China flood exposes risks of Beijing plan to launch digital currency

China is the world leader among the great nations in creating a digital version of its currency. Four days before the Zhengzhou floods, the central bank issued an official strategy for its deployment and cited the success of the trials so far. Then, Zhengzhou’s blackouts crippled the digital payment infrastructure that is the backbone of its plan.

Running out of money, some in Zhengzhou have turned to bartering, including a man who paid for vegetables with cigarettes, one of the thousands of examples shared on Chinese social media of what happens when the digital money is flying away.

Dairy company worker, 25, Zhao Jun, says the flooding left her stranded far from her Zhengzhou apartment and took refuge in a hotel overnight, then realized. that she had no way of paying for a room without Alipay and WeChat. and no way to contact the outside world. “I was very anxious,†she says.

The financial disruption has been a relatively brief, but striking, illustration of a risk nations may face in embracing digital currencies – money dependent on working cell phones. Add cellular reliability to digital wallet hacks and online exchanges as vulnerabilities as governments enter the volatile realm so far occupied by bitcoin and other cryptocurrencies.

The kind of shock experienced by the floods would wreak havoc in any modern digital economy. In Zhengzhou, online cards were not working, and electric cars were shorted out. An electronic version of the yuan will only deepen China’s adoption of the technology. An increasingly cashless society has already caused societal problems, such as the elderly being virtually unable to hail taxis without the right apps.

The flood episode ran counter to specific commitments made by Beijing in its July strategy paper that its digital currency system will have built-in defenses in the event of a natural disaster.

“The lowest common denominator that affects everyone is the power grid,†says Luke Deryckx, chief technology officer of Seattle-based Ookla LLC.

Tracking Internet outages after natural disasters, Deryckx said, his company has seen power plants and mobile phone operators quickly reestablish central operations, only to have consumers disappear from networks when their batteries have their batteries removed. phones are dying because there is no room to recharge.

The central bank said e-CNY – the official name for the digital yuan – has been tested in more than 70 million real-world transactions since early 2020, with no signs of major issues in the technology.

The People’s Bank of China did not respond to questions about whether the Zhengzhou disaster would impact its digital currency plans; neither Alipay and WeChat, nor the China Mobile cellular operator Ltd.

Chinese government officials described the flooding as a once-in-a-century disaster, while others saw it as a harbinger of climate change.

Many countries, including the United States, are monitoring Beijing’s deployment to see if it makes sense for them to digitize their currencies as well.

Beijing is generally cautious with financial innovations and so far has not committed to a timeline to officially issue its digital currency. There is no sign that the problems in Zhengzhou have altered the planning, but analysts have said Beijing may have a less rushed launch schedule than its extensive testing suggests.

“The bar is extremely high. You have no margin for error with this kind of system, â€explains Martin Chorzempa, a researcher at the Peterson Institute for International Economics in Washington. “There are really a lot of unknowns here and that’s why I think they want to be careful and not rush things.”

The Chinese central bank official guiding the e-CNY project, Mu Changchun, told an online conference in March that the digital currency is designed in part as a backup of the WeChat and Alipay systems, which together manage 90% mobile transactions in China. .

“If something bad happens to them, either financially or technically, it will certainly have negative impacts on financial stability in China,” Mu said at the Bank for International Settlements conference in March.

It’s unclear how the digital currency system could have performed better during the floods. The People’s Bank of China has made it clear that the e-CNY will require apps, including one of its own, as well as WeChat and Alipay. During the floods, financial regulators in Henan Province issued emergency advisories ordering banks to respond quickly to customers affected by the inability to pay with cellphones, including making cash available. The digital yuan appears designed to one day replace physical money, although China’s central bank said in its July report that cash will stay in circulation for as long as people want to use it.

China says digital currency has been tested under various circumstances, with some solutions designed for users who do not have a mobile internet connection. But offline capabilities appear designed for a relatively small subset of users, such as the less tech-savvy elderly, and not for the millions cut off by natural disaster.

Mr. Chorzempa said that making digital currency work without an internet connection will be one of the biggest technical challenges of e-CNY, as the system must ensure that the same yuan is not spent twice. “A payment system keeps track of who has what at what time,†he says.

One of the widely touted benefits of a digital currency is the ability for authorities to quickly disburse aid to those affected by a natural disaster, although this likely depends on cellular service as well.

To restore partial telecommunications service to the Zhengzhou area during the four days it took to repair 62,000 flood-damaged mobile base stations, the government sent a Wing Loong-2H drone squadron from Aviation Industry. Corp. of China in the sky as an airborne cell phone. relay. Authorities called it an emergency operation that required the drones to travel 750 miles, or four hours, to reach Zhengzhou, where they were able to connect fewer than 650 cellphone users at a time, according to state media.

To take shelter in the Zhengzhou hotel, Ms. Zhao found a workaround with the help of a stranger. Today she says she is not leaving the house without the money she collected as a deposit for her room when she left.

—Reddy Zhao and Liyan Qi contributed to this article.

Write to James T. Areddy at james.areddy@wsj.com