China’s Digital Currency

Executive Summary

China is pushing aggressively to be a global leader in financial technology. Over the last several years, use of mobile payment platforms has exploded in China while cash transactions have declined. At the same time, global interest in the development of central bank digital currencies (CBDCs) has also risen, with dozens of central banks now researching ways to offer digital versions of their fiat currency to ordinary citizens. The People’s Bank of China (PBOC) is leading in these efforts, aiming to release a central bank digital currency of its own. This CBDC system, which the Chinese government calls Digital Currency/ Electronic Payment (DCEP), will likely enable the Chinese Communist Party (CCP) to strengthen its digital authoritarianism domestically and export its influence and standard-setting abroad. By eliminating some of the previous constraints on government data collection of private citizens’ transactions, DCEP represents a significant risk to the long-held standards of financial privacy upheld in free societies.

The PBOC’s DCEP strategy is motivated by a number of factors. The dominance of private mobile payment firms in China has given such companies an outsized role in retail commerce, making them indispensable to the economy. The PBOC is seeking a digital currency to harness the market share and technological innovation of private financial firms and to gain better access to information about the financial activities of Chinese consumers. DCEP is also part of China’s geopolitical ambitions, and CCP officials frame the progress of DCEP as similar to advancements in other strategically important emerging technologies, such as artificial intelligence and robotics. DCEP’s development also comes against a backdrop of China’s broader push to internationalize the renminbi.

Few technical details about DCEP are publicly confirmed. The PBOC has indicated that DCEP will have a two-tier structure, with the PBOC managing the back-end infrastructure while employing banks and other companies to aid in distribution to the public. It is clear that, despite much initial PBOC discussion about distributed ledger infrastructure, DCEP will not use blockchain as part of its design. DCEP is also likely to allow for some basic programmability involving its transactions and to offer users the opportunity to access the currency via software wallets. Despite some official statements and reporting about these general features, much of the precise operational architecture is still being worked out.