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The International Lawyer

The International Lawyer, Volume 57, Number 3, 2024

Towards Cashless Society: International Digital Money Competition and Regulatory Implication

Lerong Lu

Summary

  • This paper analyses the rise of digital money and mobile payment systems across the world.  Money is at the heart of any financial system.  
  • Over the past two decades, both public and private sectors have proposed to create their own digital currency for the future economy.  
  • The creation of various digital currencies showcases the breadth and depth of global Fintech revolution and its far-reaching impact on commercial transactions and legal practices.  
  • Policymakers in several countries put forward the official initiative of building a cashless society, when digital money quickly replacing banknotes, coins, and cards as the default option of making payment for consumers and businesses.
Towards Cashless Society: International Digital Money Competition and Regulatory Implication
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Abstract

This paper analyses the rise of digital money and mobile payment systems across the world. Money is at the heart of any financial system. Over the past two decades, both public and private sectors have proposed to create their own digital currency for the future economy. The creation of various digital currencies showcases the breadth and depth of global Fintech revolution and its far-reaching impact on commercial transactions and legal practices. Policymakers in several countries put forward the official initiative of building a cashless society, when digital money quickly replacing banknotes, coins, and cards as the default option of making payment for consumers and businesses. Against this background, the paper discusses the operating mechanisms, benefits, and limitations of three generations of digital money: blockchain-based cryptocurrencies (e.g., Bitcoin and Ethereum), stablecoins (e.g., Tether and Diem), as well as central bank digital currencies or CBDCs (e.g., Digital Euro, Digital Yuan, and Digital Dollar). It also assesses popular mobile payment systems (e.g., Apple Pay, Android Pay, Alipay, and WeChat Pay) and identifies the legal and regulatory challenges presented by digital money. The paper will be of interests to international financial lawyers, academics, students, and policymakers who deal with Fintech and digital economy.

Keywords: Fintech, Digital Money, Virtual Currency, Mobile Payment, Cashless Society, Cryptocurrency, Bitcoin, Stablecoin, Central Bank Digital Currency, CBDC

I. Introduction

Money is at the heart of any financial system. The paper discusses the revolution of digital monetary and payment systems, which has the far-reaching impact on people’s life and work. It also affects the way in which most commercial and financial transactions are conducted. Over the past two decades, both public and private sectors have proposed to create their own digital currency for the future economy. Since the invention of Bitcoin in 2008, as the first generation of blockchain-based cryptocurrencies, we have seen the emergence of over 10,000 digital coins across the world. Most cryptocurrencies like Bitcoin and Ethereum are launched by private entrepreneurs and corporations, challenging the dominant position of central banks and monetary authorities who used to preserve the power of making money and governing its circulation. Cryptocurrencies have certain advantages like decentralisation and anonymity, but they are also criticised for aiding illicit activities and money laundering. But, one significant disadvantage of crypto coins is the price instability, making them a less desirable option for serving as the medium of exchange. Accordingly, stablecoins, such as Tether and Diem, have been created to address the problem of price volatility as their value is pegged to mainstream currencies, commodities, and financial instruments.

To counter the rise of privately issued digital coins, central banks began to create official or sovereign digital currencies, known as central bank digital currencies (CBDCs). Notable CBDC projects include the European Central Bank’s digital euro, the Bank of England’s digital pound, the People’s Bank of China’s digital yuan, and the US Federal Reserve’s digital dollar. Publicly issued CBDCs compete with private cryptocurrencies for greater use in international financial markets and domestic retail and wholesale scenarios. This phenomenon is described as international digital money competition, and the winner will become tomorrow’s mainstream currency. Meanwhile, the time has witnessed the digital transformation of payment methods, for people and businesses are embracing contactless and mobile payment instruments like Apple Pay, Google Pay, Alipay, and WeChat Pay. Thanks to the prevalence of digital money and payment systems, a number of countries and cities are quickly becoming a cashless society.

This paper aims to discuss and analyse the global rise of digital money and mobile payment networks, which is quickly replacing banknotes, coins, and plastic cards as the default option of making payment for consumers and businesses. It explains the operating mechanisms, advantages, and limitations of three generations of digital money: blockchain-based cryptocurrencies, stablecoins, and CBDCs, while considering the popularisation of mobile payment systems across the world. Relevant legal and regulatory issues surrounding digital money and payment will be covered in the analysis. The paper will be of interests to international financial lawyers, academics, students, policymakers, and think tanks who deal with Fintech and digital economy, providing an insight into the frontier of international monetary law, technology law, and financial regulation.

The paper proceeds as follows. After this introduction, Part II presents an overview of the fast evolution of digital money and payment systems, as governments and financial authorities have made policy initiatives to go cashless in the twenty-first century. Part III focuses on the blockchain-based cryptocurrencies, such as Bitcoin and Ethereum, explaining their operating mechanisms and what accounts for the investment mania. It also considers regulatory issues in relation to financial stability, money laundering, and initial coin offerings (ICOs). Part IV examines the advantages and limitations of stablecoins which are perceived as a more advanced version of cryptocurrencies, invented to solve the price volatility issue. Part V considers CBDCs as global central banks and monetary authorities proactively promote official digital money in order to enhance public trust and maintain their economic influence. Part VI discusses the popular mobile payment networks around the world, including Fintech payment systems based on near-field communication (NFC) technology and quick response (QR) code. Part VII draws a conclusion for the paper.

II. The Evolution of Digital Money and Payment: An Overview

Currency and payment systems make up a nation’s fundamental financial infrastructure, which underpins the operation of modern businesses. Money, at the centre of any financial system, has evolved throughout history from actual commercial commodities like grains and shells to precious metals like gold and silver, and finally to paper notes that are issued by central banks. The explosive growth of digital money in various forms has been observed in the global financial system since the turn of the twenty-first century. There are several explanations for this phenomenon. Firstly, after the global financial crisis of 2007–08, businesses and consumers have been actively looking for alternatives to traditional fiat money. This is because people are losing trust about the current banking and monetary institutions. Fiat money (i.e., banknotes and coins) has dominated world’s economy for a long time, as they are issued by one country’s central bank or financial authority, such as the US dollar, Euro, the British pound, and Chinese yuan. Secondly, the growth of the digital economy has been facilitated by recent technological advancements in the areas of artificial intelligence, big data, cloud computing, and blockchain. It causes cutting-edge financial technology to emerge. Due to the widespread use of personal computers, smartphones, and the internet, digital currency and payments are now technologically ready. Thirdly, the Covid-19 pandemic has sped up society’s shift to a virtual economy because a large portion of people have been conducting business, relaxing, and shopping from home. This has led to a rise in demand for Fintech and digital money services that can be easily accessed online, through mobile apps, or in the Metaverse.

As a result, numerous types of digital currency have emerged, as both private and public sectors propose to create their own digital currency for the economy of the future. So far, we have seen three waves of digital money creation. The first wave is the rise of blockchain-based cryptocurrencies. Privately created cryptocoins like Bitcoin and Ethereum, which challenge the status quo of the global financial system and central banks’ dominant role in money production and circulation, have swiftly become prevalent as both a new asset class and a payment method. In 2008, the concept of Bitcoin was invented by Satoshi Nakamoto who published an online paper advocating a new form of electronic cash that people can send to each other without going through disgraced banks. Various types of digital tokens, including Dogecoin, Cardano, and Ethereum, have since grown in popularity. There were 10,397 types of digital currency being traded globally as of February 2022. A few benefits of cryptocurrencies are decentralisation, cost-effective transactions, and anonymity. But cryptocurrencies are less suited to become the medium of exchange and the store of wealth over the long term due to their severe price volatility. For instance, the price of Bitcoin dropped below $30,000 in May 2022, which is fifty percent less than the peak it reached in November 2021.

The second wave of digital money innovation is the growth of stablecoins which have been created to address the concern of price instability as observed in most cryptocurrencies. The price of stablecoins, such as Tether (USDT) and Facebook (Meta)-backed Diem, is pegged to mainstream currencies, physical commodities, or financial instrument. They are viewed as a safer alternative by consumers and investors who can actually track the value of the assets that support stablecoins. Due to their linkage to recognised official currencies issued by central banks, fiat-based stablecoins have partially addressed the issue of weak public trust. Depending on whether they have a centralised or decentralised design, stablecoins can use a variety of price stabilising strategies. The majority of cryptocurrencies and stablecoins have been created by private companies, such as tech firms, investment funds, and entrepreneurs, and their lack of government support appears to limit their ability to gain wider adoption.

The third wave of digital money invention is the occurrence of central bank digital currencies (CBDC). Global monetary authorities and central banks have started to design their own versions of digital currencies, known as CBDCs or sovereign digital money, so as to maintain their prestigious status and influence over economy. The Bank for International Settlements (BIS) reports that eighty-six percent of central banks surveyed have been actively involved in CBDC-related research projects, proofs of concept, and pilot programmes. In the 2020s, CBDC is likely to be the most important undertaking for central banks around the world. Some well-known CBDC pilot projects include the European Central Bank’s digital euro, the People’s Bank of China’s digital yuan, and more recently, the US Federal Reserve’s digital dollar. Countries like China intend to use CBDCs to support the implementation of their national strategy of currency internationalisation by encouraging the wider use of sovereign digital money in cross-border, retail, and wholesale transactions. We can anticipate the coexistence of both private and public digital money in the near future, which will present several technical obstacles and regulatory issues.

