In-depth analysis of the digital RMB: smart currency, controllable anonymity, and diversified hardware wallets

On July 16, the Digital RMB Research and Development Working Group of the People’s Bank of China released a white paper on the research and development progress of China’s digital RMB.

The white paper makes it clear that the digital RMB is a legal tender issued by the People's Bank of China, mainly positioned as a cash payment voucher, does not pay interest, and will coexist with physical RMB for a long time. As a retail central bank digital currency, it is mainly used to meet domestic retail payment needs.

What are the unnoticed details and highlights in the digital RMB white paper? Is anonymity true or false? What does it mean that the digital RMB is programmable?

Why develop digital RMB?

To sum up, this is mainly determined by the international climate and domestic economic development needs.

Internationally, the research and development of central bank digital currencies has become an arms race in the digital economy era.

The latest survey report from the Bank for International Settlements shows that about 86% of central banks in 65 countries or economies have conducted research on digital currencies.

Secondly, the rapid development of cryptocurrencies, especially global stablecoins, brings risks and challenges.

The white paper shows that the central bank holds a negative attitude towards cryptocurrencies, believing that cryptocurrencies lack value support, have drastic price fluctuations, and have low transaction efficiency. They are mostly used for speculation, and there are potential risks that threaten financial security and social stability. They have also become a means of payment for illegal economic activities such as money laundering.

In China, with the development of the digital economy, new retail payment infrastructure is needed to meet the diverse payment needs of the people, improve the level and efficiency of basic financial services, and promote the smooth flow of the domestic circulation.

In addition, the cash usage rate in my country has been on a downward trend recently, and the cost of cash management is relatively high.

At the media briefing for the release of the white paper, Fan Yifei, deputy governor of the central bank, summarized the significance and role of the digital RMB into three points:

(1) The need to support the development of the digital economy; (2) The need to support the construction of a modern central bank system; (3) The need to actively participate in international financial reform and coordination dialogue.

How does the digital RMB achieve anonymity and protect privacy?

The white paper points out that the digital RMB is secure and anonymous (controllable anonymity). Note that the anonymity here is controllable anonymity, that is, "small amounts are anonymous, large amounts are traceable according to law", and it attaches great importance to personal information and privacy protection.

According to Mu Changchun, director of the Digital Currency Research Institute, at the beginning of this year, current payment tools, whether bank cards or WeChat or Alipay, are all tied to the bank account system, and bank accounts are opened with real names, which cannot meet the demand for anonymity. The digital RMB is loosely coupled with bank accounts, which can technically achieve small-amount anonymity.

An anonymous wallet can be opened with only a mobile phone number. It has the lowest KYC level, but the daily transaction limit is the lowest, which can only meet the daily small payment needs. If you want to use large-value payments, you need to upgrade your wallet. The wallet balance and payment limit will increase with the increase of KYC strength.

Mu Changchun also responded to the concern that "the central bank can obtain users' real identity information by checking mobile phone numbers through telecom operators."

He said, "This is actually a misunderstanding. Although the payment department of telecom operators is also involved in the research and development of digital RMB, according to the current national laws and regulations, telecom operators are not allowed to disclose mobile phone customer information to third parties such as the central bank, and of course they are not allowed to provide it to departments operating digital RMB. Therefore, wallets opened with mobile phone numbers are completely anonymous to the People's Bank of China and various operating institutions."

Mu Changchun emphasized that the digital RMB's protection of user privacy is the highest level among current payment tools.

What is the current actual implementation status of the digital RMB?

Since the end of 2019, the People's Bank of China first carried out pilot tests of the digital RMB in Shenzhen, Suzhou, Xiongan, Chengdu and the 2022 Beijing Winter Olympics scenarios; starting in November 2020, six new pilot areas were added: Shanghai, Hainan, Changsha, Xi'an, Qingdao and Dalian.

As of June 30, 2021, the number of digital RMB pilot scenarios has exceeded 1.32 million, covering life payment, catering services, transportation, shopping, government services and other fields. More than 20.87 million personal wallets and more than 3.51 million corporate wallets have been opened, with a total of more than 70.75 million transactions and an amount of about 34.5 billion yuan.

Fan Yifei, deputy governor of the People's Bank of China, said that the research and development and pilot program of the digital RMB will continue to be steadily advanced without setting a preset launch timetable.

In the future, the Beijing Winter Olympics will be an important usage scenario for the digital RMB. According to the white paper, the Winter Olympics will pilot the deployment of innovative application scenarios such as unmanned vending trucks, self-service vending machines, and unmanned supermarkets, and launch wearable devices such as payment gloves, payment badges, and Winter Olympics payment clothing.

