This is part of a multi-part series on blockchain and crypto in China.
China has been discussing the possibilities of the national digital currency for half a decade, and the Chinese project for digital yuan – known as DCEP (Digital Currency Electronic Payment) – has a long history. As early as 2014, the People’s Bank of China set up a research group “to examine digital currencies and application scenarios”. The research team conducted a study of digital currencies and reportedly considered issuing their own digital currency. In 2016, the PBoC announced plans to develop its own digital currency and began hiring blockchain experts. That same year, the Chinese State Council included blockchain technology in its 13th five-year plan.
In 2017, the PBoC launched the Digital Currency Research Institute, which focused on developing and researching digital currencies. According to China’s National Intellectual Property Administration (formerly known as the State Intellectual Property Office), the institute filed more than 63 patent applications related to blockchain and crypto in its first year alone. A 2018 report by the Chinese Institute for International Finance, published under the People’s Bank of China, indicated that the central bank would initiate regulatory action against all types of digital currencies.
Back in July 2019, Wang Xin, director of the PBoC’s research bureau, stated that Facebook’s plan to launch its own stablecoin, Libra (now known as Diem), had influenced China’s plans to open a digital form of the Chinese yuan to bring the market. Back then, some experts predicted that the Chinese government-backed digital currency should be introduced before Libra officially launched.
Connected: China’s central bank is developing its own digital currency in response to the scales
Over the past year the DCEP project has made significant progress. In the meantime, the details of the project remained limited. While the question remains whether being the first to launch a CBDC is enough to achieve global reserve currency status, China is clearly well on its way to leading the indictment into the digital economy.
Connected: China’s CBDC is about domestic dominance, not the dollar
This year alone, China began testing the infrastructure for the digital yuan before its official launch. The Chinese city of Shenzhen offered its citizens the opportunity to participate in a lottery event aimed at promoting the introduction of the country’s central bank’s new digital currency. Also this year, China has completed the development of hardware wallets for the digital yuan project. The first was made by the Xiong’an Branch of the Agricultural Bank of China in Hebei, and the second was made by the Postal Savings Bank of China. In early March, Bank of Communications and China Construction Bank conducted digital yuan trials in two large department stores in Shanghai.
Digital yuan vs. cryptocurrency
A major concern of experts is that China’s CBDC is unlikely to be a cryptocurrency. As Bloomberg pointed out in 2019, “The PBOC will of course support the digital yuan, making it the opposite of decentralized.” China’s new digital currency will most likely be a centralized digital currency rather than a true cryptocurrency. As Shao Fujun, chairman of China UnionPay and a former PBoC official, said in August 2019, China’s state digital currency will “have many positive effects, including tracking the flow of money in economic activities and helping to shape monetary policy.”
Mu Changchun, deputy director of the payments division of China’s central bank, said back in 2019 that the upcoming digital yuan would strike a balance between facilitating anonymous payments and preventing money laundering. He reiterated the statement earlier this month, saying that a fully anonymous CBDC was “not feasible” as a national digital currency must meet anti-money laundering, counter-terrorism and tax evasion requirements. In the meantime, the Chinese authorities are ready to ensure the highest level of privacy protection for the digital currency of the country’s central bank, according to the latest statement by Mu.
The question of whether the PBoC’s currency will be like decentralized blockchain-based cryptocurrencies or whether it will give Beijing more control over its financial system is important. Still, the development of the digital yuan has undoubtedly influenced the development of the digital economy both inside and outside of China. Cointelegraph asked blockchain and crypto experts from China for their opinion on the following questions: How has the development of the digital yuan affected the entire crypto and blockchain industry in China? Will the Chinese CBDC remain central over time or gradually decentralize?
Chang Jia, founder of Bytom and 8btc:
“The Chinese digital yuan was designed and introduced by the PBoC (China’s Central Bank). It is based on the decade-long structure of the Chinese basic financial network and is confirmed by state loans. Hence, its birth undoubtedly encourages China’s entire blockchain industry, especially those companies that have been clinging to the underlying blockchain technology, building digital currency infrastructures, and industrial blockchain solutions for several years, to see their future uses and even the grand vision of too realize listing on the STAR Market.
Initially, the Chinese digital yuan DCEP focused on a test operation in the CCB (China Construction Bank). After proving its basic functioning, it also receives basic feedback from all walks of life and the livelihood of urban people in China. With the gradual clarification and strengthening of DCEP in the national economy and people’s livelihoods, such a huge digital currency system as DCEP in many ways requires the state and people building together to build a new digital yuan network and actively explore internationalization. “
Daniel Lv, co-founder of Nervos:
“The fact that China is working on a digital yuan is proof that digital assets and the underlying blockchain technology have value. The main purpose of adopting a central bank digital currency is to protect monetary sovereignty amid concerns that Bitcoin and other cryptocurrencies will have an impact. The DCEP will also improve the efficiency of payment systems and improve the convenience of yuan payments.
Blockchain itself is a combination of many existing mature technologies such as asymmetric cryptography, consensus algorithm, time stamping, etc. As the recent patent shows, DCEP is integrated with asymmetric cryptography, unspent transaction output (UTXO) and smart contracts.
The digital yuan uses a two-tier system of issuance and distribution – the central bank issues DCEP to banks or other financial institutions, and those institutions then further distribute the digital currency to the public. While the issuance of DCEP is centralized, circulation could be based on traditional financial account systems or blockchains.
If DCEP transactions take place on a public blockchain, it will likely help the yuan with internationalization. The Chinese central bank had previously announced that the DCEP pilot scenario would include venues for the Winter Olympics. Foreign companies can simply open a DCEP wallet to conduct the cross-border transaction as the requirements for opening a DCEP wallet are much less than those for opening a yuan deposit account. Peer-to-peer transactions can be initiated between any two DCEP wallets. “
Discus Fish, Co-Founders of F2Pool and Cobo:
“The central bank digital currency is essentially completely different from Bitcoin and other cryptocurrencies in that it is essentially still the centralized fiat currency. However, the CBDC can boost public awareness of blockchain and cryptocurrency. In the long term, under the education of the central bank, the blockchain industry will attract a large number of new users, especially the young people growing up in the mobile internet environment, which will lead to the rapid development of the industry. This has a long-term positive effect on the industry.
The essence of CBDC is the centralized fiat currency, which continues to be the central bank’s debt to the public. Therefore, the central bank will adhere to the centralized management mode. This relationship between the creditor’s rights and debt will not change with the change in the form of money. Therefore, I think that regardless of how the form evolves, it is impossible to decentralize the central bank digital currency. “
Kevin Shao, Co-Founder of Bitrise Capital:
“The development of the Internet has brought about the popularization of electronic payments, particularly the applications of Alipay and WeChat payments, which have changed the way many people handle cash. Such changes have profound effects on China’s financial development. The central bank is also following the trend of digital economic development, from designing the country at the highest level to building a complete infrastructure for electronic payments.
At the moment, the central bank has not yet made a final decision on which technical means to use for the digital currency. However, we’ve seen some cities experimenting with digital currencies. Overall, however, China’s digital currency continues to serve the monetary policy and monetary functions of the central bank. “
All respondents were featured in China’s Cointelegraph Top 100 Notable People on the Blockchain of 2020. Cointelegraph China contributed to the interviews.
The views, thoughts, and opinions expressed are the sole rights of the authors and do not necessarily reflect or represent the views and opinions of Cointelegraph.
The quotes have been edited and compressed.