Apart from the three waves of Fintech innovations in money, payment methods have gone through tremendous digital transformation over the past decade. The rapid adoption of mobile payment over more established payment methods like cash, checks, and bank cards is mostly attributable to the rise in use of smartphones and the introduction of high-speed mobile networks like 4G and 5G. According to estimates, 5G mobile networks would boost the global economy by $565 billion by 2034, as nations compete in developing 5G information highways. Manufacturers of smartphones sold 314.4 million devices in the first quarter of 2022, with Samsung (which holds a 23.7 percent market share), Apple (18.0 percent), Xiaomi (12.7 percent), OPPO (8.7 percent), and Vivo (8.0 percent) dominating the industry. The popularity of smartphone use and 5G network is the prerequisite for digital mobile payments. Additionally, more retailers and customers have chosen mobile payment during the Covid-19 pandemic as physical contact of buying with cash could spread the virus. As a result, the majority of traditional brick-and-mortar businesses, including restaurants, grocery stores, clothing stores, and online-to-offline (O2O) services like bike sharing, food delivery, and taxi services, now accept mobile payments. With partnerships with more than 2,700 banks, Apple Pay has 127 million users, while the largest mobile payment system in the world, Alipay, has 1.25 million account holders. The US mobile payment market is about $112 billion, whereas the Chinese mobile payment business is worth CNY thirty-eight trillion ($5.5 trillion).

Many countries and cities have declared their intention to promote a cashless society within the next ten years as a result of the widespread use of digital currency and mobile payment options. In 2023, it is said that Sweden will completely adopt digital currency and eliminate cash. In the UK, the use of cash has declined rapidly. Cash accounted for sixty percent of all payments made in the UK in 2008, while the figure quickly dropped to twenty-eight percent in 2018. Due to its world-class telecom infrastructure and extremely high smartphone adoption rate, China has promoted a cashless society and over one billion of its citizens are familiar with e-money and mobile payment services provided by Alipay and WeChat Pay. A survey suggests that fourteen percent of Chinese residents no longer carry any cash when going out, while twenty-six percent carry less than 100 yuan ($15). The cashless or even cardless way of life has not only made shopping, dining, and using public transportation much more convenient for consumers, but it has also raised the standard for hygiene in these establishments. It is expected that more global cities and countries will go cashless in the near future, because building a cashless society is likely to be an appealing policy objective for governments and financial authorities.

III. Cryptocurrencies

A. Cryptocurrencies: Definition and Operating Mechanism

Cryptocurrency, commonly referred to as crypto, virtual currency, or blockchain-based digital currency, is a type of digital money that operates as a medium of exchange over a network of computers independent of any centralised authority like a central bank or governmental agency. Blockchain, a distributed public ledger that is updated and maintained by the coin holders, is the technology that underlies cryptocurrencies. Through a process known as mining, when investors employ computer power to solve complex mathematical issues, new units of Bitcoin are being created. Additionally, users have the option of purchasing the currencies from brokers, then storing and spending them in digital wallets. The holds of cryptocurrencies do not possess any tangible assets. Instead, they possess a digital key that enables owners of cryptocurrencies to transfer a record or a unit of measurement between individuals without the use of a dependable third party. That is why cryptocurrencies are called virtual currencies in many cases, which is opposite to physical currencies like banknotes and coins. The creation of the latter lies in the monopolised power of central banks, and their operation would require the involvement of third parties like commercial banks and payment systems.

We have witnessed an unprecedented rise of blockchain-based digital currencies including Bitcoin, Ethereum, BNB, XRP, Cardano, Solana, and Dogecoin since the debut of Bitcoin as the first cryptocurrency in 2008. Over 10,000 different coins are currently listed in cryptocurrency exchanges. Due to the fact that two cryptocurrencies - Bitcoin, with a market cap of $580.27 billion, and Ethereum, with a market cap of $250.21 billion - represent over seventy percent of the market value of all cryptocurrencies, the market is very concentrated. Due to its popularity and substantial market share, Bitcoin will therefore be used as our primary example while addressing cryptocurrencies in this paper.

The system of Bitcoin is peer-to-peer in its essence, for transactions occur among users directly without the involvement of traditional financial intermediaries. Each user is a tiny fraction of the whole Bitcoin universe. The creation and exchange of Bitcoins takes place in a blockchain as a decentralised public record system. Clearly, Bitcoin and the underlying blockchain technology not only represents the very frontier of the ongoing Fintech revolution, but also echoes the spirit of Adam Smith’s free-market ideology.

This section intends to analyse the Bitcoin trading and mining mania. It explores relevant legal and regulatory issues relating to anti-money laundering, evasion of foreign exchange controls, the illegal fundraising activities of start-ups by initial coin offerings (ICOs), as well as the financial meltdown and platform collapse in global cryptocurrency markets. It also considers the latest regulatory changes around the world, including various approaches in determining the legitimacy of ICOs, the restructuring of top Bitcoin exchanges, and the forthcoming state-backed digital currencies.

B. What accounts for the popularity of Bitcoin?

The rise of Bitcoin and other virtual currencies is partly because of the global financial crisis 2007–08 that has made many ordinary people and investors partly lose confidence in the existing financial system and rethink the possible future forms of money. During the Covid-19 pandemic, more people tend to use digital currencies or invest in cryptoassets as they work from home and shop online, resulting in a sharp increase of non-physical commercial and financial transactions taking place every second. Moreover, government measures to support the digital or virtual economy typically coincide with the rise in popularity of cryptocurrencies. Most nations, including Australia, China, Denmark, Germany, India, Japan, Netherlands, Norway, Singapore, the UK, and the US, have seen a considerable decline in the quantity of cash and cash-like transactions, which decreased at an average annual rate of six percent from 2006 to 2016.

In recent years, the demand for virtual currencies has taken off for a multiplicity of reasons. Firstly, an increasing number of start-up companies are choosing to raise money through initial coin offerings (ICOs). An ICO is, to some extent, akin to an initial public offering (IPO) when a private business sells shares on a stock exchange for the first time and thus becomes a publicly traded company. Issuers sell digital coins or tokens to investors who, for fiat or virtual currency, obtain a stake in the start-up, such as a right to use the service or software provided by the start-up. More companies and individuals are thinking about using ICOs to raise money or take part in investment opportunities. The marketplaces for these digital assets are less regulated than traditional capital markets. Even if they may offer a novel and effective way to conduct financial transactions, they also increase the danger of fraud and market manipulation. Unlike global capital markets, the price of digital coins largely depends on the valuation of their issuers and a small community of investors. Thus, for many newly launched digital currencies, the price hike has been considered as self-dictated, as the limited number of potential buyers means low market liquidity. The price of the cryptocoins is likely to face a sudden fall at any time.

Secondly, the Bitcoin bubble is a speculation carnival for investors and traders across the world. For global investors, Bitcoin seems to be a perfect object on which they could take a bet on its ever-growing intrinsic value. This is because there is a theoretical maximum number of all Bitcoins circulated, which is around twenty-one million (20,999,999.9769 BTC). Therefore, as time lapses, it will cost more and more time and money to mine new Bitcoins, leading to their skyrocketing price. As stated, the market capitalisation of all bitcoins was estimated to $580.27 billion as of March 2022, making it an increasingly important asset class for retail and institutional investors like hedge funds and family offices. Globally, there are predicted to be over 300 crypto-focused hedge funds, with an expected 150% market growth in 2021 and an average fund size of US$58.6 million. Besides, as a result of the growth of Fintech trading platforms like Trading 212 and Robinhood during the Covid-19 epidemic, more retail investors began participating in cryptocurrency investing.

Thirdly, the rapid rise of the Bitcoin price is partly due to strict foreign exchange (“forex”) controls in some countries. For example, the Chinese government in 2016 introduced several exchange control methods to curb capital outflows, including complex approval procedures for sending money out of the country. Due to the difficulty of transferring money between countries through official banking channels, some businesses and individuals in the affected countries try to convert local currencies into Bitcoins first, and then exchange Bitcoins into the currencies of destination. This seems to a feasible and convenient way of moving large amounts of money outside the border of any country without being caught by law enforcers, despite the potential market risks (i.e., the price fluctuation of Bitcoins). But that is partly why Bitcoin is criticised for assisting in contravening national laws and financial regulations, leading to more stringent regulatory rules to be imposed or even a total ban in certain jurisdictions.

Last but not least Bitcoin has also attracted a large number of so-called digital ‘miners’ to dig new coins and seek fortune. The process of creating new Bitcoins is called mining, for miners use special software to solve maths problems (the difficulty of which increases over time) in exchange of new coins. In the early days, miners solved maths problems by using their personal computers and processors. Later, miners tried to employ graphics cards for gaming and making 3D animation which are more efficient in running advanced algorithms to produce Bitcoins. Most recently, application-specific integrated circuits (ASICs) have been used for Bitcoin mining which has a stronger computing power but consumes less electricity. It was estimated, in 2014, that at least $1 billion was invested in mining equipment. As more and more miners joined the Bitcoin network, the likelihood for individuals to solve the maths problems decreased, so miners started to collaborate through mining pools. Each member of the pool will be rewarded a certain number of Bitcoins in proportion to their workload. Mining plays an important and indispensable role in the Bitcoin world, contributing to the system’s efficiency, stability, and security. Numerous miners and investors have become multi-millionaires overnight, as a result of the bullish market. The wealth effect, in turn, has drawn more entrepreneurs, professional investors, and tech talents into the Bitcoin arena. For example, some IT programmers in the US have turned the basements of their houses into Bitcoin mining fields, equipped with sophisticated computer hardware and monitors with scrolling lists of seemingly random numbers and letters. Some Chinese investors have set up Bitcoin mines with complex computing systems in small towns high up in the mountains where visitors have to bring their own cans of oxygen. It is because of the Chinese government’s negative attitudes towards the legitimacy of Bitcoin mining, as the large amount of money flowing from such mines is beyond the state control. A 24-hour mine like this can produce around [fifty] Bitcoins per day, which equal approximately $1.4 million based on the current market price. Clearly, China has become the centre of the cryptocurrency universe, for at its peak Bitcoin trading in the country accounted for 90% of the world’s total transactions.

