The expected launch of the Chinese central bank-backed digital currency, DCEP, is set to open up more opportunities for the development of the Macau financial industry and regional cooperation in the Greater Bay Area, encouraging economic diversification.
On the other hand, heighted oversight and control of capital flow by the authorities is likely to bring additional challenges to local casinos.
Mobile payment has gained traction in the city and across the globe in recent years, particularly in light of the recent pandemic of the novel coronavirus (COVID-19) that has accelerated the paradigm shift from cash to contactless payment means. In Mainland China, where mobile payments are much more sought after than bank cards and cash, a new payment means is in the making — the Digital Currency Electronic Payment(DCEP).
As Beijing has announced to gradually roll out its own version of a sovereign digital currency with tests undergoing now in several cities and potentially expanding to more places, Macau could benefit from this initiative as the city aims to diversify its economy to develop a financial hub — but its current main economic pillar, the gaming industry, might take a beating.
The People’s Bank of China (PBOC) has started to explore the idea of a sovereign digital currency — also known as the central bank digital currency (CBDC) — since as early as 2014, driven by the rise of cryptocurrencies and the popularity of mobile payments in the nation, which account for 83 percent of payments in Mainland China. Following years of research, the Chinese central bank announced last April the development works of the DCEP were progressing steadily with tests now being carried out in four major economic powerhouses — cities of Suzhou, Chengdu, Xiongan and Shenzhen — as well as the venues of the 2022 Winter Olympics, held in Beijing and nearby Hebei province. The exact timetable for the launch of the DCEP is not immediately clear, but China could become the first nation in the world to issue a digital central bank-backed digital currency.
“As we are now in the middle of the so-called new ‘Cold War’ between China and the United States, it’s very important for China to be the first major country deploying a proper electronic currency,” says Oriol Caudevilla, a specialist on China’s financial and banking systems. “China has never been able to fight against the US for monetary supremacy, as the U.S. dollar has been the main currency [for global transactions] for decades and it’s almost impossible to change this.”
The regular contributor to China Daily, the nation’s largest English-language newspaper, notes: “If China actually manages to make the DCEP work efficiently, more countries might be willing to accept this to some extent, and the DCEP could play a pivotal role in the internationalisation of yuan.”
And Macau could play a role in the process. In August it was revealed that the testing of the DCEP could be expanded to more places, including the Guangdong-Hong Kong-Macau Greater Bay Area. The digital currency will be operating through a two-tier structure, in which the PBOC issues the digital currency to commercial banks and institutions without the employment of blockchain technology, but the financial institutions could give out the digital yuan to the public through blockchain.
“The DCEP is going to bring a lot of opportunities to Macau, which is in a perfect position to be leveraged on this initiative,” Dr. Caudevilla pinpoints, as one of the aims for Macau in recent years is to become a financial hub to diversify its economy away from gambling. “Committed to be the trade and commercial services platform between China and the Portuguese-speaking countries, as well as being part of the Guangdong-Hong Kong-Macau Greater Bay Area and the ‘Belt and Road’ initiative, Macau, for example, could serve as a point of connection between Mainland China and some Portuguese-speaking countries in Africa for the usage of the DCEP [for cross-border transactions].”
The Outline Development Plan for the Guangdong-Hong Kong-Macau Greater Bay Area, published by the central government last year, indicates Macau should study the feasibility of establishing a yuan-denominated securities market, a green financing platform and a financial services platform for China and Portuguese-speaking Countries. In the policy address for this year, Chief Executive Ho Iat Seng stressed the feasibility study of a yuan-denominated securities market for Macau is still on-going.
Collaboration with Hengqin.
The strategic planning department of the Bank of China Macau Branch (BOC Macau), the city’s largest commercial lender by assets, notes in a statement that the launch of the DCEP could facilitate the development of digital economy in the mainland while further the internationalisation of yuan in global trade and settlement. “Located in the intersection of the ‘dual circulation’ of domestic and overseas markets, coupled with the advanced development of fintech, the Greater Bay Area has great potential for the usage of the digital yuan,” the lender says. ‘Dual circulation’ is a national economic strategy that has recently been raised by Chinese President Xi Jinping, which steers the economy to focus on domestic demand as much as overseas markets rather than simply relying on the demand abroad.
