Earlier this year, in early January, the People’s Bank of China (PBOC) launched digital-yuan wallet apps for Android and iOS.
As per the latest data available, gathered in May, more than 260 million people are already using China’s digital currency, totalizing more than $13.8 billion worth of transactions. It is available for use in about 23 mainland cities and is live on nine wallets.
The digital yuan is one more example of China being at the forefront of new technologies.
In July 2021, the People’s Bank of China working group published its first and only official report on the digital yuan, “Progress of Research and Development of e-CNY in China”. The report, albeit short, walked through the government’s research and development process and took care to distinguish the e-CNY, which is a central bank digital currency (CBDC), from cryptocurrencies and stablecoins.
Specifically, the report defined e-CNY as the digital version of retail fiat currency with a two-tier operating model: In the first tier, the PBOC issues and controls its supply and doles it out to authorized entities such as commercial banks, telecom operators, and payment service providers; in the second tier, only those authorized entities may distribute it and activate its use in the economy.
When it comes to the role of blockchain in the digital yuan, the PBOC chose a conventional approach to the CBDC design because of the performance and scalability challenges that blockchain presented.
But the PBOC did not totally rule out distributed ledger technologies. In a September 2021 speech, Di Gang, deputy director of its Digital Currency Research Institute, said that the PBOC was exploring the use of blockchain in three areas: First, in the core layer of Project Inthanon-LionRock prototype blocks, and maintaining CBDC balances. Second, in the digital yuan issuance layer, as in the mCBDC project. Here tamper-resistant distributed ledgers could help with reconciliation. Third, in trade finance, as in the proof of concept linking Hong Kong Interbank Clearing’s blockchain-based eTradeConnect and the PBOC’s trade finance platform.
Here in this case of trade finance, blockchain in combination with artificial intelligence and robotic process automation could minimize paper-based and people-driven processes, lower administrative costs, and extend services to small and medium-sized enterprises that typically use open account transactions, where sellers ship and deliver goods before buyers’ payments are due.
In addition to that, China is already very advanced in terms of digital payments and the digital yuan doesn’t disrupt the way to pay (QR code and face payments being already widely used through Alipay and WeChat Pay). Users can use their bank app or wallet (Alipay, WeChat) to connect with the official “digital yuan” wallet to be activated.
However, the biggest innovation is the use of smart-contract technology.
Through smart contracts, users can agree on the use time, use scope and use rules: nontransferable, nonredeemable, time-out recovery, targeted use, targeted crowd, targeted scene, consumer welfare, coupon reduction, designed merchant consumption, etc.
The digital yuan incorporates a variety of elements. For security, it combines a digital certificate system, digital signatures, and encrypted storage to reduce the feasibility of counterfeiting, transaction falsification or reversibility, and double spending, which refers to the risk—particularly when parties exchange digital currency—that one party could concurrently send a single unit of currency to two different accounts. The PBOC has not detailed how its technology solves the double-spending problem, but it claims that its “multilayer security system” will manage such risks and guarantee the safety of the e-CNY life cycle, from password and data security to privacy of financial information and business continuity.
For financial inclusion, the system requires no bank account or internet connectivity: Users can obtain and use “smartphone-free hardware wallets” with security chips and based on integrated circuit cards without a bank account; and they can make “dual offline payments,” meaning that the payer can transfer funds to the payee, likely through near-field communications technology. Smartphone users can download the free software wallet app, but it requires linking to one of the “authorized operators”.
Regarding programmability, the PBOC references the use of smart contracts, but not in terms of their inventor Nick Szabo’s definition: “an application that runs in a distributed and trust-minimized manner on a blockchain”; that is, running “on a secure consensus protocol across a network of computers rather than on an individual remote computer or centralized server” and running without reliance on a particular person or organization to secure it.
Payments in e-CNY may be programmable in the way that payments with credit cards are programmable; for example, through application programming interfaces.
Moreover, as I mentioned in my article Tech Support Provided (China Daily Global, April 9, 2020), other countries could have learned from China’s use of artificial intelligence (AI) and big data in the fight against the coronavirus.
At the very beginning of the pandemic, we saw robots being deployed to do the cleaning and sterilizing in hospital wards, and delivering food and medicine to reduce human-to-human contact. A Shenzhen-based company, for example, which usually makes robots for the catering industry, installed its machines in more than 40 hospitals around the country to support medical staff.
Another Shenzhen-based company deployed drones to deliver medical supplies and conduct thermal imaging.
AI was also used to identify infected or noncompliant individuals.
To sum up, China is at the forefront of new technologies. The digital yuan is a great example of new technologies applied to the area of payments, but China is at the forefront of blockchain technology as well as AI.
The author is a fintech adviser, a researcher and a former business analyst for a Hong Kong publicly listed company.
The views do not necessarily reflect those of China Daily.