Recent brokerage reports highlighted the potential benefits to the Macau market of accepting China’s new Digital RMB. In the first of a series of articles titled All-In Digital, MdME Lawyers take a deeper dive into the Digital RMB and spotlight how IR industry stakeholders can take advantage of these new opportunities.
The Chinese Government’s RMB Digital Currency Electronic Payment system, known as the “Digital RMB”, is the electronic version of the RMB currency, issued by the People’s Bank of China (PBOC). As such, the Digital RMB is a sovereign currency and will be exchangeable with the RMB on a one-to-one basis, meaning that the Digital RMB is pegged to the value of the RMB as a fiat currency.
The Digital RMB will be distributed through the traditional banking system, making it fully centralized and integrated into the commercial retail system for use in consumer transactions. In fact, the Chinese Government’s long term goal points to eventually replacing all physical RMB notes and coinage in circulation with the Digital RMB.
One of the key features of the Digital RMB is its centralized ledger which is managed by the PBOC. This allows the PBOC to electronically record and track all Digital RMB payment transactions, enabling complete oversight of RMB cash flows, both domestically and overseas.
From a consumer’s perspective, the Digital RMB functions through an electronic wallet, with the Digital RMB represented in electronic token form within the e-wallet. Users will be able to download the Digital RMB e-wallet app provided by the PBOC (and third party banks authorized by the PBOC) on their smartphones, and purchase Digital Yuan tokens either directly from the PBOC or from other designated commercial banks.
Users’ Digital RMB e-wallets will link directly to the user’s bank account, from which money can be converted into Digital RMB tokens and transferred to their Digital RMB e-wallets. E-wallet payment functionalities include retail payments through QR code/bar code scanning, and P2P money transfers.
These e-wallets will run on NFC technology, so an active internet connection will not be required in order to process transactions.
OPENING THE WAY FOR CROSS-BORDER PAYMENTS AND SPENDING
So what does the new Digital RMB mean for markets with traditionally high numbers of Chinese visitors, like Macau? According to a recent research report published by brokerage Sanford C Bernstein in January, if the Digital RMB were to become accepted currency in Macau (e.g. consistent with the current practical acceptance of the physical RMB), alongside the Macanese Pataca and Hong Kong Dollar, it would facilitate the availability of money for Chinese visitors to Macau and eliminate the need for currency exchanges and related costs. Ultimately, this could boost overall consumer spending in the mass and premium mass markets, which are the precise segments that have been most affected by the drop in footfall and visitations since the start of the COVID-19 pandemic.
From a policy perspective, the Chinese Government has signaled its intention for the Digital RMB to be internationally accepted overseas as part of its internationalization strategy for the Chinese RMB. This also forms part of the RMB’s drive towards being a leading reserve and global trade settlement currency.
To this end, in February the PBOC registered a new joint venture with SWIFT, the global interbank settlement organization, which could signal the way for integration of the Digital RMB into global banking systems for overseas remittances and transfers.
The PBOC is also reported to have joined a cross-border payments pilot project led by the Bank of International Settlement that will create a process for real-time cross-border foreign currency exchange payments on blockchain technology. The Hong Kong Monetary Authority and Bank of Thailand are already participating in the project, as well as the Central Bank of the UAE.
As the Bernstein report highlighted, a key aspect of internationalization would be the free flow of currency and reduction or elimination of capital controls. Given the inherent traceability of Digital RMB transactions through the centralized ledger, the PBOC’s complete oversight of RMB cash flows may encourage an easing of the formal cross-border capital controls in future.
One collateral effect of expediting cross-border transfers would be a significant reduction in demand for intermediaries’ services, such as junkets. The Bernstein report forecast a consequential impact for that market.
COULD ACCEPTANCE OF THE DIGITAL RMB PROVIDE A STIMULUS TO KICK-START THE RECOVERY OF THE MACAU MASS LEISURE INDUSTRY?
Adoption of the Digital RMB certainly has the potential to transform the current payment procedures in the IR industry and bring the mechanics into the digital era. From a customer perspective, digital payments are the transaction method of choice, allowing for greater efficiencies, time savings and hygienic conditions for money payments.
To meet customer demand, in future we may anticipate the option to pay for casino chips from the cage with Digital RMB, or transfer credit directly onto a player’s digital account in Digital RMB. Clearly, such developments will require regulatory approval to safeguard standards for AML, CTF, audit, and responsible gaming.
To that end, we may see these new features of traceable digital payments in fact advance public policy goals and facilitate improvements, thereby gaining regulatory support.
WHEN WILL THE DIGITAL RMB LAUNCH?
Pilot trials of the Digital RMB have been conducted in various cities around China since May 2020, involving offline and online payments, merchants, state owned enterprises and banks. Most major Chinese cities have incorporated Digital RMB development initiatives into their government work plans for 2021. In the latest phase, Digital RMB transactions using wearable devices, ultra-thin card wallets, biometric hardware wallets, watches and bracelets have been tested.
Although overseas trials of the Digital RMB have yet to be announced, arrangements are on course to enable foreign visitors to the Beijing 2022 Winter Olympics to use the Digital RMB during the event, and the expansion of more Digital RMB applications around the Beijing Winter Olympics is planned.
ADVANTAGES OF DIGITALIZATION
When Chinese customers start to arrive in Macau with Digital RMB in their e-wallets to spend, there will be great incentive for operators to have business and operational models synchronized with Digital RMB transactions. Crucially, a primary advantage of conversion to the Digital RMB would be improved real-time oversight of cashflows and transactions throughout the IR business.
Operators who successfully integrate this new data stream with internal business systems stand to revolutionize their business analytics and insight capabilities for greater profitability. Similarly, from a compliance perspective, Digital RMB transactions could reduce the risk of counterfeits and fraud and increase the efficiency of transaction analysis for reporting purposes. Digital RMB transactions may also provide a new mechanism by which to support the implementation of responsible gaming programs. From a practical perspective, traditionally cash-intensive areas of the business would need to be reimagined for Digital RMB transactions, including cashier stations, payment terminals, banking facilities and accounting operations. Operators can seize the opportunity to truly modernize their offering and appeal to a younger technology-driven audience. Consequently, we foresee an inevitable shift of demand and focus of security standards and protocols from offline to online cyber security, IT infrastructure and data hosting.
Correspondingly, increased data privacy and data protection measures will play a key role in building trust with customers and differentiating operators’ services from competitors.
RACE TO PREPARE
With the launch of the Digital RMB on the horizon, IR stakeholders that have already begun the process of transforming strategies and operations in preparation stand to gain a head start in the market. Introduction of the Digital RMB is predicted to facilitate mass and premium mass segment spend, so we can see that early adopters may seize the advantage and potentially grab market share in this high-margin sector.