C. The nature of Bitcoin: is it real money?

We have not reached a consensus on the precise nature of Bitcoin and other cryptoassets, including whether they should be regarded as money in the conventional sense, despite the feverish investing activities in these assets. Money has changed over the course of human history from commodities like cowrie shells to precious metals like gold and silver to officially issued coins and paper notes. The creation of fiat money and related payment methods like checks and bankcards in the 20th century considerably increased economic efficiency and decreased transaction costs.

In the eyes of the general public, the term money mostly refers to physical coins and banknotes. Economists believe that money has to fulfil three basic functions as a medium of exchange, a unit of account, and a store of value. In the modern economy, the majority of money (around ninety-six percent of the total) has been created by commercial banks extending loans. Legal scholars define money as any item that is generally being treated as payment for goods and services or repayment of debts by community. Clearly, money is essential to any modern commercial transactions as it solves the trust problem between transacting parties. Otherwise, any transaction would need a double coincidence of wants, which is the foundation of a bartering economy. Governments regard money as legal tender or fiat, as their acceptance by the public is prescribed by law. Fiat money derives their value from the state endorsement as they do not have the intrinsic value or use value as opposed to community money.

When Bitcoin is being examined against the aforementioned criteria to define money, we will find that it could fit into the characterisation of money to some extent. For instance, cryptocurrencies can be used as a medium of exchange. An increasing number of companies, restaurants, and charities have started to accept certain digital tokens, so consumers could exchange Bitcoin for goods and services that they want. Tesla allows consumers to purchase its brand merchandise using Dogecoin, and there has been a circulating rumour that the electric car maker would accept Bitcoin for its cars. But, most large corporations like Amazon and Walmart still do not take cryptocurrencies for payment, so the primary use of digital tokens has remained a tool for financial investment or speculation.

In the future, if cryptocurrencies are becoming more widely accepted by businesses and governments, there will be more products and services coming with a price label in Bitcoin. This will make Bitcoin a unit of account similar to mainstream currencies like USD, GBP, Euro, JPY, or CNY. In September 2021, El Salvador adopted Bitcoin as its legal tender, as the world’s first country to give cryptocurrencies an official endorsement. The vendors could not refuse to accept any forms of money if they represent legal tender. Thus, Bitcoin and other crypto tokens are likely to welcome more official backing, especially from some smaller countries who are experiencing a falling exchange rate and seeking alternatives to their own currencies.

Finally, whether Bitcoin can be viewed as a store of value is still controversial. We witnessed the spectacular rise of Bitcoin price over the past decade, as one Bitcoin was only worth $0.06 in July 2010, and now it is over $30,000. Therefore, any long-term investors or savers who have purchased Bitcoin would enjoy handsome profits compared with most financial instruments like shares, bonds, unit funds, or saving products. But in practice, most holders of Bitcoin are short-term investors or speculators who trade cryptoassets frequently within a very short time frame, like day trading. Such trading activities could expose investors to enormous market risks, as the price of Bitcoin once lost over fifty percent overnight.

D. The Risks of Bitcoin and Regulatory Concerns

The rapid rise of Bitcoin and other virtual currencies increasingly raises legal and regulatory concerns. At present, it is difficult to ascertain how large the Bitcoin bubble is, when it will burst, and what forms of governmental responses are actually needed. Clearly, over-optimism about the future of blockchain technology, Bitcoin, and any other cryptocurrencies should be avoided, as irrational exacerbation often leads to financial disaster. In an ever-changing financial world, we should bear in mind the proverb: caution is the parent of safety. Therefore, policymakers and financial regulators need to pay attention to various risks presented by Bitcoins. For example, Bitcoins have been widely used as a practical method to transfer money internationally, so as to evade national forex regulations. It has resulted in capital flight in some jurisdictions, and thus violated financial regulatory rules. This part discusses four primary regulatory concerns relating to cryptocurrencies: anti-money laundering, initial coin offering, financial stability, and the direction in which cryptocurrency will develop in the future.

The first regulatory concern is about the anti-money laundering (AML) dilemma. Aside from circumventing forex regulations, Bitcoins have been criticised for aiding global money laundering activities. For instance, in July 2017, Alexander Vinnik, a Russian citizen who operates the Bitcoin exchange BTC-e, was accused by the U.S. authority of laundering over $4 billion for criminal activities ranging from computer hacking to drug trafficking. Larry Fink, the CEO of BlackRock (the largest asset management firm in the world) commented, “Bitcoin just shows you how much demand for money laundering there is in the world. That’s all it is.” Bitcoin seems to be a perfect tool for laundering criminal proceeds as all transactions bypass the regulated banking system, making the tracking of money movement difficult for public authorities. In contrast to the traditional financial industry, bounded by disclosure and transparency rules, the Bitcoin market allows a high level of anonymity (or pseudonymity). The purchase or sale of Bitcoin does not require user identification, and Bitcoin exchanges do not need to keep a proper documentation of their users and transactions. Moreover, Bitcoin transactions can be executed through the so-called dark web by using ‘The Onion Router (TOR)’ network, which hides the real IP address of users. What makes criminal investigations more difficult is the decentralised feature of Bitcoin. A transaction typically spreads across multiple jurisdictions, creating uncertainty about which country’s authority has the power to launch a criminal investigation. It also causes difficulty in terms of which country’s anti-money laundering laws and regulations should be applied.

The second regulatory concern pertaining to Bitcoin is whether the ICOs are legitimate under securities regulation. The answer varies across different countries. The Howey Test is used in the U.S. to determine whether cryptocurrencies or initial coin offerings are considered as securities. When deciding whether a transaction meets the criteria for an investment contract, it alludes to a case decided by the US Supreme Court. If it is determined to be an investment contract, the transaction will be regarded as a security sale, and then the registration requirements of the Securities Act of 1933 and the Securities Exchange Act of 1934 will apply. Judged by the Howey Test, some cryptocurrencies and ICOs do satisfy the criteria for being investment contracts, making them subject to US securities laws. In September 2017, the U.S. Securities Exchange Commission (SEC) charged a businessman and two companies running ICOs with fraud and selling unregistered securities (around $300,000). But in cases where large ICOs are backed by major law firms and Silicon Valley tycoons, the regulator tends to interpret such practices in favor of the fundraisers. Across the Pacific, the Chinese authorities have taken a tough stance on ICOs. On September 4, 2017, the People’s Bank of China (PBOC), together with six government departments, jointly issued the ‘The Notice of Preventing Financial Risks Relating to Initial Coin Offerings’ (“the Notice”). This piece of regulation plays a vital role in determining the legal status of ICOs in the world’s largest market for Bitcoins and other cryptocurrencies. The Notice describes ICOs as unregistered and illegal public fundraising activities, which could result in criminal sanctions under PRC Criminal Law, including for illegal selling of tokens, illegal securities issuance, illegal fundraising, and for financial fraud and pyramid schemes. In addition, it has imposed an immediate ban on any new ICOs. Organisers of completed ICOs are required to set up repayment arrangements, so as to protect the interests of existing investors and to manage financial risks. As ICOs have been deemed illegal in China, the Bitcoin price immediately fell by nine percent to $4,437 following the release of the Notice.

Thirdly, when dealing with the booming virtual currency market, global financial regulators have placed a high priority on the protection of financial stability.

Although the $150-billion cryptocurrency market only takes up a small proportion of the entire financial industry, its rapid growth suggests its increasing importance. The recent price hike likely indicates the formation of an asset bubble. Clearly, investors who entered the Bitcoin market at an early stage have profited handsomely from the massive rally, but for new investors, there seem to be more risks than prospective benefits. The continuing bullish market is, to some extent, driven by pure speculation rather than the fundamentals of virtual currencies. A further price correction is expected in the near future. [Fifteen years ago], the burst of the U.S. subprime housing bubble triggered the global financial crisis and subsequent economic recessions. The destructive power of a financial bubble is self-evident as it undermines people’s confidence in the capitalist economy and liberal democracy. The Chinese central bank and securities regulator are particularly wary of any signs of a speculative bubble, for the country encountered a devastating stock market crash in 2015. The burst of the Bitcoin bubble could have a negative impact on the global economy and even cause social unrest, as relevant investments are not covered by official financial protection schemes, like deposit insurance. As a result, when a crisis hits, Bitcoin investors will have to bear all financial losses themselves. Thus, in September 2017, the Chinese authorities ordered some top Bitcoin exchanges (including OKCoin, Huobi, and BTCC) to close down and submit plans for liquidating their businesses, so as to cool speculative activities and prevent the next financial crisis. The market responded fiercely to the announcement, as the Bitcoin price slumped by over twenty percent. But Over-The-Counter (OTC) transactions are still allowed, and mining activities have not been affected so far. Accordingly, whether such extreme regulatory methods are effective or not remains unclear. These methods could force investors to trade directly with each other or trade through foreign platforms, leading to extra financial risk and greater difficulty in monitoring and supervision.

In November 2022, FTX, the world’s third-largest cryptocurrency exchange based in Bahamas, suddenly collapsed due to a liquidity crisis. The bankruptcy of FTX resulted in billions of investor losses, and its senior executives have faced fraud and other charges in the US, as more than $8 billion in FTX’s customer funds is missing. The failure of a significant cryptocurrency exchange can have effects on investors and the overall economy that are equivalent to those of previous financial crises, as demonstrated by the case of FTX.

