Alipay is set to play a crucial role in China’s digital currency and what shape it will take, according to patents filed over the past month. 

Why it matters: China’s currency system needs an upgrade. “Digitalization is just the tip of the iceberg,” Thomas Zhou, founder of Cryptology Ltd. and a partner of Africa Pay, told TechNode “Take it as the technology that enables the authorities to perfect policy, create data banks, and increase security around the RMB.”

  • The speed at which China’s IT industry develops means a delayed response from regulators because they cannot foresee the direction of tech development, Zhou said. They can use current policy and regulation to limit, but it will always be late. Data collected through digital currency can help them make better predictions, he added.
  • “The digitalization process will solve the issue of current forex control policy which limits the usage and liquidity of the RMB,” Zhou said. “Currently each individual can only exchange $50,000 annually. This is the only way to limit forex under the old system. With the new digitalized RMB, government will be able to control forex at a much more detailed level. Different people will have different limits. Where the money is from and usage of USD will be monitored.”

Details: Alipay filed a patent which points to its potential role (in Chinese) in secondary issuance of China’s fiat digital currency, on a equal footing with commercial banks.

  • Digital currency would not necessarily rely on blockchain technology. Instead, transactions would be split into execution instructions corresponding to each party and generate execution priorities for each instruction. The instruction list can be tracked back for the lifespan of the currency, allowing traceable transactions.
  • Front-end encryption machines could monitor secondary issuance and transactions. 
  • One of the patents filed involves control devices blocking illegal transactions. Such maneuvers are already in practice but new money can provide more evidence for this. Supervisors can send instructions to restrict accounts immediately, stopping currency flows in or out, freezing funds, and blocking operating authorities.
  • Alipay would be able to open digital currency wallets which provide different services, which differ from current wallet functions. Types of digital wallets will be identifiable according to user behavioral data. This could include frequency of use, amount, and venue of transactions, and identity data, such as biometric data, the bound ID, bank cards or phone numbers. Zhou said that he believes different wallet types will only exist in AB testing, and that they will eventually be merged.
  • Since wallets will collect a great deal of user information, Alipay has filed one patent which sets a standard for transaction anonymity. It states the digital currency will operate differently from current electronic transfers. Instead it will digitize banknotes, for instance storing a RMB 100 note, or three RMB 50 notes.
  • Tokenizing bank notes breaks through the separation between physical and virtual. Currently society relies on physical money, digitalization follows. With a fully digitalized currency system, the central bank will decide how much virtual money we need to be printed in physical bank notes.

Context: Alipay has been the world leader in filing blockchain patents for the last three years.

  • Global currencies are competing for consensus. Internationalization of the RMB has long been a Chinese government policy goal. 
  • China’s central bank has researched digital currency for many years, and has filed patents related to digital currency development. If the US takes Libra as a reserve currency, Facebook’s 2.4 billion users would make it a powerful challenger to any currency, digital or physical.
  • “There is a fundamental difference between digitalizing a currency and printing out digital currency,” said Zhou. ”I think gradually, China will develop its banking system to print out digital currency.”
  • There have been earlier reports that Alipay and rival Tencent will be included along with conventional banks as issuing parties for the central bank’s digital currency.
  • Alipay and Tencent are crucial to the ecosystem as tech providers. But the central bank and China Banknote Printing and Minting Corp., which prints money for the central bank, will remain the “core brain” for digital currency, according to Zhou.

Updated: includes additional comments from Thomas Zhou.

Lavender covers regulation and its effects on people. She previously worked in a policy advisory analyzing China’s internal governance for foreign governments and multinationals. A History graduate from... More by Lavender Au