Observation | The central bank is actively and steadily developing digital RMB, and the pilot program is expected to accelerate

DC/EP faces demands and technical challenges, such as how to achieve dual offline payment. According to central bank officials, the launch of DC/EP has multiple purposes: 1) improving efficiency; 2) reducing costs; 3) preventing money laundering risks; 4) defending national sovereignty, etc. However, if DC/EP is to achieve its goals, it still faces several practical problems and technical challenges. Practical problems include where user demand comes from and what motivation merchants have to promote DC/EP. Technical challenges include paper money can complete value transfer when both parties of the transaction are not connected to the Internet (i.e. "dual offline"), without the need for third-party confirmation. As an electronic payment method, DC/EP has difficulty in achieving real-time payment in the full offline link of "currency sender-DC/EP receiving terminal/People's Bank of China-currency recipient".

The acceleration of the implementation of the digital currency of the People's Bank of China is expected. At present, the digital currency of the People's Bank of China is being piloted in Shenzhen, Suzhou, Xiong'an, and Chengdu. The Digital Currency Research Institute of the Central Bank has reached a strategic cooperation with Didi. According to reports from Bloomberg and Caixin, the Digital Currency Research Institute has also contacted institutions such as Bilibili and Meituan. We believe that this means that the Digital Currency Research Institute is paving the way for DCEP to serve the C-end through merchants. We believe that at a time when the G7 has basically decided to cooperate on the issuance of CBDC (legal digital currency), the US Congress has held a hearing on the digital dollar, Japan has begun to verify CBDC, and international competition is accelerating, although there is still no timetable for the launch of DCEP, the pilot action of DCEP is still expected to accelerate. We are optimistic about the promotion of the digital currency of the People's Bank of China on the electronic payment industry chain, and recommend paying attention to the following key links: 1. Account side: The influence of bank accounts may be enhanced. The market believes that DCEP may not need to be bound to a bank account. We believe that DCEP cannot be separated from a bank account. The promotion of DCEP by the central bank will enhance the influence of bank accounts in the payment industry chain, and banks have the opportunity to regain the account dominance on the user side. 2. Clearing side: UnionPay and NetsUnion may still participate. The market believes that DCEP transactions do not require the participation of clearing institutions. We believe that as long as DCEP transactions need to connect different banks and payment institutions, the current two major clearing institutions, UnionPay and China National Payment Corporation, will need to participate. 3. Merchant side: acquiring institutions and service providers are still indispensable. We believe that if banks want to use DCEP to acquire more users, the methods they may adopt will most likely include: 1) reducing the fees of merchants in the promotion scenarios; 2) increasing rebates for service providers.

It may become a consensus that the private sector can participate in CBDC. Many central banks, including the People's Bank of China, and international organizations have stated that CBDC will allow the private sector to participate. We believe that this will be beneficial to the innovation and development of the industry, and the private sector's participation in the digital currency of the People's Bank of China is expected to exceed market expectations. For example, 1) BIS proposed that in order to ensure the availability of CBDC, it is best for the private sector to provide CBDC services and the central bank to provide payment infrastructure. 2) The Bank of England stated in the report "OBJECTIVES AND DESIGN PRINCIPLES OF CBDC" that the CBDC model where the central bank takes care of everything is not open to competition, may not support innovation, and does not conform to the design principles of the Bank of England. The model it designed is jointly participated by the central bank and the private sector.

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