Fourthly, policymakers and financial authorities are concerned about the direction of cryptocurrency development going forward. As mentioned, one distinctive feature of cryptocurrencies is decentralisation and non-authority intervention. But this is about to change as governments in several countries have been testing state-backed cryptocurrencies. The issuance of notes and the creation of new money have been the preserve of central banks for centuries, until the recent invention of peer-to-peer virtual currencies, so it is unsurprising that monetary authorities feel reluctant to hand over this great power to individuals and companies that can easily create a new virtual currency simply with personal computers connected to the Internet. An official cryptocurrency seems to be a compromise between financial innovation and state control. State-backed virtual currencies will make it easier for central banks and financial regulators to oversee the money flow and detect underlying financial risks. In addition, it could also facilitate the making, implementation, and adjustment of monetary policies in particular jurisdictions. Since 2014, the PBOC has carried out several trial runs of its prototype digital currency. The PBOC could be the first major central bank to issue virtual money endorsed by the state. The Bank of Canada is also examining the possibility of introducing a government-issued digital currency. A consortium of Japanese commercial banks have recently obtained a regulatory approval from the central bank and financial regulator to launch the ‘J-Coin,’ a quasi-official cryptocurrency that can be used to pay for goods and services as well as transfer money via smartphones.

IV. Stablecoins

A. Stablecoins: Definition and Operating Mechanism

The second generation of digital money is often referred to as stablecoins, such as Tether (USDT), CACHE Gold, and Facebook (Meta)’s Diem. They have been created by corporations and other private entities to resolve certain shortcomings of the first-generation cryptocurrencies, especially their extreme price fluctuation and value instability. As their name suggests, stablecoins have been designed to possess value that is relatively stable, as they will be backed by real assets like traditional currencies and commodities in most scenarios. Stablecoins are intended to trade at part with a benchmark asset, usually the U.S. dollar or gold. As a result, stablecoins can be utilised better as the unit of account or store of value, as well as in other situations where it might be less advantageous to employ volatile cryptocurrencies. While preserving stability in relation to their reference assets is a key goal shared by all stablecoins, there are significant differences between them in terms of their economic structure, backing quality, stability assumptions, and legal safeguards for coin owners. Stablecoins are most commonly acquired by traders and investors through exchange platforms. Besides, by putting down the necessary collateral with the issuing company, such as US dollars with Tether or actual gold with CACHE, it is also possible to create brand-new stablecoins.

Rank

Name

Price

Market capitalisation

Circulating Supply

1

Tether (USDT)

$1.00

$80,427,905,969

80,351,588,890 USDT

2

USD Coin (USDC)

$0.9999

$32,378,960,875

32,377,344,130 USDC

3

Binance USD (BUSD)

$1.00

$6,957,890,908

6,956,739,385 BUSD

4

Dai (DAI)

$0.9996

$5,251,364,278

5,252,802,018 DAI

5

TrueUSD (TUSD)

$1.00

$2,115,219,413

2,112,950,272 TUSD

Table 1 Top five stablecoins by market capitalisation as of 2023.

Since 2019, stablecoins have attracted lots of media attention, when Facebook (Meta) attempted to launch Libra (later on it was renamed as Diem) as the social media giant’s own cryptocurrency and payment system. The Diem has nonetheless later come under harsh criticism and opposition from central banks, academia, and the general public over issues related to monetary sovereignty, financial stability, data privacy, and anti-competitive issues. As of April 2023, the total market capitalisation of stablecoins amounted to $132.62 billion, representing 12.8 percent of the overall value of all cryptocurrencies. Because the majority of stablecoins are backed by U.S. dollars in a 1:1 ratio, they have often been traded at a price of near $1 USD per coin. From Table 1, we can see that the most popular stablecoins are Tether (USDT) and USD Coin (USDC) as they have a market capitalisation of $80.43 billion and $32.38 billion respectively. Other leading dollar-backed stablecoins are Binance USD (BUSD), Dai (DAI), and TrueUSD (TUSD), which all have a collective value of over $1 billion Clearly, stablecoins are viewed as one of the most feasible options for future digital money, given their price stability mechanism and close link with mainstream currencies, commodities, and other real assets.

In practice, stablecoins are reliant on a collection of technologies akin to those powering more well-known cryptocurrencies like Bitcoin and Ethereum. Therefore, the users of stablecoins could enjoy the same benefits offered by any cryptocurrencies like transparency, transaction security, anonymity, and privacy, as we have discussed in the previous section. Stablecoins, on the other hand, are less susceptible to price fluctuations, which are thought to be the biggest problem for most digital coins and prevent them from being widely used as a major currency. To reduce their price volatility, the majority of stablecoins have their value pegged to one or more mainstream world currencies or to other tangible assets like gold and silver. Stablecoins are therefore a special category of cryptocurrency whose price is supported by the value of their underlying assets. To maintain public confidence and price stability, the company or other entities that produce and operate stablecoins would need to maintain a reserve of underlying assets equivalent to the total quantity of stablecoins in circulation. Stablecoin owners have the option to redeem their coins for the underlying assets.

The popularity of stablecoins is partly attributed to the growing trend of decentralised finance (DeFi), which refers to the provision of financial services and products by using smart contracts and blockchain-based protocols. DeFi allows consumers to access basic financial services like saving, lending, borrowing, and investments without the involvement of banks and other financial institutions. Stablecoins are the application of DeFi in the money and payment systems, which forms the foundation and key infrastructure of a decentralised financial world. Investors, by purchasing stablecoins and depositing them into decentralised lending protocols, could achieve a better return than traditional fixed-income investments like savings, bonds, and money market funds. For instance, TerraUSD holders have been provided with a twenty percent annual return on investment which is the primary reason for stablecoins’ rising popularity. The higher return and potentially safer design make stablecoins appeal to many risk-taking investors of cryptocurrencies or traditional investors holding financial assets such as shares and bonds.

B. The Main Categories of Stablecoins

Based on how they function, particularly the type of the underlying assets, there are four distinct types of stablecoins. Firstly, fiat-backed stablecoins, which are the most common stablecoins, as their value is backed by U.S. dollar, Euro, Chinese yuan, or other major fiat currencies at a fixed ratio like 1:1. The examples of fiat-backed stablecoins are TrueUSD (TUSD), Tether (USDT), USD Coin, and Facebook (Meta)’s Diem. Most of them have been created by issuers who hold off-chain (i.e., not on the blockchain) collateral through regulated banks that serve as the depositary of fiat currencies to support the value of such stablecoins. The creation of fiat-based stablecoins is intended to promote wider use of cryptocurrencies. As a result, cryptocurrency users can utilise fiat-pegged stablecoins to make online purchases just like they would with any other kind of virtual money. Fiat-pegged stablecoins have another noteworthy feature in that their value is correlated to that of the fiat currency that serves as their underlying asset. Accordingly, they don’t fully base their value on the short-term effects of supply and demand, so fiat-backed stablecoins are typically seen as a more trustworthy type of cryptocurrency.

Secondly, commodity-backed stablecoins, which are pegged to the price of commodities and physical assets including precious metals, oil, and real estate. Gold has been the most common commodity to be used as collateral for such stablecoins. Traditional commodity investors are particularly drawn to commodity-backed stablecoins. It is because the stablecoins enable them to invest in gold without having to source and store real gold, which could be expensive and time-consuming. Examples of commodity-backed stablecoins are Tether Gold (XAUT) and Paxos Gold (PAXG). The stablecoins can typically be redeemed by their holders at a conversion rate to obtain the real assets. However, the cost of holding and safeguarding the commodity backing is part of the stablecoins’ operation.

Thirdly, crypto-backed stablecoins have their price being collateralised by one or a portfolio of cryptocurrencies, and the peg is executed on-chain (i.e., on the blockchain) via smart contracts. Stablecoins backed by crypto function essentially the same as stablecoins backed by fiat; they maintain the value of a pegged asset. But the cryptocurrency-backed stablecoin uses reserved cryptocurrency instead of money as collateral, and in most cases, Ethereum is used. One of the most well-known stablecoins with a cryptocurrency backing is MakerDAO. It pools enough ether (ETH) on the Ethereum blockchain in a self-executing smart contract to serve as collateral for its stablecoin. Users can then mint DAI, the MakerDAO stablecoin, once the amount of collateral in the smart contract hits a specific threshold.

Fourthly, algorithmic stablecoins, such as TerraUSD, which are not backed by any currencies, commodities, or virtual assets. Instead, they rely on computer algorithms to adjust the supply of stablecoins in an intelligent manner. At any time, the algorithms will automatically mint (create) new coins or burn (remove) existing coins from circulation, according to the real time data regarding the fluctuating demand for such digital tokens. A typical algorithmic stablecoin structure, known as a two-coin system, uses one coin to buffer market volatility while the other tries to maintain the peg. The former token is widely traded on secondary decentralised markets and is also identified as a balancer or sharing token. Algorithmic stablecoins rely on independent investors to engage in price stabilising arbitrage in order to get market incentives to sustain a supposedly stable ecosystem. But it is as dangerous to rely on independent, market-driven people to carry out discretionary arbitrage without being bound by the laws or any financial regulations.

C. The Advantages and Limitations of Stablecoins

Since the first wave of cryptocurrencies, including Bitcoin and Ethereum, are entirely virtual, there is no reliable process for setting their prices because they have no intrinsic value. Thus, the value of Bitcoin and most cryptocurrencies is basically determined by the overall market supply and demand of relevant digital tokens, which has rendered their price incredibly instable. Also, as cryptocurrencies have been issued by private entities, they do not have the endorsement from governments. Therefore, it is less likely for Bitcoin to become a common means of exchange due to the price fluctuation, the lack of underlying assets, and the lack of state credit. In contrast, stablecoins have been created to address these limitations associated with cryptocurrencies. They are considered a safer option for investors and consumers who could actually observe the value of assets underpinning stablecoins. In particular, fiat-based stablecoins, which are pegged to official currencies issued by central banks, have partially solved the issue of a lack of public trust.