In addition, to facilitate overseas athletes, coaches, referees and tourists coming to China, the People's Bank of China will guide participating research institutions to launch soft wallet and hard wallet service solutions for the digital RMB.

Does the digital RMB use blockchain technology?

Mu Changchun, director of the Digital Currency Research Institute of the People's Bank of China, said, "Blockchain has advantages such as data immutability and traceability, but it has shortcomings in performance and scalability. It is more suitable for low-concurrency, low-sensitivity asset confirmation, transaction transfer, and account verification scenarios."

The digital RMB is widely used in high-frequency payment scenarios with high concurrency and low latency, which requires strong performance support and is not suitable for settlement using "inefficient" blockchain.

Therefore, a centralized architecture is adopted at the transaction layer of the digital RMB payment system. There is only one center, which is the central bank. All cross-institutional transactions transfer value through the central bank.

However, at the issuance layer of the digital RMB payment system, a unified distributed ledger is built based on the alliance chain technology. The central bank, as a trusted institution, uploads transaction data to the chain through the application programming interface to ensure that the data is true and accurate. The operating institution can conduct cross-institutional reconciliation, collective ledger maintenance, and multi-point backup. The digital RMB system combines the blockchain consensus mechanism and programmable smart contract features to achieve automatic reconciliation and automatic error handling.

Therefore, the digital RMB partially uses blockchain technology, which is also a manifestation of the pragmatic approach of “not pre-setting the technical route”.

Which institutions and companies are involved in the research, development and operation of digital RMB?

This is related to the characteristics of digital RMB, which adopts centralized management and two-tier operation.

The People's Bank of China occupies a central position in the digital RMB operation system. It is responsible for issuing digital RMB to operating institutions, and the operating institutions are responsible for providing digital RMB exchange and circulation services to the public.

Fan Yifei introduced that currently, the operating institutions participating in the research and development of digital RMB mainly include ICBC, ABC, BOC, CCB, BOC, Postal Savings Bank of China, China Mobile and ICBC, China Unicom, China Telecom and BOC have respectively established joint project teams to participate in the research and development. Ant Group and Tencent's two Internet companies' MyBank and WeBank also participate in the research and development, and China Merchants Bank has also recently been approved to join.

In addition, since the digital RMB is a legal currency in digital form issued by the People's Bank of China, it is managed in the same way as physical RMB. The People's Bank of China does not pay interest on it, does not charge designated operating institutions for exchange and circulation services, and designated operating institutions do not charge individual customers for redemption and redemption services of digital RMB.

How can the digital RMB be paid across borders and settled with other central bank digital currencies?

Cross-border payment is an imaginative application scenario for the digital RMB, but the description in the white paper is quite cautious.

The white paper stated that in an active response to the initiatives of the international community and in exploring ways to improve cross-border payments, the digital RMB has the technical conditions for cross-border use, but is currently mainly used to meet domestic retail payment needs.

“In the future, the People’s Bank of China will actively respond to the initiatives of international organizations such as the G20 to improve cross-border payments and study the applicability of central bank digital currencies in the cross-border field. The People’s Bank of China will explore cross-border payment pilot projects on the premise of fully respecting the monetary sovereignty of both parties and complying with laws and regulations, and will follow the three requirements of “no loss”, “compliance” and “interoperability” to establish legal digital currency exchange arrangements and regulatory cooperation mechanisms with relevant monetary authorities and central banks to meet the regulatory and compliance requirements of various countries.”

In summary, the internationalization of the digital RMB is not a technical issue, but an institutional issue. Cross-border payment technology is mature, but it needs to meet international regulatory and compliance conditions.

In addition, the Digital Currency Research Institute of the People's Bank of China has signed a memorandum of cooperation with the Hong Kong Monetary Authority, and joined the multi-currency legal digital currency bridge (mCBDC Bridge) project led by the Bank for International Settlements Innovation Hub (BISIH).

The multi-currency legal digital currency bridge can be generally understood as a "cross-chain bridge" in the blockchain world. How different central bank digital currencies can interoperate will be a rigid demand in the future, as well as a difficult problem.

Zhou Xiaochuan, former governor of the People's Bank of China, said at this year's Boao Forum for Asia that the interoperability of cross-border use of digital currencies is relatively complicated.

"Every country has its own macro-control and monetary sovereignty, which is different from other countries in terms of system. Some countries also have certain foreign exchange controls, which are not so easy to cancel. Therefore, if CBDC is developed, many countries will have their own CBDCs, which are based on their own currencies and will have different rules during use. In this case, the interoperability of cross-border use of digital currencies is very complicated," said Zhou Xiaochuan.

