Banking News

China’s central bank: don’t transform traditional payment systems using blockchain

People's Bank of China PBOC

Today the Digital Currency Research Institute’s Blockchain Research Group published a paper reviewing the current status of blockchain. The group is responsible for the People’s Bank of China (PBoC) central bank digital currency (CBDC), also known as DC/EP or the digital renminbi. The article reviews the pros and cons of blockchain and concludes that blockchain is not ready to be used in high volume payment systems.

While the DC/EP is not mentioned, it was previously implied the central bank would not use blockchain for its digital currency. Still, subsequently, there were conflicting statements about possible incorporation.

Yesterday Sweden’s central bank, Riksbank, announced it was testing a CBDC using the Corda blockchain. However, Corda is strictly not a blockchain but a distributed ledger technology (DLT) and does not replicate all transactions on every node.

The Chinese paper was written by key figures in the Institute, including its leader Mu Changchun. It concludes: “The blockchain at the cost of synchronous storage and co-calculation of a large amount of redundant data, sacrifices system processing efficiency and some of the customer’s privacy, and is not yet suitable for high-concurrency scenarios such as traditional retail payments.”

The central bank’s use for blockchain

However, the central bank believes that blockchain is better suited to lower concurrency requirements for settlement, trade finance and property rights transfer.

In terms of the central bank’s blockchain activities, it outlined three areas. First is as a thought leader and involvement in standard setting. It’s been involved with the Bank for International Settlements (BIS), the Financial Stability Board (FSB), ISO and ITU exploring standards. And it claims to have more blockchain patents than other central banks.

Second is the PBoC trade finance platform, also known as the Bay Area Trade Finance Blockchain. It currently supports supply chain financing, tax filing, rediscounting and international trade supervision. As of December 17, there were 38 banks involved and the business volume was RMB 87 billion ($12.37 billion). In just five months, the volumes almost tripled – up from $4.5 billion in early July.

And thirdly, the Institute referenced a digital bill trading platform produced in association with the Shanghai Stock Exchange, which had a successful pilot in early 2018.

The paper goes on to warn against both cryptocurrencies and vanity blockchain projects. It wants the blockchain industry to develop in an orderly fashion and to do that requires standards.