Blockchain for Banking Capital markets News

Digital yuan being trialed for securities transactions

digital yuan CBDC securities

China Galaxy Investment Management, which has 13 million brokerage customers, will run a digital yuan pilot for securities transactions in association with ICBC Bank, the state-owned bank that is the world’s largest. The project has been accepted into a Beijing sandbox.

China’s central bank digital currency (CBDC) or eCNY will be used for three types of transactions. The first is to pay fees for data, consulting and other services. 

It will also be used to settle over-the-counter stock transactions in the “tripartite deposit management system.” To explain what that is, in China, the broker doesn’t handle cash. Instead, the broker opens an account with a bank and refers its clients to do the same. Hence, any cash deposited by the client doesn’t go directly to the broker but instead to their own account at the broker’s bank. When the client buys shares, the money is transferred from the special client’s account to the broker’s bank account. So for the digital yuan trial, digital currency will be used instead of using a bank account.

The whole point of the three-way depositary system was to ensure that brokers cannot misappropriate client funds by not allowing them to touch cash.

If you consider a digital currency where a client has control of it through a wallet, do they still need this tri-party system? Or does the digital currency remove the need for the trusted third party?

We think this is the rationale behind the third sandbox application, where a client has a digital stock wallet that can include a digital RMB balance to pay for over-the-counter stocks. It’s not removing the bank altogether, because the state banks are the intermediaries for the CBDC.

As with all digital yuan pilot projects, it will be restricted to pilot regions. There are currently ten pilot locations plus the Beijing Winter Olympics.

China’s CBDC trials have ramped up and have reached 140 million wallets or 10% of China’s population. One of the current development areas is how to combat money laundering and counter fraudsters.

Meanwhile, apart from the retail CBDC, China is also participating in a wholesale CBDC trial or multi-CBDC for cross border payments, along with Hong Kong, Thailand and the UAE as part of the M-CBDC Bridge Project. All six of China’s big state-owned banks are participating.