This article explains the development of the central bank’s digital currency and China’s DCEP

On September 24, Di Gang of the Central Bank’s Institute of Mathematics stated at the “Blockchain and Digital Economy Development Forum” that the Institute of Digital Currency has focused on the specific practice of blockchain in recent years.

For example, building a unified distributed ledger based on blockchain at the issuance layer of digital renminbi, improving the efficiency of reconciliation, and actively exploring the application of blockchain in the digital renminbi system.

In addition, with the support of the Innovation Center of the Bank for International Settlements, a multilateral central bank digital currency bridge project was initiated. At the same time, with the support of the Ministry of Science and Technology, the central bank’s trade finance blockchain platform also focuses on the application of blockchain.

On the same day, Mu Changchun, director of the Digital Currency Research Institute of the People’s Bank of China , also stated at the 10th China Payment and Settlement Forum that the digital renminbi is a public product provided by the People’s Bank of China for the domestic retail payment market. Its original intention was to promote the development of financial inclusion . At present, there is still a “digital divide” in the field of payment inclusiveness, and financial inclusiveness is also being continuously implemented in the digital renminbi pilot process.

It can be seen that the deployment of digital currency in our country is gradually advancing. Since the digital renminbi internal test in developed cities in China in 2020, more than 200 million digital renminbi red envelopes have been issued. Not only are red envelopes issued for everyone to experience this simple ,, Meituan, Station B, SF Express and other major factories, as well as subways in some areas mentioned at the beginning, have all begun to conduct pilot projects, covering all aspects of our lives.

It can be said that the digital renminbi is getting closer and closer to us and is being integrated into our lives in all aspects. In fact, it is not only our country, but central bank digital currencies are being deployed all over the world. So, what exactly is the central bank’s digital currency, and how is the progress of our country’s digital renminbi? We might as well take a closer look.

What is central bank digital currency?

CBDC is a new form of currency, issued directly by the central bank in digital form as legal tender. The current form of legal currency is cash, reserve deposits or balance settlement. There are two main differences between CBDC and other digital currencies (including encrypted currencies and other forms of central bank currencies):

1. CBDC is a two-tier structure, and you can choose decentralization or centralization. There are central banks, commercial banks, merchants, and users among participants. Compared with ordinary Internet financial institutions, the overall privacy level is relatively high.

2. Contrary to the current digital cash, the operation structure of CBDC will be different from other forms of central bank currency. CBDCs are more powerful. They are programmable, can generate interest, can be cleared in near real time, have cheaper handling fees, and have a wider degree of openness.

When the CBDC was actually designed, the progress of central banks varied. Different central banks have adopted their unique methods. However, in general, there are three questions being explored. Should CBDC be token-based or account-based, should CBDC be batch-based (only open to banks) or retail (open to the public), and should it be based on distributed Ledger?

When the CBDC is to be actually implemented, things become complicated, and there are many tricky issues to consider.

For example, once the CBDC is launched, is it necessary to cancel cash?

Should CBDC accrue interest? Should they have face value like cash?

Or is it linked to the total price index? What impact will this have on commercial banks? How to deal with anonymity and privacy issues? All these questions have yet to be answered.

All these questions have yet to be answered.

Why is a CBDC issued ?

In an internal discussion document in 2017, the Bank of Canada gave six reasons for issuing CBDC in an article entitled “Central Bank Digital Currency: Motivation and Impact”:

Ensure that the central bank provides sufficient cash to the public and maintain the central bank’s seigniorage revenue

Lower the lower limit of interest rates and support non-traditional monetary policies

Reduce overall risk and improve financial stability

Improve the competitiveness of payments

Promote financial inclusion

Curb criminal activity

Looking back at our previous analysis of the Bank for International Settlements survey, payment security and domestic efficiency were selected as the most important motives for the central bank.

According to a large number of papers published by central banks and other large financial institutions, for developed countries, the transition to a cashless society is the main driving factor, while for developing countries, financial inclusion, cost reduction, and operational efficiency are the main driving factors. The main motivation.

Looking at the rest of the reports and the literature that can be found, the fierce competition brought about by Bitcoin and other innovations in the cryptocurrency industry , as well as the clear need to be “one step ahead”, of course, are not listed as reasons for issuing CBDC. .

If the central bank starts to introduce CBDC and succeeds in the end, the potential benefits are many.

From a technical point of view, CBDC is much better than the current form of legal currency. They can be better tracked, more convenient for tax collection, better transmission of monetary policy, better financial inclusion, and can reduce the production of physical currency the cost of. The most obvious advantage is that the payment is cheaper and faster, whether it is domestic payment or cross-border payment.

