China’s Central Bank Eyes a More Robust Role for its Digital Yuan

China downplays its role for cross-border transactions in its white paper on its digital currency but remains open for discussions on developing global standards for the international monetary system.

By
Chung Yee
on
July 18, 2021
Category:
Blockchain News

White Paper by E-CNY Research

China unveiled a comprehensive plan for its Central Bank Digital Currency (CBDC) in a white paper published in English. The white paper outlined the background, vision, and key objectives behind the research and development of the digital yuan, provisionally known as e-CNY. 

China is one of the leading pioneers in the CBDC race and has tested the digital currency in its major cities, including Beijing, Shenzhen, and Shanghai. 

Source: e-CNY is defined as a hybrid payment instrument with legal tender status


However, there is no definitive timeline for an official rollout of the CBDC. China’s vision for its CBDC is for the domestic retail market, but it is technically capable of cross-border use. 

In its white paper, the third objective addresses China’s CDBC for cross-border use. The report recognizes numerous issues such as monetary sovereignty, foreign exchange policies, regulatory and compliance requirements hurdles. It also states that the internationalization of a currency is a natural result of market selection. 

The white paper has downplayed the role of China’s CBDC as a global settlement solution. Many analysts have speculated that the digital yuan was created to break the dollar’s dominance globally. 

Source: China downplays the role of e-CNY as a cross-border payment solution


Acknowledging the Rapid Growth of Cryptocurrencies

China recognizes that the crypto market has grown rapidly. It went on to state why cryptocurrencies are not suitable to be used as currency.

The characteristics of cryptocurrency determined to make it unsuitable are the lack of intrinsic value, acute price fluctuations, low trading efficiencies, and huge energy consumption. 

Cryptocurrency is used as a speculative instrument that makes it a risk to financial security and social stability. The paper also criticizes stablecoin because it poses risks and challenges to the international monetary system, payment and clearing system, monetary policies, and cross-border capital flow management. 


Personal Information and Privacy

The e-CNY follows the principle of ‘anonymity for small value and traceable for high value.’ It gives assurance that great importance is attached to protecting personal information and privacy.

Small payment services based on risk features will remain anonymous but acknowledge that there must be safeguards to curb misuse of e-CNY for illegal and criminal activities. 

The central bank will set up a firewall for e-CNY related information and implement information security and privacy protocols. A tiered authorization system, proper checks, and balances and internal audits will be implemented as internal controls to prevent privacy breaches. 

Source

Programmability 

In an exciting development, the white paper discloses that e-CNY is programmable. It deploys smart contracts that will not impair its monetary functions.

Self-executing payments with predefined conditions between the transacting parties will facilitate business model innovation. This capability would enable the CDBC to carry out most of the capabilities in the current ecosystem except for a decentralized protocol. 


Potential Application of e-CNY

The white paper concludes by expressing the willingness of China to participate in shaping the international monetary system. The central bank will participate actively in internal exchanges and discuss standards openly and inclusively. 

Although the white paper was explicit in disclosing that China does not prioritize the use of e-CNY as a cross-border settlement solution, the digital yuan seems to have a greater role to play globally. With plans in place for a common platform with jurisdictions like Hong Kong, Thailand, and UAE, China certainly looks like it has broader aspirations. 


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Chung Yee

Chung Yee has a legal background and has been involved in research works for the legal and compliance industry. Writing is his passion, centered on topics such as the blockchain and finance.

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