Exactly one year ago, in early January, the People’s Bank of China (PBOC) launched a digital yuan wallet app for Android and iOS.
Most recently, the People’s Bank of China included China’s digital currency in its calculation of the amount of money in circulation in December, a first for one of the early adopters of central bank digital currencies (CBDCs) and the world’s second-largest economy, According to data released by its central bank two weeks ago.
The People’s Bank of China stated, “From December 2022, the circulation of electronic renminbi will be included in the circulation (M0). At the end of December, the circulation of electronic renminbi was 13.61 billion yuan. Significant changes”. There was 13.61 billion yuan (approximately US$2 billion) in circulation, or about 0.13% of the 1.05 billion yuan in circulation.
Also, last week the digital yuan was used for the first time to purchase securities: Soochow Securities enabled electronic yuan payments on its mobile app, marking the first use case of a CBDC in securities market transactions.
The digital yuan is yet another example of China being at the forefront of new technologies.
In July 2021, the People’s Bank of China Working Group released the first and only official report on digital renminbi, “China’s Electronic Renminbi Research and Development Progress”. The report, while brief, details the government’s research and development (R&D) process and takes care to distinguish the e-yuan, which is a central bank digital currency (CBCD), from cryptocurrencies and stablecoins.
Specifically, the report defines e-RMB as a digital version of retail fiat currency with a two-tier operating model: on the first tier, the PBOC issues and controls its supply and distributes it to commercial banks, telecom operators, etc. Authorized entities and payment service providers; on the second layer, only those authorized entities can distribute it and activate its use in the economy.
When it comes to the role of blockchain in the digital yuan, the People’s Bank of China has opted for a traditional CBDC design approach due to the performance and scalability challenges blockchain presents.
But the PBOC has not ruled out distributed ledger technology entirely. In a speech in September 2021, Di Gang, deputy director of the Digital Currency Research Institute of the People’s Bank of China, said that the People’s Bank of China is exploring the use of blockchain in three areas: First, in the core layer of the Project Inthanon-LionRock prototype block , and maintain the CBDC balance. Second, at the digital renminbi issuance layer, such as the mCBDC project. Here, tamper-proof distributed ledgers can help with reconciliation. Third, in trade finance, such as a proof-of-concept (POC) linking Hong Kong Interbank Clearing’s blockchain-based eTradeConnect with the People’s Bank of China’s trade finance platform.
In this case of trade finance, blockchain combined with artificial intelligence and robotic process automation can minimize paper-based and people-driven processes, reduce administrative costs, and extend services to markets that typically use open account transactions. Small businesses, where the seller ships and delivers the goods before the buyer’s payment is due.
In addition, China is already very advanced in digital payments, and the digital yuan has not disrupted payment methods (QR codes and face payment are already widely used through Alipay and WeChat Pay). Users can connect to the official “digital yuan” wallet through the bank APP or wallet (Alipay, WeChat) to activate.
However, the biggest innovation is the use of smart contract technology.
Through smart contracts, users can agree on the use time, use scope and use rules: non-transferable, non-redeemable, overtime recovery, targeted use, targeted groups, targeted scenarios, consumption benefits, coupon reduction, design merchant consumption, etc.
The digital yuan incorporates a variety of elements. In terms of security, it combines digital certificate systems, digital signatures, and encrypted storage to reduce the possibility of counterfeiting, transaction falsification or reversibility, and double spending, which refers to the risk that one party can do it at the same time—especially when various When two parties exchange digital currency—sending one unit of currency to two different accounts. The PBOC did not elaborate on how its technology would address the double-spending problem, but claimed its “multi-layered security system” would manage such risks and ensure the security of the e-renminbi’s lifecycle, from password and data security to privacy of financial information and business continuity.
The double spending problem mentions the risk that one can send one unit to two different sources at the same time (especially when exchanging digital currencies).
In addition, the digital yuan wallet app allows for dual offline payments, meaning the payer can pay the payee without being connected to the internet
For financial inclusion, the system does not require a bank account or an internet connection (in fact, the Android version of the Digital Yuan app launched for offline use and battery-depleted use). Users can obtain and use “smartphone-less hardware wallets” with security chips and integrated circuit card-based cards without a bank account; they can make “dual offline payments,” meaning payers can Transfer funds to recipient. Smartphone users can download the freeware wallet app, but need to be linked to one of the “authorized carriers.”
Since CBDCs are “programmable money,” each government and central bank must determine where they want to focus. Regarding programmability, the People’s Bank of China mentions the use of smart contracts, but not “applications that run in a distributed and trust-minimized manner on the Consensus runs “a protocol across a network of computers, rather than on a single remote computer or central server,” and does so without relying on a specific individual or organization to secure it.
Electronic renminbi payments can be programmed like credit card payments, for example, through an application programming interface.
A big problem with CBDCs in general is anonymity and privacy. Speaking of China, Mu Changchun, head of the Digital Currency Research Institute of the People’s Bank of China, explained at a conference that “there is actually a big misunderstanding about the anonymity of the eCNY system.”
In August 2021, the Chinese government officially passed the Personal Information Protection Law (PIPL). “According to the law, telecom companies cannot release any information, any identity information to any third party, including the central bank,” Mu said.
As a result, central banks, commercial banks and payment providers do not have access to the personal information associated with the number. The only transactions central banks have access to are through institutions.
Separately, the digital yuan aims to enhance transaction privacy, making it harder for private companies to track users’ movements between different merchants. Therefore, all wallets have a sub-wallet functionality (tokenization and encryption will be used), where each online retail store can have a separate wallet, to avoid linking one person across retail stores.
“Compared with traditional electronic payment systems, the eCNY system collects the least transaction information,” Mu said. “My personal concern is how to effectively prevent and combat money laundering, terrorist financing and tax evasion under an effective anonymous electronic renminbi system.”
Taken together, China is at the forefront of new technologies. The digital yuan is a good example of new technology applied to payments, but China is at the forefront of blockchain technology and artificial intelligence.
*The author is quite influential in the field of financial technology, has provided consulting services for several financial technology companies, and has an extensive network around the world. He holds an MBA and PhD in Hong Kong Real Estate Law and Economics. He is also a well-known international speaker in the field of central bank digital currencies and blockchain.