There are various price stabilisation mechanisms for stablecoins, depending on whether they have adopted a centralised or decentralised design. Take Tether as an example for centralised stablecoins. They would need a central custodian to manage and hold the underlying assets. Tether, as it is backed by U.S. dollars, has a bank account to hold the currency reserves in an amount equivalent to the number of Tethers being circulated. Therefore, the price fluctuation of Tether could be minimised. On the other hand, there exists other decentralised stablecoins that could also achieve the function of price stability without resorting to a centralised authority. For instance, Dai, as a cryptocurrency-backed stablecoin, is operating on Ethereum blockchain. It employs smart contract to manage collaterals and maintain a value of $1.00 without actually holding any U.S. dollars in a bank account. This is done through the automatic adjustment of the number of digital coins in circulation to prevent price fluctuation.

It is debatable if stablecoins will actually be able to attain long-term price stability, which is a requirement for developing a widely used type of digital currency. Clearly, the price of stablecoins’ underlying assets could still undergo fierce price change. In recent years, we have experienced the Covid-19 pandemic, the war in Ukraine, and many other economic or geo-political incidents leading to enormous price fluctuation of major currencies and commodities like oil and wheat. A lot of ‘black swan’ events expose investors to highly unexpected financial risks, and it is unlikely to have fully safe or stable assets in the current macroeconomic environment. Therefore, if the underlying assets of stablecoins start to lose value or become illiquid during any economic turmoil, the price of stablecoins, correspondingly, will be likely to experience high volatility. In this sense, the price of stablecoins is not always stable, so its name might be a misleading label. It is simply that inventors and operators of stablecoins try to use their names to attract more risk-averse investors.

The U.S. Federal Reserve, in its ‘2022 Financial Stability Report,’ pointed out that stablecoins are susceptible to runs when investors rush to convert their holding of stablecoins to underlying assets. In May 2022, the price of TerraUSD fell below $1.00, which is the value figure that most dollar-backed stablecoins would like to maintain. It’s because Luna, a sister cryptocurrency to TerraUSD that uses the same operating system, underwent a price crash and dropped from over $100 to under a penny. Moreover, many investors of Tether, the world’s largest stablecoin, have often raised the concern of whether Tether has sufficient U.S. dollars or other dollar equivalents in its bank account to support their token value. In February 2021, Tether settled a legal dispute with the New York Attorney General’s Office, as the corporation and a crypto firm Bitfinex agreed to pay a total fine of $18.5 million for making false statements about the backing of Tether. According to Attorney General Letitia James, “Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie.” Besides, a senior regulator from the U.S. warned Tether investors about the lack of interoperability because stablecoins based on dollars cannot be exchanged for one another directly. Not all stablecoins operate in a same way across multiple blockchains. For stablecoins to be widely utilised in daily payment rather than investing, this could be a significant barrier.

V. Central Bank Digital Currencies (CBDCs)

There is no denying that the global economy has been embracing Fintech-enabled digital money. But it is less certain about which form of digital currencies will dominate tomorrow’s financial world. As discussed, cryptocurrencies are prone to significant price fluctuation, and their lack of public authority and ineffective regulation often cause regulatory challenges like money laundering and financial instability. Similarly, the value of stablecoins is not always stable as their operators have claimed, due to the insufficient reserve of underlying assets. So far, it doesn’t seem like traditional fiat currencies could be replaced by either the first-generation cryptocurrencies or the more current stablecoins. Therefore, as an official response to the crypto age, central banks and monetary authorities around the world have started investigating and testing central bank digital currencies (CBDCs). This section considers the incentives for central banks to introduce official digital currencies and the various design options of CBDCs.

A. CBDCs: Definition and Operating Mechanism

Aside from cryptocurrencies and stablecoins, the third type of digital money is state-backed CBDCs or sovereign digital currencies. They denote the official solution to the rise of digital money and Fintech payment networks. Central banks aim to exploit CBDCs to join the currency competition, having addressed certain limitations of privately issued digital tokens. CBDCs have certain advantages that are typically found in central bank-issued money (i.e., banknotes) such as settlement finality, liquidity, and integrity. Such features make them more widely acceptable for digital economy. CBDCs are the digital representation of sovereign currency made by one jurisdiction’s monetary authority that will appear on the liability side of their balance sheets. Contrary to decentralised money like Bitcoins or stablecoins, CBDCs are governed by a centralised system similar to that for conventional currencies, like U.S. dollars, Euro, British pounds, and Japanese yen. Since the government is pushing for digital payment and a cashless society, all transaction records and stored data of CBDCs will therefore be accessible to authorities. CBDCs also contribute to more effective monetary policy solutions, as they not only act as official money and payment systems but also work as an interest leverage tool. In practice, CBDCs could even be charged with extra regulatory functions like the anti-money laundering tool, fraud prevention procedure, as well as cross-border applications to accelerate currency internationalisation.

CBDCs have drawn a lot of interest recently as a potential digital substitute for conventional fiat currencies. CBDCs are issued and backed by central banks that are in charge of preserving the integrity and stability of the financial system. CBDCs are a new type of money being issued digitally by central banks as legal tender, which is genuine money in the legal and economic sense. This makes them distinct from privately issued cryptocurrencies like Bitcoin. CBDCs represent cash-like direct claims on the central bank. The Bank of England perceives CBDCs as a financial innovation in terms of both the form of money provided to the public and the financial infrastructure on which payments can be made. CBDCs have the potential to develop into a regulatory toolset if used widely. Initially, they are utilised as an official cash alternative to compete with other digital currencies. Different technological standards, such as distributed ledger technology or a more centralised strategy, can be used to build and deploy CBDCs. Regardless of their design features, CBDCs are expected to be subject to regulatory requirements that are comparable to those that apply to conventional fiat currencies as well as extra regulatory rules because of their digital character, such as cybersecurity and data privacy laws.

According to the Bank for International Settlements (BIS), eighty-six percent of sixty-five surveyed central banks have been engaging in some form of CBDC work, with sixty percent of them having progressed from conceptual research to experiences or proofs-of concepts and fourteen percent moving forward to development and pilot arrangements. Since 2014, the People’s Bank of China (PBOC) has carried out several trial runs of its prototype cryptocurrency, as it could be the first major central bank to issue virtual money endorsed by the state. In 2018, the Bank of England has further explored the design mode of freely trading bank deposits against CBDCs by elaborating several core principles of CBDC issuance. In January 2022, the U.S. Federal Reserve expressed potential interest of developing its digital currencies as digital dollar and issued a discussion paper examining pros and cons of the adoption of CBDCs. At present, CBDCs seem to be the most viable non-physical currency option for digital economy thanks to their advanced regulatory functions, the stable value, and most importantly, the official endorsement and wide acceptability. But it is argued that CBDCs may increase the risk of bank runs because a significant quantity of savings will likely be moved away from commercial banks. In addition, CBDCs could result in the rise of surveillance state when governments are able to collect more transaction data from citizens and restrict their financial freedom.

B. Market vs State: The Currency Competition

The decentralisation and lack of interference from governments are two distinguishing characteristics of cryptocurrencies. This is set to change, though, as a large number of countries have been experimenting state-backed digital currency. Up until the recent invention of peer-to-peer virtual currencies, the issuance of notes and the creation of new money had been the exclusive preserve of central banks for centuries. As a result, it is not surprising that monetary authorities are reluctant to transfer this great power to individuals or organisations since anyone with access to the Internet can now easily create a new virtual currency. An official cryptocurrency appears to be a compromise between governmental control and financial innovation. As of 2023, a hundred nations were studying CBDCs in some capacity, with some testing and possibly giving them to the general population. Evidently, one possible turning point in the history of money is the introduction of CBDCs. With CBDCs, central banks and financial regulators will find it simpler to monitor the money flow and identify underlying risks associated with state-backed virtual currencies. Other benefits of CBDCs include settlement finality, liquidity, and integrity, which are often present in central bank-issued money. These advantages make CBDCs a more commonly accepted form of payment for digital trade.

So far, the digitisation of money has raised the mounting issue of currency competition, as both private and public sectors compete to create new forms of digital tokens, making their own monetary standards for the future economy. CBDCs seem to be an effective solution in the eyes of monetary authorities because they help to restrict the use of privately produced digital currencies, which could endanger monetary sovereignty and financial stability. It is also challenging to monitor and regulate privately issued digital money operating outside the realm of a country’s financial regulatory architecture. In contrast, CBDCs are a sort of centrally controlled cryptocurrency that central banks can use to counteract the market dominance of private payment systems. Central banks are able to monitor almost all transactions made by CBDCs. The regulatory powers against criminal and illegal activities may be expanded for CBDCs. In the event that a large amount of data is gathered through their use, CBDCs could also serve as a future regulatory toolkit for financial authorities. Evidently, CBDCs compete more favourably than other digital currencies thanks to the strong backing of the national credit and the requirement of compulsory circulation. CBDCs could assist central banks in increasing the efficiency of monetary policy. Due to their digital nature, CBDCs can be used as a payment method as well as an interest-leverage instrument to improve the way monetary policies are transmitted. It is clear that CBDCs make it more straightforward for central banks to develop, implement, and adjust monetary policies in most jurisdictions. Since CBDCs are the fiat currency issued by a central bank, they benefit from the attribute of having unlimited legal credit. They are subject to the same legal indemnity framework as banknotes and coins due to the fact they are considered as legal tender. If the requirements for acceptance are met, neither individuals nor businesses may refuse to accept CBDCs when they are being used to pay any public or private debts. Being legal tender is the ultimate goal for any digital currency if it is going to be used on an expansive basis, so this is a significant competitive advantage for any CBDCs.

