This is Part One of a multipart series on blockchain and crypto in China. Read Part Two about the role of emerging technologies in the future of finance in China and globally here.
China has been discussing the possibilities of national digital currency for half a decade, and the Chinese digital yuan project — referred to as the Digital Currency Electronic Payment, or DCEP — has years of history. Back in 2014, the People’s Bank of China set up a research group “to study digital currencies and application scenarios.” The research team was conducting a digital currency study and reportedly considering issuing its own digital currency. In 2016, the PBoC announced plans to develop a digital currency of its own and started to hire blockchain experts. The same year, China’s State Council included blockchain technology in its 13th Five-Year Plan.
In 2017, the PBoC launched the Digital Currency Research Institute, which focused on the development and research of digital currencies. According to China’s National Intellectual Property Administration (formally known as the State Intellectual Property Office), the institute filed more than 63 patent applications related to blockchain and crypto during its first year of existence alone. In 2018, a report — released by the Chinese Institute of International Finance, operated under the People’s Bank of China — indicated that the central bank would institute a regulatory crackdown on 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 launch a digital form of the Chinese yuan. Back then, some experts predicted that the Chinese government-backed digital currency aimed to be rolled out earlier than the official launch of Libra.
Last year, the DCEP project made significant progress; meanwhile, the details of the project remained limited. While the question of whether being the first in launching a CBDC will be enough to win global reserve currency status remains open, China is clearly moving toward leading the charge into the digital economy.
This year alone, China started testing infrastructure for the digital yuan prior to its official launch and the Chinese city of Shenzhen provided a chance for its citizens to participate in a lottery event that aimed to encourage the adoption of the country’s new central bank digital currency. Also this year, China completed the development of hardware wallets for the digital yuan project; the first one was produced by the Xiong’an branch of the Agricultural Bank of China in Hebei and the second by the Postal Savings Bank of China. And earlier in March, the Bank of Communications and China Construction Bank conducted digital yuan trials at two major department stores in Shanghai.
Digital yuan vs. cryptocurrency
A major concern among experts is that China’s CBDC is unlikely to be a cryptocurrency. As was underlined by Bloomberg in 2019: “The PBOC will, of course, back 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 back in August 2019, China’s state-owned digital currency “will have lots of positive impacts, including tracking the money flow in economic activities and supporting making monetary policy.”
Mu Changchun, deputy director of the Chinese central bank’s payments department, said back in 2019 that the forthcoming digital yuan would strike the balance between facilitating anonymous payments and preventing money laundering. He repeated the statement earlier this month, saying that a completely anonymous CBDC “is not feasible” because a national digital currency must meet requirements related to Anti-Money Laundering, Counter-Terrorist Financing and anti-tax evasion. Meanwhile, Chinese authorities are willing to ensure maximum user privacy for the country’s central bank digital currency, according to Mu’s recent statement.
The question of whether the PBoC’s currency will be like decentralized blockchain-based cryptocurrencies or if it will give Beijing more control over its financial system is an important one. Nonetheless, the development of the digital yuan has undoubtedly influenced the development of the digital economy both within and outside of China. Cointelegraph reached out to experts in the blockchain and crypto space from China for their opinions 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 stay centralized or gradually become decentralized over time?
Chang Jia, founder of Bytom and 8btc:
“The Chinese digital yuan is designed and launched by the PBoC (China’s central bank). It is based on the construction of China’s basic financial network for decades, and it is endorsed by state credit. Therefore, its birth undoubtedly encourages China’s whole blockchain industry, especially those corporations that have been persisting in the underlying technology of blockchain, digital currency infrastructure construction, and industrial blockchain solutions for several years to see their future use, and even realize the great vision of listing on the STAR Market.
At the beginning, the Chinese digital yuan DCEP focused on a trial operation in the CCB (China Construction Bank). After proving its basic operation, it will also get basic feedback from all walks of life and urban people’s livelihood in China. With the gradual clarification and strengthening of DCEP in the national economy and the people’s livelihood, such a huge digital currency system like DCEP certainly needs the joint construction of the state and the people in many aspects to create a new digital yuan network and to actively explore internationalization.”
Daniel Lv, co-founder of Nervos:
“The fact that China is working on a digital yuan is proof that there’s value in digital assets and the underlying blockchain technology. The primary purpose of introducing a central bank digital currency is to protect monetary sovereignty out of concern that Bitcoin and other cryptocurrencies will have an impact. The DCEP will also improve the efficiency of payment systems and enhance 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 seen from its latest disclosed patent, DCEP is integrated with asymmetric cryptography, unspent transaction output (UTXO), and smart contracts.
The digital yuan adopts a two-layered system for issuance and distribution — the central bank issues DCEP to banks or other financial institutions, and then these institutions further distribute the digital currency to the public. While the issuance of DCEP is centralized, the circulation could be based on traditional financial account systems or blockchains.
If DCEP transactions happen on a public blockchain, I assume it will probably help the yuan to internationalize. China’s central bank had previously announced that the DCEP pilot scenario included Winter Olympics venues. Foreign entities can simply open a DCEP wallet to conduct the cross-border transaction, as the requirements to open a DCEP wallet are much lower than those to open a yuan deposit account. Peer-to-peer transactions can be initiated between any two DCEP wallets.”
Discus Fish, co-founder of F2Pool and Cobo:
“Essentially, the central bank digital currency is completely different from Bitcoin and other cryptocurrencies because it is still the centralized fiat currency in essence. However, the CBDC may strengthen the public’s perception of blockchain and cryptocurrency. In the long run, 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, thus leading to the rapid development of the industry. It has a long-term positive impact on the industry.
The essence of CBDC is the centralized fiat currency, which is still the central bank’s debt to the public. Therefore, the central bank will adhere to the centralized management mode. This relationship between creditor’s rights and debt will not change with the change of monetary form. Therefore, I think no matter how the form develops, it is impossible for the central bank’s digital currency to be decentralized.”
Kevin Shao, co-founder of Bitrise Capital:
“The development of the Internet has brought the popularization of electronic payments, especially the applications of Alipay and WeChat payment, which have changed the habits of many people around using cash. Such changes are profoundly affecting China’s financial development. The central bank is also following the trend of digital economic development, starting from the top-level design of the country, and building a complete set of electronic payment infrastructure.
At present, the central bank has not made a final decision on which technical means will be used for the digital currency. However, we have seen that some cities have experimented with digital currencies. But overall, China’s digital currency still serves the central bank’s monetary policy and monetary functions.”
All interviewees were featured in Cointelegraph China’s Top 100 Notable People in Blockchain of 2020. Cointelegraph China contributed to the interviews.
The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
The quotes have been edited and condensed.