China’s central bank digital currency could catalyze its economy

By BC Group CFO Steve Zhang

In the past couple of years, regulators and financial institutions across the globe have begun to  embrace digital assets. As the COVID-19 pandemic continues to wreak havoc on the international economy, new impetus has been placed on innovation in the financial system. 

The recent announcement that the People’s Bank of China (PBoC) is rolling out trials of the digital RMB is a boon for blockchain and the digitization of financial assets and could also hold the key to reigniting the world’s second largest economy.

The implementation of the China central bank digital currency – known as DCEP (Digital Currency/Electronic Payment of the RMB) – is an important milestone. It highlights China’s technology leadership, marks an acceleration in the global adoption of digital assets and lays the groundwork for a cashless world. 

As China emerges first from COVID-19, it also provides scope for the PBoC to exercise effective macro-economic control under a negative interest rate environment, all of which is aligned with the Central Government’s recently announced measures to stabilize and ensure a smooth running of the wider economy.

Pilot projects for DCEP deployment have recently begun among state employees in four Chinese cities, with distribution by four major Chinese banks – China Construction Bank, the Bank of China, the Industrial and Commercial Bank of China, and the Agricultural Bank of China.

The DCEP will be eventually available for commercial and retail customers, with the transfer of funds allowed between bank accounts and digital wallets. Utilizing blockchain technology, the new digital currency is intended to replace the cash-and coin-based RMB altogether. 

OPPORTUNITY FOR BLOCKCHAIN INNOVATION
DCEP will be built on three pillars – certification, registration, and big data analytics. The certification centre will manage institutional and personal identification processes, including verifying the identity of institutions and individuals. 

The registration center will manage the digital currency’s ownership procedures, including records of digital currency transfers. The big data analytics center, meanwhile, will ensure compliance, including AML/CTF due diligence.

What’s more, DCEP has blockchain at its core, and is expected to utilize blockchain-based protocols like smart contracts. As reported, the new CBDC deploys unspent transaction output (UTXO), a process by which ownership of a digital currency is transferred digitally on blockchain. 

Indeed, shortly after proposing trials of DCEP, regulators in China announced the 71 members of its National Blockchain Council and launched the country’s Blockchain Service Network (BSN).

BSN is a blockchain-as-a-service platform designed to encourage innovation by SMEs and individuals. The network will be facilitated by key technology and finance partners, such as telecoms company China Mobile, finance firm China UnionPay, and a digital asset exchange.

China’s system will likely also be a boon to counterparts from an anti-money-laundering point of view as its blockchain and security components allow for rapid flagging and tracking of suspicious funds. This will help global organizations and governments that use the DCEP to transact quickly, safely and securely across borders, a major step forward from the current fiat model.

With the deployment of DCEP and establishment of a blockchain network, China is staking its macro-economic and financial future on blockchain and digital.  As always, the country will be prudent and take measured steps before full implementation. Nonetheless, the actions taken by China now could pay dividends in the future, increasing the pace of worldwide adoption and normalizing digital assets and blockchain. 

The DCEP is the latest chapter in China’s rise as a centre for innovation and growth, something the world needs more than ever as it wrestles with the unprecedented impact of COVID-19.