Much attention has been paid to the global, geopolitical implications of China’s rapid and pioneering development of its digital yuan, also provisionally known as e-CNY.
Yet in a new white paper published by the Working Group on E-CNY Research and Development of the People’s Bank of China (PBoC), the institution gave a more domestic-focused and technologically-driven vision of the new currency’s background and key objectives.
Recapping the currency’s research and development timeline, the paper notes that the PBoC first set up a task force to study digital fiat currency back in 2014. By 2016, it had established a Digital Currency Institute, which developed the first-generation prototype for the new currency. With the State Council’s approval, the bank began to collaborate with commercial institutions on further developing and testing the e-CNY at the end of 2017.
Notably, these years coincided with the steep growth of the decentralized cryptocurrency markets and their first major bull run in winter 2017, alongside significant transformations of the domestic and international digital economy transformations.
Big data, cloud computing, artificial intelligence, blockchain and the Internet of Things are the key innovations singled out in the white paper and the bank notes that the Covid-19 pandemic has markedly sped up the digital transformation of Chinese enterprises and payment services.
The PBoC is drawing on many of these developments for the e-CNY, including using smart contracts to allow for programmability, as the new paper reveals for the first time.
Yet while the institution takes a positive view of technological change and far-reaching innovations to retail payment services, its characterization of decentralized cryptocurrencies is scathing:
“Cryptocurrencies such as Bitcoin are claimed to be decentralized and entirely anonymous. However, given their lack of intrinsic value, acute price fluctuations, low trading efficiencies and huge energy consumption, they can hardly serve as currencies used in daily economic activities. In addition, cryptocurrencies are mostly speculative instruments, and therefore pose potential risks to financial security and social stability.”Moreover, the PBoC notes that concerns about price volatility have spurred some private actors to launch stablecoins, pegged to fiat currencies or other assets. Plans to launch a global stablecoin by commercial institutions, in the PBoC’s view, will “bring risks and challenges to the international monetary system, payment and clearing system, monetary policies, cross-border capital flow management, etc.”
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In this context, Beijing’s preference for state-led innovation of retail payment infrastructure and the creation of a centralized, two-tier management model for the e-CNY is to be expected:
“The right to issue e-CNY belongs to the state. The PBOC lies at the center of the e-CNY operational system. It issues e-CNY to authorized operators which are commercial banks, and manages e-CNY through its whole life cycle. Meanwhile, it is the authorized operators and other commercial institutions that exchange and circulate e-CNY to the public.”In its strictly technical design, the currency integrates both centralized and distributed architectures, however. This has been used to great effect in various trials, implemented in over 1.32 million scenarios to date and with transaction volume totaling 70.75 million at a total value of roughly RMB 34.5 billion ($5.34 billion).
The white paper also considers the intensifying interest by central banks worldwide in the development of central bank digital currencies (CBDCs), noting that the PBoC has been engaged in extensive consultations with international organizations like the BIS, IMF and World Bank. It takes a cautious stance towards the use of e-CNY for cross-order use, stressing “various complicated issues such as monetary sovereignty, foreign exchange policies [...] as well as regulatory and compliance requirements.”
Given that the e-CNY is already technically ready for cross-border use, the PBoC says it will nonetheless actively respond to initiatives from the G20 and other organizations and explore possible pilots for cross-border payments, “preconditioned on mutual respect to monetary sovereignty and compliance.”
