China's 'Pays' could lead a crypto market, but the government won't let them
China appears to have a lot of the advantages to pull off a move similar to Facebook Libra, but there are plenty of factors working against it.
China possesses a modern, widely adopted and mobile-centric payment system that makes it the envy of many abroad, with both WeChat Pay and Alipay accounting for more than 90% of the domestic payments market, with a total volume of $41.51 trillion in 2018 and growing in adoption abroad.
Its home-grown ventures and government-led initiatives have played a leading role in the acquisition, pursuit and funding of blockchain-related technologies and patents. Despite this, however, it's highly unlikely there will be any incentive for the adoption of open digital currencies by its tech firms or institutions.
Despite its overwhelming popularity and undeniable convenience, at its core, WeChat Pay and Alipay stand as mobile and user-friendly “wrappers” around the Chinese domestic banking system and UnionPay network. This foundation means all the restrictions of a closed system apply—a system limited to mainland Chinese citizens or residents holding a domestic bank account, subject to capital controls and limited interaction outside of its financial boundaries. Strict limits on money transfers abroad apply and on-demand currency conversion remains a challenge. The core focus is on tight monetary control to prevent capital flight as well as maintaining foreign exchange rates at a level favorable for the wider export market (a dominant part of the economy).
With their premise of openness, open digital currencies stand in direct opposition with the core elements underpinning the Chinese banking system & broader economy (at a macro level), and in direct competition to WeChat Pay’s operational goals of user data mining, control and surveillance in this closed system (at a micro-level).
The argument could be made for a permissioned digital currency, though that is arguably precisely what WeChat’s current “virtual wallet balance” represents. Another case could be made for a central bank-issued digital currency by China's central bank—a digital representation of the Yuan, with the same governance mechanisms, but more efficient blockchain-based underpinnings (indeed similar initiatives are being considered by many governments). Both are highly likely to happen, as evolutions of the status quo, but both are vastly different from Libra’s vision and foundations.
Digital currencies based on permissionless networks are, by nature, decentralized, global and cross-border, and therefore are not directly controllable by a single state actor. One could say that permissionless systems form the technological backbone for western companies, enabling them to build a WeChat-like all-in-one platform, but based on open and inclusive foundations.
As for WeChat’s expansion abroad, retail adoption in many western countries is growing. This expansion ties in with the demand from increasing numbers of Chinese nationals traveling abroad, rather than from locals based in those markets. Since that growth is subject to fluctuations tourism rather than organic adoption, this strategy alone will not drive consistent penetration.
Due to its target audience and strategy, it is unclear how a WeChat digital payment currency would be able to compete with more open western players, although it is certainly possible. A solution would be segmenting the operational entity and brand to tackle the specific needs of western markets, or (more likely) the future investment/acquisition of an existing digital currency payment provider.
The real opportunity will therefore center on open markets outside of mainland China. Chinese tech giants (collectively known by the “BAT” acronym—Baidu, Alibaba and Tencent) enjoy a unique advantage and can best use their strong financial arms to fund and compete abroad, without disrupting its insulated banking system. While Facebook’s Libra initiative is a step in the right direction, the real challenge lies ahead. Finance is now intrinsically connected with technology, with value becoming intangible and virtual. Do we disregard our values and close ourselves in to tightly controlled silos subject to systemic external shocks? Alas, the race for our financial future is on.