“Macau should get grasp of the opportunities arising from the development of the DCEP — the city should actively advocate for research on the innovations on the Sino-Lusophone cross-border trade and the application of the DCEP [in the field], while it should also collaborate with Hengqin to actively explore the application of the DCEP… in cross-border financial products,” the bank says.
For instance, BOC Macau proposes the digital yuan could be employed when residents from Macau and Guangdong province have to settle cross-border fees, purchases of financial products, and currency exchanges. “In this way, Macau could contribute to the development of the national digital economy, and at the same time, could seize new development opportunities.”
As the state-back digital currency is believed to help further internationalise the yuan, the DCEP could also enhance the transparency of the nation’s monetary system, allowing the regulator to have better supervision over the capital flows across the nation and curbing issues like shadow banking, in which non-banking institutions provide financial services to firms and individuals without being subject to the regulatory oversight. And this might deal a huge blow to the Macau gaming industry.
Zhou Jinquan, an assistant professor of the Centre for Gaming and Tourism Studies of Macau Polytechnic Institute, notes the digital yuan, if employed in a wide scale, might deter mainland Chinese — the main patrons for the city’s casinos — from splurging on gaming tables due to lower privacy. “As gambling is illegal in the mainland, [the regulator] might be able to track any individuals for their gaming activities through the digital yuan,” the scholar notes. “This means the accounts of mainland individuals and enterprises might be all under surveillance.”
While the DCEP could impose challenges upon the operations of land-based casinos, the gaming expert says the digital currency could technically give rise to online gaming due to the convenience. “But the point is online gaming is illegal in Macau,” he says.
The professor adds the city’s Financial System Act might need amendments for the full implementation of the digital yuan, and the territory should null the possibilities of issuing the digital version of its local currency, Pataca. The city could also work on transforming itself into a hub for digital currencies like the DCEP and the e-Hong Kong dollar, as the CBDC could become the future trend. “This could help diversify the industrial structure of Macau and advocate the opening up of the Chinese financial industry,” Prof Zhou remarks.
Besides China, a few places in the world have also jumped on the bandwagon of the CBDC. Sweden’s Central Bank, Riksbank, also announced this year it would launch its own digital currency, named as e-krona, in the future with tests undergoing at the moment; the European Central Bank also said this September it would begin exploring the pros and cons of launching the CBDC for the region. Norman Chan, former chief executive of the Hong Kong Monetary Authority, advocated a new regional digital currency backed by central banks, incorporating the Hong Kong dollar, the yuan, the Japanese yen and the South Korean won.
Dr. Caudevilla suggests Macau could join in the proposed Hong Kong digital currency project, in addition to being one of the testing grounds for the DCEP, to further develop its financial industry and become less reliant on gaming. However, while Macau might accept the CBDC this does not necessarily translate to the same tolerance for cryptocurrencies, which are beyond the oversight of the regulator and sometimes linked to crimes and money laundering.
“It is true that the regulator in Macau has taken a tough and conservative approach toward cryptocurrency, but the DCEP is not to be confused with cryptocurrencies,” he says. “The DCEP is backed by the People’s Bank of China, completely different from cryptocurrencies, which are created by the private sector and de-centralised in a way that it’s hard to know who uses these and for what purposes.”
Differences among sovereign digital currency, cryptocurrencies and third-party payment
Sovereign digital currency, or central bank digital currency (CBDC), is basically the digital form of money established by the authorities. Compared with cryptocurrencies, including Bitcoins, Ethereum, Nano and others, CBDC is an opposite concept. Issued by the state, CBDC has the legal status that cryptocurrencies lack and is subject to the oversight of the regulator, while the latter, established by private entities, are de-centralised and beyond the authorities’ reach.
One of the latest examples of CBDC is the Digital Currency Electronic Payment (DCEP) to be launched by China. Compared with other popular mobile and third-party platforms in Mainland China, including Alipay of Alibaba Group and WeChat Pay of Tencent, CBDC is a different concept as it is the money itself, and supports transactions even without an internet connection and handling of a third party.