E-CNY Progress Report Reveals Telling Details About The Chinese Retail CBDC Project
On July 16th, the Peoples Bank of China (PBOC) released a new progress report on the research and development of e-CNY. This is the first publication of an English language explanation from the PBOC on the important topic of the Chinese digital currency. Until now, this has reached the world as gnomic utterances from Chinese Central Bankers or high officials, translations or research published by various organizations including Binance. A survey of the Chinese patents granted to PBOC and other organizations have also revealed some information. Another source has been reports on the series of pilots and tests carried out by PBOC across the country. This has allowed rumor to flourish, with people claiming that the e-CNY is not based on Blockchain for example. With this paper, we have a better understanding of motivations and the monetary policy implications of the project. Technical underpinnings are still vague. According to one commentator, they are gibberish. Reading between the lines, some more detail can be discovered. Throughout this article, the term e-CNY will be used rather than DC/EP or digital Yuan or digital Renminbi.
The lack of credible news from China has been inducing anxiety in many central banks, since the Chinese economy is either the largest or the second largest economy in the world, this paper addresses parts of this lack of information. Whatever the Chinese do will affect other national economies. In Washington, this has been seen as a challenge to the status of the dollar as a world currency, allowing America to borrow at low rates and denominating trade, settlement, credit, prices of important commodities like oil, gold and even bitcoin for that matter. This fact is mentioned as one of the most important drivers of the Digital Dollar Project. The Fed through the utterances of Jay Powell, does not address this challenge directly, but states that MIT and the Boston Fed are undertaking Project Hamilton to research and test a FedCoin (or BenCoin).
The definition makes clear that e-CNY is a digital version of the fiat currency issued by the PBOC and is legal tender, with the three-legged functionality of money, unit of account, medium of exchange and store of value. As far the token versus account conundrum which is fashionable in CBDC circles, especially among economists; the answer is, it is both. e-CNY is value-based, quasi-account-based (whatever that means) and account-based hybrid payment instrument. Another statement that is difficult to parse is the statement that it is “loosely-coupled account based”. I take this to mean that e-CNY covers the continuum between account and token based systems.
e-CNY is backed by the sovereign credit of China via the PBOC and is a result of the natural evolution of currency technology and economic activities. PBOC will issue e-CNY and regulated financial institutions will distribute it. PBOC will also manage this asset, setting the ground rules for wallet design as well as collecting any data thrown off by transactions. Physical cash will exist in parallel for the foreseeable future. “As long as there is demand for physical RMB, the PBOC will neither stop supplying it, nor replace it via administrative order.” Physical RMB is seen as important in a diversified payment system in a country with multiple needs, habits and ages.
The whitepaper seems to state that the e-CNY is a retail CBDC. Used for small value retail transactions, not for wholesale transactions. However, the paper points out that e-CNY and reserve accounts are fully interoperable, holding out the possibility of e-CNY participation in higher value transactions.
As stated already, the vision for e-CNY fits the evolution, technical and economic of the rapidly changing and expanding Chinese economy, e-CNY is not just an instrument but cannot be separated from its retail payment infrastructure which is meant to be efficient, inclusive and adaptable. Those without bank accounts can use a e-CNY wallet, foreign visitors can have access to the e-CNY payment infrastructure without a bank account. As e-CNY allows immediate settlement, merchants and ordinary people can enjoy immediate liquidity in contrast to credit card or e-Money payments in a safe secure and fair manner. The paper draws the comparison between existing payment systems and e-CNY payments. e-CNY is part of M-zero or base money and is an obligation of the PBOC, the safest form of money. e-CNY also supports offline payments- important for locations with spotty or no internet connections, it does not say anything about whether the transfer can be done without electricity. If charged phones are available, it can be through touch or contact, as previous communications indicate.
e-CNY is not targeted, but technically ready for use in cross-border payments, as cross-border payment involves issues such as monetary sovereignty, foreign exchange policies and arrangements, as well as regulatory and compliance requirements to prevent capital flight. Internationalization of currency according to the paper is a market selection process, with the utility of the currency being dependent on the economic fundamentals (which are strong in China) and the depth, efficiency and openness of its financial markets (which require improvements in China). e-CNY is technically ready for cross-border payments. However, PBOC will work with the G20 and other organizations to develop the cross border aspect, taking into consideration the principles of no disruption, compliance and interconnectivity. Just having a two-tier system may not be enough as data sharing arrangements may be problematic as is evident from the latest Chinese cybersecurity moves on Didi and other companies. The unstated challenge to the supremacy of the dollar as an international currency is clear, especially if international agencies are to be involved in leveling the playing field and the stated principle of no disruption.
Many of the e-CNY aspects are detailed by the PBOC, but it is art of being detailed without revealing much. Wallet standards are developed by the PBOC and select and authorized intermediaries can create their own wallets. The importance of wallets is clear, wallets enforce tiers- low value and low daily limit transactions can be through non-KYCed accounts, without a corresponding bank account. Corporate and personal wallets are different, in capabilities, limits and other features. There is also a concept of sub-wallets which can enforce payment limits or other conditions, with a rich smart contract ecosystem for helping with transactions as well as controlling and monitoring these in conjunction with AML-KYC for high valued transactions. The PBOC calls this “managed anonymity”. Software as well as hardware wallets are envisioned; software wallets with a high degree of interoperability using SDKs and APIs and hardware wallets to fit different form factors like wearables, IOT devices and cards. There seems to be a concept of serial numbers and the intriguing statement “It has a variable face value and its value transfer takes the form of cryptocurrency strings”- no further details are available. Maybe parsing the Blockchain patents taken out by the PBOC research department with this statement can reveal more.
Whether blockchain is used in the system; the PBOC remains mum on the question, but reveals that it is a hybrid of a distributed and platform-based design, for scalability. With smart contracts and the use of the word distributed, as well as the patents granted to the research department; some form of distributed ledger technology is used in parts of the system. “The PBOC uses a mix of technologies such as trusted computing and special encryption based on hardware and software integration”. Just a smattering of the right terms without revealing details. Hopefully we will get a yellow paper on the technical design of e-CNY soon.
e-CNY is in an advanced state of testing, with multiple field tests on a number of use cases. PBOC also continues to engage on international fronts, including cross border work with the BIS on the m-CBDC bridge as well as through engagement with ITU, ISO and other standards development organizations. There is no preset timetable for launch, but the 2022 Winter Olympics will feature a pilot with a wide national and international footprint. PBOC recognizes that the creation of e-CNY is a holistic exercise covering, regulation, security, privacy, wallet safety, monetary policy and other considerations. Recent evidence has shown that the PBOC and its partners are proceeding on a determined path with enough feedback loops for improvement to develop e-CNY which is an entire ecosystem with connectors to existing and newly developing payment systems and currencies. One wishes for more transparency into the technical architecture and operational aspects, that will be revealed in bits and pieces as PBOC and the Chinese authorities engage with outside organizations and try to advance e-CNY as a international currency.Source