Zhou Xiaochuan, the Governor of the People’s Bank of China until 2018, says that the digital yuan or eCNY has been incorrectly classed as a central bank digital currency (CBDC). Writing in the China Finance 40 Forum, Zhou said the digital currency is the liability of the major state-backed banks that issue it.
In Hong Kong, three commercial banks issue the physical notes in circulation but have to hold reserves at the Hong Kong Monetary Authority and the central bank issues a reserve certificate. Critically the banknotes issued in this way are a liability of the commercial banks, not the central bank. And the digital yuan uses a similar model.
It’s already known that the commercial banks will be responsible for the eCNY’s KYC, anti-money laundering and data privacy protection. But Zhou notes that “CBDC in the general sense considers these responsibilities to be a part of the role of the central bank”. However, to our knowledge, most CBDC models currently being explored are likely to delegate these roles.
Zhou explained that the reason for the two-tier system was “that a competition-based, multi-solution operating system, one that is dynamic and continuously evolving, would better accommodate China’s economic reality.”
For the central bank to choose a technical solution would be hard, and upgrading such a system would be a major challenge in a country with China’s size. That contrasts with the fast-moving nature of fintech, and that dynamism is the reason why the two-tier system was chosen.
It has already been made clear that the heart of the digital yuan does not use blockchain. One of the reasons is the need to delete transactions. Otherwise, there’s a risk that incorrect information could end up in a credit reporting system. And on a related point, Zhou noted that China could borrow ideas from Europe’s General Data Protection Regulation (GDPR).
A final highlight was Zhou’s emphasis that cross-border usage of a digital yuan should only be for retail payments for travel and highlighted the importance of monetary sovereignty for other countries. He sees the use of Libra for cross border remittance as ‘problematic’.
It’s entirely possible that details are lost in translation, but the Ministry of Commerce has also talked about using the digital currency in the future. It’s conceivable that the purpose is for trade with other Chinese territories.
In the meantime, the second big public trial of the digital yuan is currently progressing in Suzhou.