The worldwide and geopolitical consequences of China’s quick and pioneering growth of the digital yuan, also known as e-CNY, have gotten a lot of attention.
However, the People’s Bank of China (PBoCWorking )’s Group on E-CNY Research and Development produced a fresh white paper that provided a more domestic-focused and technologically-driven view of the new currency’s background and primary objectives.
The PBoC originally established a task force to explore digital fiat currency in 2014, according to the report, which outlines the currency’s research and development timetable. It formed the Digital Currency Institute in 2016, which created the first-generation prototype for the new currency. The bank began collaborating with commercial institutions on further developing and testing the e-CNY in late 2017 after receiving authorization from the State Council.
These years were notable for the rapid rise of decentralized cryptocurrency markets, including their first major bull run in winter 2017, as well as substantial changes in the domestic and worldwide digital economies.
The white paper highlights big data, cloud computing, artificial intelligence, blockchain, and the Internet of Things as major breakthroughs, with the bank noting that the Covid-19 outbreak has accelerated the digital transformation of Chinese businesses and payment services.
As the new study shows for the first time, the PBoC is drawing on several of these advancements for the e-CNY, including the use of smart contracts to allow for programmability.
While the institution is enthusiastic about technology advancements and far-reaching advances in retail payment systems, it is dismissive of decentralized cryptocurrencies:
“Cryptocurrencies such as Bitcoin are claimed to be decentralized and entirely anonymous. However, given their lack of intrinsic value, acute price fluctuations, low trading efficiencies, and huge energy consumption, they can hardly serve as currencies used in daily economic activities. In addition, cryptocurrencies are mostly speculative instruments, and therefore pose potential risks to financial security and social stability.”
Concerns about price volatility have prompted some private actors to establish stablecoins, which are tethered to fiat currencies or other assets, according to the PBoC. Commercial institutions’ plans to create a global stablecoin will, according to the PBoC, “present dangers and challenges to the international monetary system, payment and clearing system, monetary policies, cross-border capital movement management, and other areas.”
Beijing’s inclination for state-led retail payment infrastructure innovation and the construction of a centralized, two-tier management mechanism for the e-CNY is understandable in this context:
“The right to issue e-CNY belongs to the state. The PBOC lies at the center of the e-CNY operational system. It issues e-CNY to authorized operators which are commercial banks and manages e-CNY through its whole life cycle. Meanwhile, it is the authorized operators and other commercial institutions that exchange and circulate e-CNY to the public.”
However, the currency’s strictly technical design incorporates both centralized and distributed structures. This has been employed to great effect in numerous experiments, with approximately 1.32 million scenarios conducted to date and a total transaction volume of 70.75 million transactions worth roughly RMB 34.5 billion ($5.34 billion).
The white paper also analyzes central banks’ growing interest in developing central bank digital currencies (CBDCs), stating that the PBoC has had extensive meetings with international institutions such as the BIS, IMF, and World Bank. It is wary about using e-CNY for cross-order transactions, citing “a number of complex challenges like as monetary sovereignty, foreign currency rules […], as well as regulatory and compliance considerations.”
Despite the fact that the e-CNY is already technically ready for cross-border use, the PBoC said it will aggressively respond to G20 and other organizations’ initiatives and study possible cross-border payment pilots, “subject to mutual respect for monetary sovereignty and compliance.”