On Saturday, it was revealed that China is almost ready to unveil its Central Bank Digital Currency (CBDC). Deputy Director of the People’s Bank of China (PBOC), Mu Changchun, has previously publicly voiced opinions about Libra. Now he says the Chinese CBDC is ‘ready’ without giving any time scales.
The details about China’s planned CBDC are highlighted by Beijing News, include that it’s unlikely to be blockchain-based. It will have a two-tier structure involving the central bank issuing the currency to banks or institutions, with these banks circulating the currency amongst their customers. And the digital cash will be 100% backed by central bank deposits from commercial banks and institutions.
China has been exploring a CBDC since 2014, and it has committed significant resources. Currently, there are 996 staff at the Digital Money Institute.
The digital currency will be centrally controlled, but the central bank wants to remain technology agnostic. Presumably referring to the second, consumer-facing tier, the banker stated that different “designated operating agencies” are trying different routes. Hence there was a reference to the market deciding the best option.
Mu Changchun referenced tests done with blockchain technologies. He pointed to Bitcoin and Ethereum’s poor performance rates of less than 20 transactions per second, and even Facebook Libra’s predicted 1,000 transactions per second. In contrast, peak online transactions in China have reached 92,771 per second.
The PBOC doesn’t want to become consumer-facing. Hence the need for a two-tier structure of issuing digital currency to banks and other institutions. Additionally, banks can leverage their existing infrastructures and technological expertise in dealing with customers. And again there was an emphasis on competition and market forces.
Other reasons for the two-tier structure include the belief that if it targeted the public directly, the scale of the infrastructure required would be too large. Plus the central bank is wary of dis-intermediating commercial banks and making them more reliant on the interbank market.
By using the two-tier structure, the PBOC believes monetary policy is not affected. But it emphasized the target is M0 or cash / retail payments, as opposed to using digital currencies for bank payments. Given it’s a cash replacement, there will be no interest payments.
That’s another reason why the PBOC is not keen on just any smart contracts. It’s concerned that by using smart contracts and adding too much functionality, it may detract from the digital currency’s monetary role. Ultimately the purpose is to make transactions, as a store of value, and unit of account. The worry is that sophisticated smart contracts might make it more valuable than intended, reduce its usability and internationalize the renminbi. So, in conclusion, it will use smart contracts, but only those that are good for monetary functions.
Mu Changchun also stated that by issuing a digital currency, it expects to reduce the demand for cryptocurrencies. And it hopes it will enable it to consolidate the national currency’s sovereignty.
Western readers tend to be concerned about privacy. The plan is to have “controllable anonymity”. The central bank said there has to be a balance between keeping the two parties anonymous and compliance. That includes anti-money laundering, anti-terrorism financing and tax evasion. There’s some room for interpretation about what that means. But the government can likely take a look at transactions.