E-CNY

Previously, the English abbreviation of the digital RMB was generally called DCEP (Digital Currency Electronic Payment). Now in the English version of the white paper, the digital RMB has an official unified abbreviation: E-CNY.

Smart Contracts

The biggest highlight of the digital RMB in the white paper is that "the digital RMB achieves programmability by loading smart contracts that do not affect the currency function, so that the digital RMB can automatically pay transactions according to the conditions and rules agreed upon by both parties to the transaction while ensuring security and compliance, thereby promoting business model innovation."

This means that the RMB will gradually upgrade from traditional currency to smart currency, a landmark transformation.

According to the definition given by Nick Szabo, a smart contract is a set of digitally defined promises, including protocols on which the parties can execute these promises. Smart contracts are written into computer-readable code. Once the triggering conditions are met, they are automatically executed by the computer, and can load preconditions such as time and credit. They can be applied to various scenarios such as tax payment, anti-terrorism, and financing.

There are different opinions on whether digital RMB needs to be loaded with smart contracts.

A central bank official once said that a cautious attitude should be maintained towards loading smart contracts into central bank digital currencies.

The reason is that the central bank's digital currency is a substitute for M0 and has unlimited legal tender. The original banknotes do not carry any other social and administrative functions. The "Regulations on the Administration of Renminbi of the People's Republic of China" stipulates that it is prohibited to deliberately damage the renminbi. Therefore, adding additional social or administrative functions to the banknotes is actually suspected of damaging the renminbi.

It believes that loading smart contracts other than the legal tender function will affect its legal compensation function, and even make it degenerate into a valuable ticket, reducing the free use of my country's central bank digital currency, and will also have an adverse impact on the internationalization of the RMB, reduce the speed of currency circulation, affect the transmission of monetary policy and the central bank's performance of macro-prudential functions. At the same time, it may also infringe on citizens' privacy rights and be detrimental to the protection of personal rights and interests.

At the beginning of 2021, Yao Qian, former director of the Digital Currency Research Institute of the Central Bank and current director of the Science and Technology Supervision Bureau of the China Securities Regulatory Commission, expressed his view at the International Financial Forum (IFF) that digital currency cannot be a simple simulation of physical currency. If the digital advantages are to be brought into play, the future digital currency must move towards smart currency.

Yao Qian said that there have been some system disasters caused by security loopholes in smart contracts, which shows that the maturity of this technology needs to be improved. Therefore, the central bank's digital currency should start with simple smart contracts and gradually expand its potential while fully considering security.

It can be foreseen that in the future, the smart contract function of the digital RMB will be a cautious exploration process from simple to complex.

In Mu Changchun's words, "We will load smart contracts that are conducive to the function of currency, but we will remain cautious about smart contracts that exceed the function of currency."

In the future, how smart contracts will affect the efficiency of currency circulation and currency integrity will become a long-term research topic.

Foreigners visiting China for a short period of time can use digital RMB to obtain financial services

Whether in China or abroad, enjoying financial services requires a basic bank account. Without a bank account, you can't move forward. The emergence of the digital RMB wallet will break this trend.

The digital RMB can transfer value without relying on a bank account, which will further lower the threshold for the public to access financial services and enable the public without bank accounts to enjoy basic financial services through digital RMB wallets.

According to the white paper, foreign residents who come to China for a short period of time can open a digital RMB wallet without opening a bank account in mainland China to meet their daily payment needs in China.

For example, during the Winter Olympics, Chinese athletes, coaches, referees, and tourists can use digital RMB wallets to enjoy basic domestic financial services.

Digital RMB Hard Wallet

There are many ways to classify digital RMB wallets. According to the opening entity, they are divided into personal wallets and corporate wallets; according to the carrier, they are divided into soft wallets and hard wallets; according to the ownership of permissions, they are divided into parent wallets and sub-wallets.

Among them, the most anticipated is the hardware wallet.

The white paper stated that the hard wallet realizes digital RMB related functions based on technologies such as security chips, and provides services to users based on IC cards, mobile phone terminals, wearable devices, Internet of Things devices, etc.

In other words, the hardware wallet of the digital RMB is not just a card in everyone's concept, it has rich and diverse forms, which has also been confirmed by bank staff.

An employee of a large state-owned bank told TechFlow that digital RMB hardware wallets come in many styles and categories with diverse designs, focusing on small-value payments and supporting dual offline functions.

Watches, mobile phone cases, headphone cases, accessories, crutches, etc. may all become carriers of digital RMB hardware wallets.

This will greatly facilitate the elderly who face a digital divide, as it will not only enable payment functions, but also allow them to contact their families with one click.