Advance payments promise to be far safer, reliable, applicable to more biz

China launched an advance payment solution based on digital yuan smart contracts on Thursday in the latest step to further enhance the e-CNY's role of reducing transaction costs and better protect consumer rights.

The Digital Currency Institute of the People's Bank of China, the country's central bank, unveiled the advance payment solution called "Yuan Steward" on Thursday, which employs digital yuan smart contracts in e-CNY wallets to prevent payees from wrongfully taking prepaid money.

A digital yuan smart contract refers to a set of computer programs that automatically execute payments in digital yuan when a predetermined event takes place.

In other words, it uses a computer program to write a contract and automatically fulfills the contractual obligations by making digital yuan payments according to the agreed-upon conditions.

By leveraging digital yuan smart contracts, the new advance payment system creates a digital wallet for a consumer when he or she makes an advance to a business, Di Gang, deputy director of the institute, said at the China (Beijing) Digital Finance Forum 2022 on Thursday.

The prepaid money is owned by the consumer before the business completes the provision of services or goods. A business cannot extract money from wallets on its own and has to wait for the system to transfer the money to its account after it finishes the provision of services or goods, Di said.

Di said this new solution marks a contrast with traditional prepaid modes in which prepaid money is owned by businesses and placed in their accounts at commercial banks, potentially putting consumer rights at risk.

The new advance payment system has been used in the educational sector, where the system pays a training institution each time a pupil has a lesson. The prepaid training fee belongs to consumers unless the pupil takes the lesson.

Officials and experts said the solution would be conducive to reducing the risk of financial fraud and contract violations while strengthening consumer rights protections, thus shedding light on the potential broader use of digital yuan smart contracts in the future.

Fan Yifei, deputy governor of the PBOC, said digital yuan smart contracts should play an effective role in developing the digital economy, enhancing the business environment and improving digital governance.

The smart contracts can help improve transaction transparency, reduce the risk of contract breaches, protect consumer rights, improve the operational efficiency of enterprises and optimize regulatory capabilities, Fan said.

Huang Yafeng, director of the general office of the Beijing Chaoyang Houhai Training School, a company that has adopted the new prepayment system, said the use of digital yuan smart contracts has helped strengthen parents' trust in the school and improved its operational efficiency.

Di with the PBOC's Digital Currency Institute said the institute will expand advance payment solutions from the educational and training sectors into more areas, such as retail, catering and sports, in an orderly manner.

"We have seen buoyant market demand from many industries and regions to apply digital yuan smart contracts," Di said, including when it comes to the dispensing of fiscal subsidies, loans and research and development funds.

China has made solid progress in expanding e-CNY pilot programs while deepening related R&D. As of May 31, a total of 264 million transactions had been carried out via digital yuan in pilot areas, with the cumulative transaction value hitting 83 billion yuan ($11.9 billion), official data showed.