China’s ambitious foray into Central Bank Digital Currency (CBDC) has taken a significant turn as reports emerge of workers cashing out their digital earnings for tangible fiat currency.

Overview

On May 13, 2024, a South China Morning Post report revealed that some Chinese cities have begun paying state employees in the country’s CBDC, but most of these early adopters convert it to cash immediately. Sammy Lin, an account manager at a Chinese state bank in Suzhou, said, “I prefer not to keep the money in the e-CNY app because there’s no interest if I leave it there.” Lin added, “There are also not so many places, online or offline, where I can use the e-yuan.” 

Civil servant Andrew Wang revealed that he was not too worried by the idea of digital cash as it was only a tiny part of his salary being paid  In digital yuan. However, Wang’s spouse, who gets paid entirely in digital yuan, promptly converts the entire sum to physical cash upon receiving it, citing the limited usefulness of the digital currency. Wang said, “She can’t deposit the money or buy financial products with the e-CNY wallet.” The adoption of CBDC, often touted for its efficiency and traceability, faces a new challenge as workers seek to convert their digital wages into traditional money. This development raises questions about the efficacy of CBDC in daily transactions and its potential impact on China’s economy.

Workers’ Behaviour

The transition to CBDC payments for workers across various sectors was intended to streamline transactions and reduce reliance on physical cash. However, recent reports suggest that many Chinese workers convert their digital earnings into fiat currency, undermining the government’s efforts to advance the digital yuan. Several factors contribute to this behaviour:

1. There needs to be more trust in the stability of digital currencies, particularly among older generations accustomed to traditional forms of money. According to a report by SCMP, although China has embraced a cashless society for nearly a decade, many Chinese people are still reluctant to fully adopt the digital yuan. This hesitancy is attributed to concerns about surveillance and the limited practicality of digital currency in various situations.
2. Concerns about privacy and government surveillance may drive individuals to prefer cash transactions over digital ones.
3. The ease of converting CBDC to fiat currency through various platforms and informal networks makes it a convenient option for workers seeking liquidity.

Despite authorities’ efforts to promote the digital yuan as a viable alternative to cash, the preference for tangible money persists among many Chinese residents. Experts at bitcoinsynergy.net mentioned that despite reservations, transactions worth over $250 billion have been carried out using the digital yuan as of July 20 2023.  

Challenges for CBDC Adoption

The growing trend of workers cashing out their CBDC earnings presents a significant challenge to China’s efforts to promote digital currency adoption. One of the primary objectives of introducing CBDC was to create a more efficient and transparent financial system. However, if workers continue to convert their digital wages into cash, it could undermine the government’s ability to track and regulate transactions. Furthermore, the widespread conversion of CBDC to fiat currency could hinder the development of digital payment infrastructure in China.

Businesses may only be willing to invest in digital payment systems if there is limited demand for CBDC transactions. This could slow the adoption of digital currencies and impede China’s progress toward a cashless society. Ye Dongyan, a researcher at Beijing’s Cheung Kong Graduate School of Business, emphasised the necessity for a greater focus on achieving a balance between privacy and security should the government intend to implement the digital yuan across the entirety of China. Dongyan said, “Paper currency is used anonymously, but the digital yuan is different. The boundaries between information tracking and information security protection need more deliberation.” 

Government Response

The Chinese government has taken several measures to encourage digital currency usage in response to the challenges posed by workers cashing out their CBDC earnings. These include promoting merchants’ acceptance of CBDC and offering incentives for digital transactions. Additionally, authorities are exploring ways to enhance CBDC’s features to make it more attractive to users. 

This may involve introducing incentives such as loyalty programs or discounts for individuals who use digital currency for their purchases. Furthermore, efforts are underway to educate the public about CBDC’s benefits and address concerns related to privacy and security. The government hopes to encourage greater acceptance and usage of digital currency among Chinese residents by building trust and confidence in the digital yuan. Since its introduction in 2020, various regions in China have been striving to increase the acceptance of the CBDC. Several cities have distributed over 180 million Chinese yuan ($26.5 million) in subsidies and consumption coupons. 

The emergence of reports indicating that Chinese workers are converting their CBDC earnings into fiat currency highlights the challenges facing the adoption of digital currencies. Despite the government’s efforts to advance the digital yuan, deep-rooted preferences for cash and concerns about privacy and security influence consumer behaviour.

Addressing these challenges will require a multifaceted approach that combines regulatory measures, technological innovation, and public education. By fostering trust and confidence in CBDC and enhancing its usability, China can overcome barriers to adoption and realise the full potential of digital currency in its economy.