Summary of the Progress of Research & Development of E-CNY in China

At end-2017, upon the approval of the State Council, the PBOC began to work with commercial institutions in developing and testing digital fiat currency (hereinafter referred to as e-CNY, a provisional abbreviation following international practices). So far, as the top-level design, function development, and system testing has been basically completed, the PBOC has initiated pilot programs in some representative regions, while making sure the pilots run in a steady, safe, managed, innovative and practical manner.

The PBOC working group on e-CNY research and development hereby releases this white paper to clarify the PBOC’s position, to explain the background, objectives and visions, design framework and policy considerations for the e-CNY system, to seek public comments, as well as to deepen communication with all those concerned and join hands with them in building an open, inclusive, inter-operable and innovative currency service system for the era of digital economy.

A) Background for creation of e-CNY:

1. The development of digital economy calls for new retail payment infrastructures that are safe, inclusive and adaptive to the digital era.
2. The functions of cash and the environment of using cash are changing profoundly.
3. Cryptocurrencies, especially global stablecoins (GSC), have developed rapidly.
4. The international community pays close attention to central bank digital currency (CBDC) and is exploring CBDC options.

B) Definition of e-CNY:

E-CNY is the digital version of fiat currency issued by the PBOC and operated by authorized operators. It is a value-based, quasi-account-based and account-based hybrid payment instrument, with legal tender status and loosely-coupled account linkage. It has the following connotations:

1. e-CNY is the fiat currency issued by the central bank. e-CNY is the digital version of China’s fiat currency. It has all the basic functions of money, i.e., unit of account, medium of exchange and store of value. Same as the physical form of RMB, e-CNY is China’s legal tender.
2. e-CNY adopts a centralized management model and a two-tier operational system. The right to issue e-CNY belongs to the state. The PBOC lies at the center of the e-CNY operational system.
3. e-CNY is mainly a substitute for cash in circulation (M0), and will coexist with physical RMB. Both e-CNY and physical RMB are the PBOC’s liabilities to the public, with the same legal status and economic value. The PBOC will issue e-CNY and physical RMB in parallel, and will take account of both during daily data collection, analysis and management.
4. As retail CBDC, e-CNY mainly serves domestic retail payment demands. E-CNY is a retail CBDC issued to the public. With a modern domestic payment system in China, the issuance of e-CNY will fully meet the public’s daily payment needs, further improve the efficiency of the retail payment system and reduce the cost of retail payment
5. In the future digital retail payment system, e-CNY and funds in the electronic account of authorized operators are inter-operable, and both constitute cash in circulation. Commercial banks and licensed non-bank payment institutions that meet compliance requirements and regulatory requirements regarding risk management on a comprehensive and on-going basis may participate in the e-CNY payment system

C) Objectives and vision:

The development of China’s e-CNY system aims to create a new form of RMB that meets the public’s demand for cash in the era of digital economy. Supported by a retail payment infrastructure that is reliable, efficient, adaptive and open, the e-CNY system will bolster China’s digital economy, enhance financial inclusion, and make the monetary and payment systems more efficient.

1. The first objective is to diversify the forms of cash provided to the public by the central bank, satisfy the public’s demand for digital cash and support financial inclusion.
2. The second objective is to support fair competition, efficiency and safety of retail payment services. E-CNY will provide the public with a new interoperable way of payment, which will further diversify payment instruments and make the payment system more efficient and safer.
3. The third objective is to echo the international initiative and explore the improvement of cross-border payments. Whether e-CNY will be used in cross-border payments, and to promote RMB internationalization draws much attention.

Though technically ready for cross-border use, e-CNY is still designed mainly for domestic retail payments at present. Looking ahead, the PBOC will actively respond to initiatives of G20 and other international organizations on improving cross-border payments, and explore the applicability of CBDC in cross-border scenarios.

D) Design of e-CNY:

The design of e-CNY system follows the concept of “safe and inclusive, innovative and user-friendly, and time-evolving.” The principles for design are based on a holistic consideration of monetary functions, market demand, supply model, technological support, and cost-benefit. Aim is to deliver an open, inclusive, sound, and reliable e-CNY system design plan that suits China.

