China’s central bank releases white paper on digital yuan development, confirming smart contract programmability

China’s central bank on Friday released a white paper on the progress of the country’s digital fiat currency, or the e-CNY. It summarized the currency’s background, technology roadmap and development objectives.

The e-CNY is the digital version of the fiat currency issued by the People’s Bank of China and it is handled by authorized operators. It is a value-based, quasi-account-based and account-based hybrid payment instrument with legal tender status and loosely-coupled account linkage, the white paper clarified.

It reiterates previous messages but clarifies some issues. For example, the former central bank governor had previously stated that the state banks issued the e-CNY against central bank deposits, a synthetic CBDC. Today’s whitepaper explicitly states the central bank digital currency (CBDC) is issued by the central bank and commercial banks merely distribute it.

Through the end of June, individuals opened almost 21 million wallets and corporates started another 3.4 million wallets. RMB 34.5 billion ($5.34bn) was processed across 70.75 million transactions. This gives an average transaction value of RMB 488 ($75.47), which is less than half the average in October last year.

As the digital economy develops, the share of transactions made using cash is rapidly declining in China.

Meanwhile, a variety of so-called cryptocurrencies such as Bitcoin pose potential risks to financial security and social stability, given their lack of intrinsic value, acute price fluctuations, low trading efficiencies and huge energy consumption, the white paper noted.

“Adopting blockchain and encryption technology, 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,” the PBoC wrote.

“To tackle the relatively big price fluctuation concern of cryptocurrencies, some commercial institutions launched so-called ‘stablecoins,’ and tried to stabilize their values by pegging them to sovereign currencies or related assets,” the central bank continued. “Some commercial institutions even plan to launch global stablecoins, which will bring risks and challenges to the international monetary system, payment and clearing system, monetary policies, cross-border capital flow management and etc.”

The development of the e-CNY system aims to create a new form of RMB that meets the public demand for cash in the digital economy era.

“Supported by a retail payment infrastructure that is reliable, efficient, adaptive and open, the e-CNY system will bolster China’s digital economy, enhance financial inclusion, and make the monetary and payment systems more efficient,”

The paper outlines the primary objectives of the digital yuan. Firstly, the aim is to ensure financial inclusion and provide a public good digital cash while physical cash usage declines. Digital renminbi holdings will not earn interest.

Promoting fair competition and interoperability between different forms of digital cash is the second stated objective without mentioning dominant mobile payment platforms AliPay or WeChat Pay. It differentiates the e-CNY from other digital payment tools as being legal tender, not requiring a bank account, supporting offline payments and providing ‘managed anonymity’. 

This refers to the ability for low value wallets to be set up with only a mobile number. As previously reported, Chinese authorities already have the ability to track payments.

The paper says, “The e-CNY system collects less transaction information than traditional electronic payment and does not provide information to third parties or other government agencies unless stipulated otherwise in laws and regulations.” 

A third objective is for cross border payments. The central bank addresses concerns about RMB cross border use by stating, “The internationalization of a currency is a natural result of market selection. The international status of a country’s currency depends on its economic fundamentals and the depth, efficiency and openness of its financial markets.” We observe that while historically, China’s markets have been closed, there is currently a gradual opening. 

The whitepaper states that while the digital currency can be used cross border it is “mainly” designed for domestic use. The central bank also acknowledged monetary sovereignty issues and the principle of “no detriment”.

Anonymity for Small Value and Traceable for High Value

Meanwhile, the digital yuan also supports interoperability with traditional electronic payment systems. The paper further details that in addition to the 20 million digital yuan wallets, 3.5 business wallets have also been deployed.

The white paper explains that the digital yuan is “non-interest accrual,” which means it is simply a substitute for the monetary supply that “carries and pays no interest.” The paper also touches upon anonymity and privacy and highlights that the network has some elements of privacy, but it also guards against illegal financial activities.

“[The] e-CNY follows the principle of ‘anonymity for small value and traceable for high value,’ and attaches great importance to protecting personal information and privacy,” the white paper notes. “It aims to meet the public demand for anonymous small value payment services based on the risk features and information processing logic of [the] current electronic payment system.” The PBOC’s digital currency progress report adds:

Download and read the white paper HERE