The People's Bank of China (PBOC) has been developing a state-backed cryptocurrency over the past five years. But unlike decentralized blockchain-based cryptocurrencies, which enable anonymous transfers, China's cryptocurrency is designed to tighten the government's grip on its financial system.

The PBOC will initially launch the cryptocurrency on a mobile wallet app, and let users trade their yuan for the digital currency or make payments on the platform. The central bank will also track the origins and destinations of every transaction.

Cryptocurrency coins.

Image source: Getty Images.

Many industry watchers believe that Facebook's (NASDAQ:FB) introduction of Libra pushed the PBOC to accelerate its own cryptocurrency efforts. But unlike Libra -- which aims to cut banks out of the loop, simplify cross-border transfers, and become a "global" currency -- the digital yuan aims to increase the transparency of all financial transactions.

Many conversations about the digital yuan focus on its comparisons with Libra. However, there are fewer discussions about how this new digital currency could impact Tencent's (OTC:TCEHY) WeChat Pay, the country's top digital payments platform.

Why digital payments matter to Tencent

Tencent's "WeChat Pay" (or Weixin Pay in China) is actually the mobile extension of an older payments platform called TenPay. Their differences are rooted in Tencent's two core social platforms: QQ, its older social platform which originated on PCs, and WeChat (Weixin), its newer messaging platform for mobile devices. QQ still serves 731 million monthly active users (MAUs), but WeChat has a broader reach of 1.15 billion MAUs.

Tencent launched TenPay as a payments service for QQ in 2005. Tencent integrated TenPay into WeChat in 2012, and that mobile extension evolved into WeChat Pay. Tencent still uses both brands, but TenPay remains mainly tethered to QQ and PCs, while WeChat Pay is integrated into WeChat's expanding ecosystem of over a million mini programs.

Tencent's rival in China's digital payments market is Ant Financial's AliPay. Alibaba (NYSE:BABA), which owns a major stake in Ant Financial, integrates AliPay into all its e-commerce marketplaces. According to an Ipsos survey in late 2018, 86% of Chinese consumers used WeChat/TenPay, 71% used Alipay, and 64% used both.

As a result, WeChat Pay and Alipay are both widely used for payments at brick-and-mortar retailers, night markets, public transportation hubs, and even hospitals. In October, an eMarketer study found that 49.6% of China's population used proximity mobile payment apps over the past six months, and predicted that percentage would climb to 60.5% by 2023.

A customer uses a mobile payment app at a coffee shop.

Image source: Getty Images.

That's why Tencent's new "fintech and business services" segment, which was established at the beginning of the year, generated 26.8 billion yuan ($3.8 billion) last quarter and remains the tech giant's fastest-growing business:

Fintech and business services

Q1 2019

Q2 2019

Q3 2019


21.8 billion RMB

22.9 billion RMB

26.8 billion RMB

YOY growth




Percentage of Tencent's revenues




YOY = Year-over-year. Source: Tencent quarterly reports.

Tencent's payments, wealth management, and cloud services are the business' core growth engines, but it doesn't disclose WeChat Pay's revenue separately. However, Tencent noted that higher payment volumes and services at WeChat Pay boosted the unit's gross margin 260 basis points annually (and 370 basis points sequentially) to 27.7% during the quarter, and likely offset the lower margins of its cloud business.

The PBOC could partner with WeChat Pay and AliPay

It might seem like the PBOC wants to compete against Tencent and Ant Financial by launching its own digital wallet. However, a recent Forbes report suggests that the PBOC plans to partner with seven institutions -- including Tencent, Alibaba, and several Chinese banks -- to roll out the digital yuan.

Those companies will likely integrate digital yuan purchases and payments into their existing apps. Moreover, the PBOC is reportedly encouraging those partners to distribute the digital yuan overseas, which could turn it into an "international" cryptocurrency and potentially compete against the U.S. dollar or Japanese yen as a safe haven currency.

In the past, foreign-issued credit cards couldn't be linked to WeChat Pay and AliPay. But both Tencent and Ant Financial opened up their platforms to international credit cards earlier this year, which could make it easier for foreigners to use the digital yuan once it launches on both apps.

It's unclear if consumers and businesses will actually use the digital yuan, but the PBOC and its partners could offer subsidies or discounts for early adopters. Yet it's clear that the Chinese government isn't interested in competing against WeChat Pay or AliPay -- it considers them valuable partners in its war on cash.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.