The e-CNY system adopts a distributed and platform-based design, which enhances the resilience and expansibility of the system and supports the rapid growth in the volume of e-CNY transactions. The e-CNY system combines centralized architecture with distributed architecture, forming a hybrid technical framework featuring the co-existence of dual states, namely, steady state and agile state, as well as the integrated development of centralized and distributed architectures.

Principles for design:

1. Compliant with laws and regulations: strictly complies with regulations on the administration of RMB, AML/CF), the administration of FX, and data and privacy protection
2. Safe and Convenient: The e-CNY operational system is highly secure, highly usable, and highly expandable and concurrent, which can ensure business continuity
3. Openness and Compatibility: The e-CNY system supports interoperability with traditional electronic payment systems. It makes full use of existing financial infrastructures to connect digital wallets of different operators as well as connect e-CNY wallet with bank accounts

Features of e-CNY design: The design of e-CNY takes account of the advantages of both physical RMB and electronic payment instruments. Therefore it shares both the features of physical RMB, such as settlement upon payment and anonymity, and the features of electronic payment instruments, which are less costly, highly portable, highly efficient and hard-to-counterfeit.

• Identifiable both as an account-based and a value-based system
• Non-interest accrual
• Low costs
• Settlement upon payment
• Anonymity (managed anonymity)
• Safety
• Programmability

Design of e-CNY wallet:

• There are different types of wallets, depending on the strength of customer personal information identification.
• There are personal and corporate wallets, depending on the type of holder.
• There are software and hardware wallets, depending on the carrier.
• There are parent wallets and sub-wallets, depending on the authorization.
• The PBOC together with authorized operators and relevant organizations jointly build, own, and share the e-CNY wallet ecological platform.

Design of the e-CNY system to mitigate negative impact

The PBOC leverages on operational, technological and policy designs to minimize the impact of e-CNY system on existing monetary system, financial system, and the real economy. To reduce competition with bank deposits, e-CNY is a substitute for M0 and pays no interest. It circulates in the same way as the physical RMB in a two-tier system under which commercial banks exchange e-CNY for the public. Meanwhile, the PBOC has put in place system frictions as appropriate to prevent the rapid spread of bank runs.

To promote the use of e-CNY in retail payment scenarios, ease the crowding-out of bank deposits, and prevent arbitrage as well as procyclical effects under stressful conditions, the PBOC has come up with a tiered design of e-CNY wallet with different caps on transaction and balance for different types of e-CNY wallets. Additionally, the PBOC has set up a framework of big data analysis, risk monitoring and early warning for e-CNY to enhance the foresightedness, accuracy and effectiveness of e-CNY management.

E) Outlook

The PBOC will continue to prudently advance the pilot e-CNY R&D project in line with China’s 14th Five-Year Plan, with no preset timetable for the final launch. Efforts will focus on the following areas.

1. First, the PBOC will forge ahead with the pilot R&D project in a prudent and orderly manner. Building on the experience from the previous pilot tests and taking into account the development plans and local circumstances of pilot places, the PBOC will further expand test scenarios to cover all possible scenarios in selected pilot regions.
2. Second, the PBOC will improve relevant institutional arrangements and rules. It will actively advance the revision of laws and regulations, such as the Law on the People’s Bank of China, and explore to formulate administrative measures on e-CNY to enhance protection of personal information. The PBOC will improve the rulebook and technical codes.
3. Third, the PBOC will strengthen research on major issues. It will deepen their analysis of e-CNY’s deep impact on monetary policy, financial system and financial stability, in an effort to lay a solid theoretical and policy foundation for the R&D and potential application of e-CNY.

Download full presentation here: https://www.pbc.gov.cn/en/3688110/3688172/4157443/4293696/index.html

Summarised by: -Musheer Ahmed, Founder & MD, Finstep Asia. www.finstep.asia