’s why you’ve got Wechat and Alipay with four times China’s GDP being transferred, and where in the United States credit cards are only a fraction of GDP.
[00:18:34] Rui: The next thing I want to talk about is the digital RMB’s impact on the world. As we know right now, it’s really intended primarily for domestic use and certain limited cross border transactions. A lot of experts don’t think that it’s going to displace the USD status as reserve currency, and that it’s not going to be some danger to the USD or other currencies,
[00:18:58] But there are lots of people who [00:19:00] feel differently. For example, I just Googled, and one of the first results that showed up was China’s digital Yuan is a warning to the world, from wired. And I see titles like that all the time. So what do you think is the level of concern that the rest of the world should have, if any, about the digital RMB?
[00:19:19] Rich: . Number one, the Chinese digital RMB is not an immediate threat to dollar dominance, not an immediate threat. Now the next statement be afraid. Be very afraid.
[00:19:34] Long-term you have to think about a very long timeframe. And in my book Cashless, I talk about how the digital RMB will displace dollar use over a 10 year horizon. And then after that, who knows. What is going to happen is that the local Asian countries, they’re all going to build central bank digital currencies. And what you’re going to see is [00:20:00] China’s central bank digital currency being used as a regional reserve digital currency within Asia.
[00:20:07] So will it impact the dollar? Absolutely. Is it something that Washington should be concerned about? Absolutely. Should there be absolute fear over this? We should be very concerned, but there should be no sense of radical fear right now over this happening, but you really have to watch it.
[00:20:29] Rui: okay. That’s fair. So it’s something we should be watching, but shouldn’t be too panicky about. Now, have you been able to use the digital yuan and what is your personal experience?
[00:20:40] Rich: I have not used it on my own phone, and the reason is up till now in Shanghai, and it’s different depending on which region you’re in, foreigners have not had the ability to download and use the wallet. That changed as of about two weeks ago. [00:20:57] However, my Mandarin teacher, who’s [00:21:00] wonderful. I got her to download the wallet on her phone and I have used it, but it’s not technically on my own phone.
How does it work? It’s no different than using WeChat pay and Alipay. You push the button. It opens up and you say you want to receive payment or you want to pay somebody. [00:21:18] And if you want to pay somebody, you push a button, and a QR code pops open and you put that in front of the machine. And we used it at a vending machine at the subway station, and they will have been converted to take digital RMB and you can buy your bottle of water. Just as easily with digital RMB as you do with Wechat pay and Alipay.
[00:21:39] Rui: Okay. We have a question from the audience. Someone wants to know if it is true that it requires no internet. I believe so, but maybe you can give slightly more in-depth answer.
[00:21:52] Rich: Sure. That’s absolutely one of the key design parameters. One of the things that the PBOC [00:22:00] did many years ago, going back seven or eight years, they said, look, we want you, digital currency research institute design a CBDC for us. One, it has to maintain some kind of privacy and two, it has to replace the use of cash, and three, [00:22:16] it has to be usable without a network, cuz China’s really freaking big. And it’s got people who are in places without signals.
What was interesting is that the PBOC is actually more forthcoming with their design specs than the Fed. We have no idea what the Fed is trying to build with the CBDC in MIT.
[00:22:36] But the point is this, as part of their initial design criteria, they demanded that the research Institute make a non-network based transfer mechanism. So what they did was they used the NFC (near-field communication) built into cell phones and built into these little cards that I mentioned earlier, and they made it so that you could tap one [00:23:00] phone or one card against the other, and they can use NFC and make payment without a network.
Now, those payments are limited. You can only do a certain size, a couple of hundred RMB. I don’t remember what the limit is exactly, but the idea is that you can be far away and still make and receive small payments, which is reproducing cash.
[00:23:22] Rui: Okay. Got it. Thanks so much, Richard, for joining us all the way from Shanghai. And I also want to thank all the Tech Buzz China Insider subscribers for joining us live. Now, if any of us have more questions, what is the best way for us to reach?
[00:23:38] Rich: The best of all ways to reach me is on LinkedIn, where I post about China and the central bank digital currency virtually almost every day. Yesterday I talked about how China’s CBDC is going to be used in Africa.
So reach out to me on LinkedIn, reach out to me on Twitter, and anybody who is interested in the book Cashless, [00:24:00] Cashless is on apple books, Amazon of course, and lots of other digital bookstores across the planet.