C. CBDCs’ Design Options and Characteristics

Next, it will examine five essential design elements for CBDCs. First, CBDCs are likely to substitute cash in circulation, which is known as M0 in economics. In practical terms, CBDCs often function as M0 to replace cash as the fundamental unit of money. M0 is the term used to describe the currency used by people in daily transactions, as opposed to the reserve currency kept in banks. It is classified as money in the strictest sense since banknotes are “monopolistically issued by the central bank of a sovereign state” and because there are alternative commonly used payment methods like checks and credit cards. Currency is divided into layers according to its liquidity: “M0 is the direct claim on the central bank with the highest liquidity; M1 contains both currency in circulation and tradable deposits, which represents the direct purchasing power of society as a whole; M2 typically consists of M1 and other non-tradable deposits such as the time deposit; and finally, M3 is made up of M2 and other current assets like government bonds, bank acceptances, and commercial paper.” When calculating the inflation rate and making monetary policies, central banks should classify CBDCs as cash (rather than deposits or other current assets) if they are to be considered M0, which would give them immediate purchasing power on the commodity market. On the other hand, the fundamental idea behind issuing CBDCs is the digitisation of currency whose inherent value is just as secure as legal tender.

Second, CBDCs can be used in three different application contexts: retail, wholesale, and cross-border. Retail CBDCs, often referred to as general purpose CBDCs, are virtual currencies designed for use by individuals and small businesses. They can be applied to a range of transactions, including in-person, online, and peer-to-peer payments. Retail CBDCs are easier to use and marketed towards the general public. Most existing CBDC projects, such as China’s digital yuan and Sweden’s E-krona, targeted retail transactions. “At retail level, the simplest and most common model for completing transactions is the direct cash payment without any settlement activities through banks or other financial institutions.” The benefits of cash payments in this situation are evident, including their adaptability, rapidity, and widespread acceptance. Cash becomes the best payment mechanism for retail purchases, which is also what CBDCs want to do. Furthermore, CBDCs can lower clients’ storage expenses and dangers associated with carrying cash. It lessens the time lag and lowers the cost of transfers among commercial banks. They can also reduce a nation’s maintenance costs for its currency. Wholesale CBDCs, on the contrary, are digital currencies made for use in high-value interbank settlements and other financial transactions conducted by banks and other major financial organisations. They are designed for usage within the financial sector and are not often available to the general public. The design aspects of CBDC applications vary in real-world use. While Dinero Electronico in Ecuador and Petro in Venezuela are primarily focused on retail CBDCs, Project Jasper in Canada adopts a hybrid approach with an emphasis on wholesale CBDCs. Apart from the retail and wholesale applications, by enhancing CBDCs’ cross-border applicability, central banks can encourage the further development and widespread adoption of sovereign digital money. For example, “according to the Financial Stability Board (FSB), there is a consensus among major economies, such as the G20, to enhance cross-border payments.” It is evident that national economies would benefit if CBDCs offered cross-border payment services that were less expensive, faster, more transparent, and inclusive.

Third, CBDCs could be offered in either token-based or account-based formats. Despite being a purely technical issue, the division of CBDCs has significant effects on their design, expense, identity verification, and access management. Account-based CBDCs are digital currencies that may be accessed using a digital wallet or other electronic devices and are kept in a central bank account. They can be used for a number of transactions, including peer-to-peer payments, online purchases, and in-person payments. They can be held by individuals, companies, and financial institutions. A trusted third party is often used in an account-based method to confirm a user’s identification as the account holder. It is also used to check user’s account balance before allowing them to make a payment. The accounts are then appropriately debited and credited. Account-based CBDCs could result in unnecessary expenses, and the requirement for additional verification stages could incur similar costs and deficiencies in current financial systems. For wholesale CBDC and interbank payments, where the compromise between accessibility and identity proof seems to be more clear-cut, an account-based solution might be more appropriate. In contrast, token-based CBDCs are digital money represented by a digital token or other tokenised assets. They are transferable between users and can be kept in a digital wallet or other technological device. CBDCs built on tokens may offer further features or capabilities, like the compatibility with smart contracts or other programmable forms of currency. In practice, the verification of token-based CBDCs employing blockchain technology removes the requirement to check a customer’s balance before approving a transaction. A transaction will be automatically executed, as long as users can prove their identity as the token holder, such as providing a private key and signing the transaction and meet the necessary level of identity criteria. Although there is a danger involved when a private key is lost, there are ways to maintain the control of ownership in such situations. Without the requirement for an account, token-based systems can offer a more direct, cash-like approach. The multi-factor authentication is used to stop double-spending, which is the practise of simultaneously spending or spending the same cash more than once.

Fourth, CBDCs’ operating models can be categorised as centralised, decentralised, or hybrid. A central authority, such as a central bank, which has the authority to control the flow of currency and keep an eye on transactions involving it, issues and regulates centralised CBDCs. This is the most common design option for global central banks. But CBDCs, that function in a decentralised manner, are supported by distributed ledger technology, such as blockchain. Transactions with decentralised CBDCs are documented on a public, decentralised network and are often protected by cryptographic methods. The additional design option could a hybrid CBDC, where decentralised and centralised components of CBDCs are combined. They operate similarly to a centralised CBDC in a way that they are issued and managed by a central bank. But they are also supported by a decentralised ledger system, making them comparable to a decentralised CBDC or other first-generation cryptocurrencies like Bitcoin and Ethereum. Compounding the advantages of both centralised and decentralised digital currencies is the ultimate aim of creating any hybrid CBDC. For instance, a hybrid CBDC can provide transaction efficiency and transparency that typically belong to a decentralised digital currency, whilst possessing the beneficial features of a centralised digital currency, such as state credit, security, and stability. As a result, this might make hybrid CBDC a more appealing choice to governments and a broader range of users, such as individuals, corporations, and financial institutions.

Fifth, the anonymity design is likely to be another crucial feature of CBDCs. When creating CBDCs, central banks must strike a fine balance between the requirements for anti-money laundering (AML) compliance and the protection of personal data privacy, so the anonymity feature should be carefully considered. In the European Union (EU), the proportionality test is a requirement for member states to ensure that the regulatory power given to any governments under a particular law does not improperly restrict other fundamental rights. The Court of Justice of the European Union (CJEU) may review the AML transaction monitoring procedure to determine whether a case requiring banks to implement the detection and reporting of suspicious customer activity complies with the General Data Protection Regulation (GDPR). Future outcomes of AML legislation enforcement may be subject to extrajudicial assessments because the protection of data privacy as a fundamental human right must first be respected. Thus, the EU member states are most likely to adopt the anonymity mechanism when designing their CBDCs. They will then gradually improve the design features for containing AML risks in order to balance the fundamental rights of individuals with the protection of public interest and reduce compliance costs. This viewpoint has been strengthened by the latest study conducted by the European Central Bank (ECB) on the anonymity of CBDCs. However, when personal data is used to identify and prevent crimes, Chinese authorities tend to believe that it is exempt from data protection laws. In mainland China, there are no special provisions that address the issue of AML compliance with respect to the collection of personal data, but the country’s Personal Information Protection Law (PIPL) does mandate that administrative officials and regulators should only collect personal data to the extent necessary to meet legal requirements. As a result, creating a token-based CBDC system with complete anonymity is seen as a risky endeavour and is unlikely to be approved by Chinese regulators in the future. China’s digital currency is probably going to follow the controlled anonymity approach. The authentication of digital yuan users’ identities relies on a controlled anonymity system that fully utilises the particular features of the digital currency: ‘front-end voluntary’ and ‘back-end real-name’ in order to preserve privacy and personal data protection. When users transact with one another, it is anonymous; however, the central bank will keep all transaction data under the real names of the users.

It is clear that individual countries have distinctive political, economic, and legal systems; thus, they might adopt different strategies to make their current financial and legal frameworks more compatible with the CBDC experiments. The importance of carefully weighing the benefits and limitations of various CBDC solutions is paramount, as central banks and financial regulators need to adjust their policy initiatives to meet their unique local circumstances. The practical requirements and policy goals of a country will ultimately dictate how a CBDC project is designed and implemented within its borders.

VI. Mobile Payment Systems

A. The Historical Development of Payment Methods

The payment industry has witnessed significant changes over the past two decades. People can now make payments using a variety of methods, including cash, checks, credit cards, debit cards, mobile banking, direct debit, and standing orders. A total of 39.3 billion payments were made in the UK in 2018, with approximately ninety percent of those coming from consumers and the rest coming from businesses, the government, and not-for-profit organisations. There exist traditional methods of making payments such as paying by cash (banknotes or coins) and paying by cheques. Cash payments once dominated all payment methods, but they have been in steady decline. A decade ago, cash accounted for sixty percent of all payments made in the UK, but now it fell to only twenty-eight percent. In the US, as people use cash less frequently, the number of ATMs has decreased annually over the previous few years to 451,500. It is because smartphone payments and card payments, particularly those with the contactless payment function, have grown quickly. Following the COVID-19 outbreak, a growing percentage of consumers who never used cash at all are now using cards and other payment options to manage their expenditures. Digital payments have become more common as a result of the fact that ninety-five percent of internet users now access the internet through a mobile device.

Although paying by cheques seems old-fashioned, it is still a standard payment method, especially among the older generation. Due to the growth of card payments and internet payments since the early 1990s, the use of checks has drastically reduced. In the UK, there were 1.32 billion cheque payments issued in 2008, but ten years later, that number had significantly decreased to 342 million. But when payers are unaware of the recipient’s bank account information, check payments are still a preferred payment option that are practical and secure. People who receive checks must take them to a bank branch and ask the staff members to deposit the funds into their own accounts. But, there are several drawbacks to using checks for payment. Given that checks do not always clear immediately, it could take longer than other methods of payment. Cheque recipients may need to wait a specific amount of time before the funds appear in their accounts. Furthermore, using checks requires caution because they are vulnerable to fraud. There are three basic types of check fraud: counterfeit, forgery, and fraudulently altered checks. A check is counterfeit if it was made on a non-bank paper in order to look real. Although it refers to an actual account, it was actually authored by a fraudster with the intent to commit fraud. A valid check that has a different account holder’s signature on it is referred to as a forgery. The check was signed by the fraudster to create a fake signature. A fraudulently altered check has been made out by a legitimate customer but has had some part of it changed before it has been cashed, such as changing the amount or the recipient’s name. The check is no longer valid because it has been modified.

