Update on e-CNY: 7/23/2021
The PBOC released a R&D paper on the objectives and progress of its CBDC
I’m back — apologies for the extended time away. I recently moved to a different city so the last month has been filled with tasks related to getting set up.
Public discourse about crypto has declined since the peak in May, but activity is still ongoing in the space. I’ll review some of the bigger news stories in the next Safu newsletter but today I’ve got something a little different.
As you know, the People’s Republic of China has been developing a CBDC. I’ve mentioned it a few times in previous newsletters. The CBDC went under the name DC/EP (Digital Currency/Electronic Payment)… but now we know a little more about it! Last week, the country published a report (English; Chinese) about the R&D of the currency and I’ve got some key highlights:
The name of the digital currency will be e-CNY to follow provisional abbreviation used in international practices. For those following the crypto space, the e-CNY is not a true, traditional, decentralized cryptocurrency and — in my opinion — should not categorized as such.
e-CNY will be recognized as legal tender in the country, representing the central bank’s liabilities to the public. It will be issued by the PBOC and the PBOC only. The digital currency will function through a two-tiered system: The first tier representing the government and the second tier representing financial institutions (FIs), companies, and other private organizations. Because of the nature of this system, the paper commits to maintaining a fair level playing field for all non-government organizations. For all practical purposes, circulation and use cases of e-CNY will be identical with all forms of physical RMB. Should demand for physical RMB exist, the PBOC will not discontinue issuance of paper currency. e-CNY will be counted in M0 supply.
For retail CBDC (meaning the purpose is to settle the public’s transactions), e-CNY will fully meet the demands of daily life. FIs such as commercial banks and payment institutions must meet certain compliance — anti-money laundering, anti-terrorist financing, etc. — requirements to participate in the transactional ecosystem.
Surprisingly, the piece seems to imply the CBDC is not targeted for international use, meaning cross-border payments. A lot of geopolitical positioning is around CBDCs as a means to replace dollar hegemony, and while the paper does seem to say e-CNY is able to be used internationally, that’s does not appear to be the goal now. Part of that is likely because the international infrastructure isn’t in place to accept e-CNY (other partners need to have a digital wallet accepting e-CNY) so I suspect this component will still be heavily applicable in upcoming years — “Looking ahead, the PBOC will actively respond to initiatives of G20 and other international organizations on improving cross-border payments.”
Users can transact with the CBDC through a e-CNY wallet. This will be beneficial to a large number of the rural population without access to banking. The PBOC will set rules for developers of digital wallets, who will be those authorized to create apps on mobile devices. Wallets will have various levels of features unlocked depending on the level of KYC supplied (similar to Binance and other exchanges allowing users to purchase and withdrawal a small daily limit without providing personal info). Foreigners traveling to China a for limited stay can open a e-CNY wallet to meet payment needs without needing to create an account with domestic banks.
Last sentence is big news for foreigners. I’ve previously written about the difficulty for outsiders to participate in China’s current payments system without a local bank account. The infrastructure is too advanced (hint: mobile payments) that using cash like I do when I visit is shocking to natives. e-CNY will probably come with privacy tradeoffs (more on that later) but should boost convenience.
Wallets will be categorized as personal and corporate wallets, with each having characteristics best suited for the user. Wallets can also be broken into software and hardware wallets; software wallets provides services through apps, SDKs, and APIs. Hardware wallets will be operated through security chips, phones, IOT devices, and other wearable objects. Finally, there will be parent wallets and subwallets.
e-CNY will follow the principle of “anonymity for small value and traceable for high value” and claims to value protecting personal information and privacy while ensuring anti-money laundering practices are still followed. Interestingly, the PBOC claims the e-CNY will collect less transaction information than existing digital payment. The PBOC will also set up a firewall for access to data relevant to e-CNY utilization. There will be a tiered authorization system, leading to checks and balances and internal audits.
e-CNY will allow for smart contract programmability as long as the programming doesn’t impact its monetary functions. The paper directly mentions self-executing payments as a use case.
The paper is unclear about who will be building the smart contracts. This could be limited entirely to the government and programmability might be a closed-access system. However, should the government open smart contracts to the public (maybe to foster innovation?), users would in theory be able to duplicate the DeFi ecosystem on legal tender instead of unregulated stablecoins.
If you’re interested in reading more about e-CNY, our friends at Sino Global Capital have put together a deck with additional analysis here.