Card payments are likely among the most used forms of payment, especially for routine supermarket and retail purchasing, aside from cash and checks. Debit and credit cards are the two primary categories of plastic payment cards. Instead of using cash, debit card users make purchases since the funds are immediately debited from their bank accounts. The money will then be instantly transferred from the payor to the payee. In many countries, debit cards have surpassed cash as the preferred mode of payment. With credit cards, users can make purchases using a line of credit provided by the institutions that issue the cards. In fact, cardholders borrow money to make payments with a pledge to reimburse the issuers later, along with interest and other fees. The evolution of bankcards has been seen over time. Magnetic stripe or swipe cards are the traditional types of bankcards. On the reverse of the cards, there is a real stripe that stores data using modified iron-based magnetic particles. When making a purchase, the cardholder must first swipe the card against the terminal device and then authorise the transaction with their personal identification number (PIN) or signature. Magnetic stripe cards are not very secure since fraudsters can easily copy the information on the strip to create a new card and use it to make purchases to steal money from bank accounts. Due to this, card issuers have been switching over to EMV chip cards during the past ten years, replacing magnetic stripe cards.

So far, the majority of bankcards have undergone an update to chip and PIN cards, which increases the level of complexity and security of financial transactions. On the top side of chip cards, there is a real computer chip implanted. The cardholder must first insert their card into the terminal before entering their PIN or signing their name. To validate and authorise the transaction, the terminal will get in touch with the issuer using the data from the chip and PIN. Compared to magnetic trip cards, chip cards offer far better security against fraud. The complicated technical standard makes it more difficult to counterfeit chips than stripes. Chips have the ability to generate a constantly changing, one-of-a-kind code each time a payment needs to be made, unlike magnetic trips that can only store static information about cardholders. It is impossible for thieves to read the information on the card because of the dynamic number. In the US, eighty-eight percent of Mastercard credit cards use chip technology presently. Additionally, more bank cards now include a contactless payment feature. It enables cardholders to conduct payment transactions by just tapping their cards over the device without entering additional information. The contactless cards’ integrated circuits store the data that the terminal will wirelessly read using the Near-Field Communication (NFC) technology. In the UK, Australia, and Canada, over sixty percent of bankcards now have the contactless capability, however the technology is still not commonly used in the US and Japan.

In addition, direct debits and standing orders are favoured when it comes to regular bill payment. Most consumers choose for standing orders or direct debits when paying regular bills to local authorities like utility companies or tax authorities. The distinction between these two payment methods is a source of much confusion. Both of these are requests for your banking institution to regularly pay a third party. When consumers create a standing order, they instruct the banks to make a payment to a certain recipient on a regular basis—for example, the utility company or the broadband service provider. Only the consumers are authorised to modify the standing order’s specifics, including the recipient and amount. It takes up to three days before the money is transferred. With a direct debit, consumers grant a third-party permission to take a specific sum of money out of their account. The funds will then be instantly sent to the account of the third party, such as the credit card provider. Standing orders are slower and more expensive than direct debits, hence direct debits have taken over as the preferred mode of payment for many businesses.

B. NFC vs QR Code: The Technical Battle for Mobile Payment

Nowadays there have been two competing sets of technologies frequently used in the mobile payment industry across the world: Near-Field Communication (NFC) and Quick Response code (QR code). Both technologies have attracted a large number of IT companies and smartphone makers, as they serve as the technological foundations for smart phone networks. NFC has been employed by notable mobile payment systems like Apple Pay, Samsung Pay, and Android Pay. In contrast, QR code has been mainly used by Chinese mobile payment providers, such as Alipay and WeChat Pay.

NFC is a simple but versatile low-power interface between two devices, supported by some international standards and an independent certification process. The NFC technology originated from radio frequency identification (RFID), and it was jointly developed by Philips and Sony as a new standard for digital devices to establish a peer-to-peer network to exchange information and data. An electronic device can gather and analyse data from another device or anything with an NFC tag, thanks to this short-range wireless technology. NFC tags are passive devices since they store information that active NFC devices can access and read. Without an internet connection, power and data will be delivered through linked inductive circuits in close proximity of a few centimetres. In practical terms, a number of major contactless payment systems employ NFC extensively. Additionally, it offers a condensed and adaptable method to convey information for advertisements and social media features like sharing contacts, images, videos, music, and files. With Android Beam, for instance, two Android phones may be held together to share webpages, pictures, contacts, and instructions.

So far, NFC has been adopted by smartphone operating systems devised by Alphabet (Google), Apple, and Microsoft. Although NFC chips have been built inside credit cards for the purpose of making contactless payments for a long time, the latest change is to incorporate such technology into smartphones and wearables like fitness trackers and smartwatches. When NFC is applied into any contactless payment system, smartphones need to be swiped at an NFC reader, which is normally installed near the cashier machines, so as to complete a contactless payment. NFC is said to digitalise people’s wallets as we only need to take a smartphone with NFC chips to buy groceries, take a taxi, or buy a cup of coffee. Users must hold their smartphones or smartwatches close to contactless payment terminals. Then, relevant payments will complete automatically within a few seconds, as the NFC devices transmit information regarding the smartphone users’ debit and credit cards. Because NFC occurs within very short distance, the payment transactions are considered secure and hard to tamper. NFC is also energy-efficient compared with other wireless communication methods. In the future, it is possible that we can store and use any plastic cards (e.g., loyalty cards, transportation cards, library cards, and business cards) into our smart devices via NFC. The potential of NFC should not be underestimated for it can be applied in various commercial scenarios. For instance, passive NFC tags can be built into printed advertisements, posters, and informational kiosks to transmit additional information that enable smartphone users to open a web address, get a discount voucher, or view a map.

QR code is a two-dimensional barcode with small black-and-white squares representing data in grid form which can be deciphered by a computer or mobile device. The barcode is a type of machine-readable optical label comprising information regarding the item where it is attached. In order to store data in a more efficient manner, QR code utilises four standardised encoding modes: numeric, alphanumeric, binary, and kanji. QR code can be scanned by electronic devices like the built-in cameras of any smartphone, and then the information will be processed by the devices using Reed-Solomon error correction until the image is finally interpreted. Finally, the data will be extracted from the visual patterns that are present in both the horizontal and vertical components of the QR code. QR codes often encompass information for a locator, identifier, or tracker pointing to a specific website or smartphone application. In 1994, QR code was first invented by Denso, a Japanese automotive manufacturer. It was originally used to track vehicle components during the manufacturing process as QR code allows workers and machines to scan a large number of components at an ultra-high speed. After QR code was invented, it became popular outside the car industry owing to its speediness of reading and great capacity of storing data. Nowadays, QR codes have been utilised in a much broader context ranging from commercial tracking applications to consumer smartphone applications. Its popularity has been growing rapidly with the arrival of the smartphone age, as over five billion people in the world now own at least one mobile device.

But QR codes have received a mixed reaction around the world. In China and some Asian countries, QR codes have become a common and everyday way of connecting offline life with smartphone apps and websites. Though, in the US and Europe, QR codes are less favourable due to the low penetration rate. Clearly, QR codes have multiple advantages over other information technologies. They are versatile and convenient in terms of marketing products and services as QR codes can be printed on product packaging, newspapers, magazines, posters, and billboards. They can be easily added to TV or online advertisements at no extra cost while adding great value to the products and services. As a result, viewers are able to interact with content creators as the QR code bridges the offline world with the online one seamlessly. Apart from that, QR codes can be created with images, logos, and other artworks to improve their visual attractiveness and enhance branding and marketing effects.

C. Case study: Alipay and WeChat Pay

With an estimated user penetration rate of 40.4% and an average annual transaction value of $3,940 per user, China has the largest mobile payment market in the world. As of 2023, the user penetration rates are 28% for South Korea, 22.7% for the UK, 22.8% for India, 19.6% for the US, and 20.2% for Germany. Alipay and WeChat Pay, two major providers of mobile payment who have been widely embraced by retailers, restaurateurs, and e-commerce platforms, control the burgeoning industry for payment apps in China. The development of mobile payment systems in China is unique in the sense that payment options used to be fairly limited just ten years ago. Cash had been the dominant form of payment for several decades prior to the rise of smartphone payment methods. Credit card use had never been broadly adopted in a nation with a large number of small businesses that serve consumers, leading to a leapfrog effect where businesses and consumers moved straight from cash to digital payment applications.

Furthermore, “alipay had a very humble beginning. It was first launched in 2003 as a simple built-in payment tool of Taobao.com.” Thanks to the rapid development of the online shopping industry over the past two decades, Taobao has become one of the most popular online shopping portals in China. In 2010, Taobao occupied eighty percent of China’s e-commerce market, with 170 million registered shoppers. It defeated eBay to become the market leader in the country. Accordingly, Alipay enjoyed an exponential growth as most transactions on Taobao were settled via Alipay. In May 2011, the People’s Bank of China (PBOC) granted third-party online payment licences to Alipay, along with another 26 internet finance companies. Thus, Alipay was among the first group of Fintech companies to obtain official authorisation to operate an online payment system. Until then, it had been largely regarded as an E-payment facility for online shopping.

2011 marked a new era for Alipay, as it expanded its payment service from online to offline. Alipay launched its smartphone APP on both Apple IOS and Google Android platforms, allowing smartphone users to pay for purchases and services in high street retailers, cafes, and restaurants. In contrast to mobile payment systems which adopt the Near Filed Communication (NFC) technology, such as Apple Pay and Samsung Pay, Alipay and most Chinese Fintech companies have chosen the Quick Response code (QR code) to carry out the mobile payment function. QR code is the trademark for a type of matrix barcode (or two-dimensional barcode) first designed for the automotive industry in Japan. Alipay uses QR code because it has a lower infrastructure threshold, making it cheaper and easier to popularise the country in a short time. When making mobile payments in-store, shoppers will use the Alipay APP on their smartphone to generate a one-off QR code, and then the retailers’ staff will hold a specially-designed barcode reading gun to scan the QR code, and complete the transaction. An alternative way of receiving payment is for some retailers to print out their Alipay accounts which are presented in QR code, and then stick the printed QR code near the counter. Consumers can use their smartphone cameras to scan the QR code and make immediate transfers. The latter method does not even require any investment in payment hardware, rendering the mobile payment facility available for everyone including small shops, street vendors, and street artists.

WeChat Pay is one of the leading third-party payment platforms, and it is affiliated to the Tencent Group. Established in 1998, Tencent is an internet-based technology and cultural enterprise headquartered in Shenzhen, which has the mission to ‘improve the quality of life through internet value-added services’. Through its user-oriented business philosophy, Tencent delivers various integrated internet solutions to billions of citizens across the world. The key products of Tencent include popular social networking software QQ and WeChat, Tencent Games, Tencent Literature, QQ Music, QQ Mail, Tencent News, and Tencent Video. By adopting ‘WeChat Pay is more than payment’ as its slogan, WeChat Pay is committed to provide safe, convenient, and professional online payment services for its users and enterprises. As of August 2018, the number of WeChat Pay’s active monthly users was around 1.058 billion. WeChat Pay has been accepted by millions of stores in over 30 industries. Users are able to use WeChat Pay when seeing doctors, shopping, dining, travelling, and paying utility bills, as the mobile payment network offers the smart life solutions. WeChat Pay is particularly well recognised for its red envelope feature, which is based on the Chinese custom of giving money to family and friends in red envelopes (“hongbao”) for special occasions.

WeChat Pay has been extensively used by Chinese residents when making payments, transferring money, and giving red envelops. As the increasing number of Chinese residents travelling overseas, WeChat Pay has also been accepted by thousands of stores across the world. WeChat Pay can be connected with a credit or debit card from over 300 banks as the payment network supports credit cards issued by JCB, VISA, and Mastercard. But the payment options might vary depending on whether the users have a bank card issued in China or not. If users have a China-issued bank card, they will be able to use the full functions of WeChat Pay without any restrictions. Users have to verify their accounts by providing identity documents such as mainland resident ID cards, Chinese passports, Mainland Travel Permits for Hong Kong and Macao Residents, or Mainland Travel Permits for Taiwan Residents. Then they can link WeChat Pay with savings cards and credit cards from over 70 Chinese banks. With the above documents verified and bank cards linked, users are able to use WeChat Pay for most online and in-store purchases. On the other hand, if users do not have a China-issued bank card, they will face certain restrictions when using WeChat Pay. It supports most Visa and Mastercard credit cards issued by any global banks. Users just need to link the cards to WeChat Wallet and can enjoy the payment services when accessing e-commerce websites or using mobile apps such as JD, Ctrip, Qunar, Didi, Air China, and China Railway Corporation. But the latter type of WeChat Pay (restricted account) can only be used to make payments but users are not allowed to transfer money or send red envelops. According to a survey, 64.4% of foreigners who live in China use WeChat Pay for multiple purposes including transportation, group buying, take-away, dining, convenience stores, supermarkets, and online supermarkets.

Alipay and WeChat Pay, as a cost-effective payment option, have brought great benefits and convenience for both retailers and consumers. It also has a profound impact on the operation of banks and traditional payment networks. The QR codes automatically generated by the smartphone apps are one-off, constantly changing to enhance the level of security. Users have to set up a passcode or use biometric information, such as the fingerprint censor and facial recognition function on their smartphones, to verify their identities before initiating payments. Alipay and WeChat Pay can be linked to debit and credit cards issued by most banks, so as to function as a mobile E-wallet.

In China, the swift shift from traditional payment (e.g., cash and cards) to mobile payment is due to the popularisation of smartphones in the last decade. Ninety-five percent of internet users in the country now go online through mobile equipment. At present, most brick-and-mortar stores like supermarkets, restaurants, and cloth shops, as well as online-to-offline (O2O) services such as taxi hailing, food delivering, and bike sharing, will accept mobile payment options including Alipay and its main rivals like WeChat Pay. Alibaba and Tencent have teamed up with millions of retailers across the country to build a cashless society. For instance, the US cafe chain Starbucks decided to accept WeChat Pay at its 2,600 shops in China, except for one located at Alibaba’s Hangzhou headquarter. Outside China, Alipay and WeChat Pay have been expanding fast to promote their innovative payment services to consumers in Asia, Europe, and the United States. In the UK, some department stores, including Harrods and Selfridges, already accept Alipay. Alipay now has 1.25 billion users all over the world, making it the largest mobile payment system contesting fiercely with its US competitors like PayPal and Apple Pay.

Making payment by smartphones has become a default option for many Chinese people. Even people asking for money on the street are presenting QR codes to receive donations instead of receiving physical banknotes and coins. The market scale of China’s mobile payment sector amounted to CNY38 trillion ($5.7 trillion), which was 50 times that of the US market ($112 billion). Alipay is extremely streamlined and convenient, allowing consumers to complete transactions in a few seconds without taking out their wallets. Recently, even the giving of red envelopes stuffed with lucky money, a millennium-old Chinese New Year tradition, has been fully digitalised. Nowadays people tend to hand out virtual red envelopes to their relatives and friends during the new year, which is a built-in function of Alipay and WeChat Pay. As a result of the proliferation of mobile payment facilities, many Chinese cities have become cashless and cardless. According to a survey, fourteen percent of Chinese no longer carry any cash when they go out, whilst twenty-six percent carry less than 100 yuan ($15), and seventy-four percent of participants said they can survive for over one month with only 100 yuan in their pockets. Clearly, smartphones installed with Alipay or WeChat Pay apps have become the only essential thing for people to carry when going out shopping, dining, and for entertainment.

As Fintech service providers rewrite the rules of the financial industry, the businesses of traditional banks and card payment systems have taken a beat. In the past, China UnionPay was the principal payment system in the country as most bank cards issued in China use UnionPay’s payment and clearing network. Even Visa and MasterCard found it difficult to compete with it. But, Alipay has surpassed UnionPay in terms of the daily number of processing payments, underscoring Alipay’s dominant position in the entire payment industry. As of 2015, Alipay earned CNY139 billion ($20.84 billion) from its payment services, which would otherwise have been channelled to UnionPay and major card issuers like the ICBC and Bank of China. Moreover, Alipay also poses a major threat to retail banking, as an increasing number of savers have moved their money from their bank accounts to Alipay E-wallets. Within the Alipay app, various financial services are provided such as wealth management, securities investment, insurance, and loan facilities. In practice, Alipay is serving as a de facto gateway to Ant Financial’s Fintech business empire. To many consumers, what makes Alipay’s E-wallet particularly attractive is an add-on service called Yu’E Bao (or left-over treasure) which invests consumers’ money into money-market funds but permits them to use and withdraw the money on demand like current accounts. Yu’E Bao offers an annualised return higher than the bank saving rates, and interest is paid on a daily base into consumers’ Alipay accounts. Attracted by the decent return and convenience, millions of savers have opted for Alipay as their default banking account, leading to a sharp drop in deposits for major Chinese banks. Yu’E Bao had around 260 million users across China, and in 2023, its users earned a total of RMB 54.5 billion ($7.63 billion) through their investment in the money-market funds. Apparently, the fast expansion of Alipay and WeChat Pay has eroded the deposit base, revenue, and profitability of China’s banking industry. It shows the competitive relationship between traditional financial institutions and Fintech platforms. Global Fintech businesses and their regulators could learn a lesson from the Chinese practices.

VII. Conclusion

Any financial system revolves around money. This paper has assessed the rapid development of digital money in its many forms since the turn of the twenty-first century. For the economy of the future, both the private and public sectors advocate creating their own digital currencies. Blockchain-based cryptocurrencies, stablecoins, and CBDCs are the three rounds of digital currency innovation that have so far occurred. They all have advantages and drawbacks. This paper suggests that, due to the state backing, constant value, and solid technological infrastructure, CBDCs have thus been viewed as the more viable form of money in the long term (i.e., by the middle of twenty-first century). In contrast, privately issued cryptoassets and stablecoins are more geared towards financial speculation and investments. But, in the near future, private cryptocurrencies and public CBDCs are expected to coexist for another decade or two. Despite the significant efforts of central banks in certain countries to roll out CBDCs on a large scale, traditional fiat currencies are likely to remain the mainstream form of money, while private coin issuers will strive to survive and compete with CBDCs.

Finally, thanks to the growing usage of digital currency and mobile payment methods, many nations and cities have declared their aim to create a cashless society within the next ten years. The widespread use of smartphones and the launch of high-speed mobile networks like 4G and 5G are largely accountable for the quick uptake of mobile payment over traditional payment methods including cash, cheques, and bank cards. As a result of growing Fintech, it is expected that cash will soon disappear in many parts of the world. A large percentage of consumers in China, Sweden, and the UK no longer carry cash when they go shopping and dining, thanks to the wide acceptance of Apple Pay, Alipay, and WeChat Pay by merchants. Therefore, international lawyers need to adapt to the cashless society, recognise the benefits and limitations of digital money, and better serve their clients while seizing commercial opportunities in the ongoing digital currency revolution.

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