However, in addition to the design and implementation difficulties, a key issue with the issuance of CBDC is that CBDC may increase the risk of bank operations. However, this will only happen when the bank promises that the bank’s deposits can be exchanged for CBDC on demand. According to this document from the Bank of England, this situation may not necessarily happen.

Currently more famous CBDC projects include: Uruguay’s E-peso (the project was successfully tested in 2018), China’s DCEP, Thailand’s “Project Inthanon,” and Sweden’s E-krona (still under investigation)…

It is worth noting that in recent years, our country’s DCEP has been proceeding in an orderly manner and has achieved relatively leading results.

What is DCEP in China?

As a digital currency issued by my country’s central bank, DCEP can be regarded as a kind of CBDC, which is positioned as a substitute for paper money.

By definition, DCEP is a digital payment tool with value characteristics. “Value feature” means that value transfer can be achieved without an account, just like we usually use cash, without the existence of an account. So if someone asks you what DCEP is, just tell him: DCEP is digital cash used for payment.

Digital cash used for payment? Isn’t that the same as Alipay and WeChat Pay? In fact, there are still obvious differences between them:

1. DCEP is a substitute for cash, it is legal currency, so it has unlimited legal compensation, and no one can refuse to accept it. Although WeChat and Alipay are widely used today, they cannot be used for payment anywhere.

2. DCEP is directly settled in central bank currency, incorporated into the central bank’s debt system and protected; while using WeChat and Alipay to pay, settlement is based on commercial bank deposits. If one day WeChat goes bankrupt (although it is unlikely), the money you put in WeChat can only participate in the bankruptcy liquidation, and there is a risk of major losses.

3. DCEP can realize “dual offline payment”. The use of DCEP for payment does not require a network, as long as there is electricity. For WeChat and Alipay, not to mention that under extreme conditions such as earthquakes and typhoons, even if the signal is not good, there is no way to pay normally.

4. DCEP does not require an account when paying, so under the premise of legality and supervision, it can meet the public’s demand for anonymous payment. However, Alipay and WeChat are difficult to realize payment anonymity due to the need for real-name authentication and associated bank accounts.

What is the current development of DCEP?

Since the start of the research on digital currency in 2014, the establishment of the Central Bank Digital Currency Research Institute in 2016, the Central Bank announced in 2017 to promote the development of blockchain in the five-year plan. In August 2019, Mu Changchun publicly stated that DCEP was ready to come out, and DCEP began in September. “Closed-loop testing”, the top-level design, standard formulation, function research and development, joint debugging and testing will be basically completed in December.

In the central bank’s release of the article “Inventory of the central bank’s financial technology in 2019”, the article stated that the central bank has basically completed the top-level design, standard formulation, function research and development, joint debugging and testing of legal digital currencies on the premise of adhering to two-tier operation, M0 substitution, and anonymity. Work.

Entering 2020, news of DCEP’s internal testing in Shenzhen, Suzhou and other places came out… Since the start of the research, DCEP has been developing for 8 years. The process is not high-profile, but it is also one step at a time. Although new news comes every once in a while, bringing a wave of enthusiasm, but for most people, DCEP is still hidden in the mist, which is very mysterious.

As mentioned earlier, DCEP is a substitute for cash. To be more precise, DCEP has achieved a balance between convenience and legitimacy while inheriting the attributes and value of cash.

  • In terms of convenience, DCEP reduces the cost of printing, circulation, storage and carrying of cash, has the advantages of electronic payment, and can realize payment anonymity to a certain extent.
  • In terms of legitimacy, DCEP, like cash, has to face issues such as counterfeit banknotes (for example, someone privately issuing additional notes), money laundering, tax evasion, terrorist financing, etc. At the same time, due to the characteristics of DCEP’s anonymous payment, it will be challenging to avoid these risks. Bigger.

In response to these problems, on the one hand, the government will use big data technology to strengthen the supervision and identification of anonymous payments, and at the same time, it will also set up some institutional frictions to increase the difficulty and cost of illegal crimes; on the other hand, the two-tier system of DCEP itself is more conducive to implementation. Efficient and precise supervision, truly anonymous and controllable.

With the accelerating implementation of DCEP, the most concerned issue should be how to put, obtain and use DCEP. Judging from the information known in the current test, the whole process is actually not much different from cash, except that it has changed from physical paper money to digital currency.

However, there are still many problems to be solved in the overall advancement. For example, it also needs correspondingly subdivided and clear legal provisions, high operating thresholds to popularize science, preventing criminals from taking the opportunity to make trouble, and the need to establish a more suitable circulation environment…


From cautious wait-and-see to fast entry, some countries are indeed deliberately “scratching” the popularity of CBDC. Although the central bank’s DCEP was an internal test opened in 2020, it was a natural result after 8 years of steady performance. The country has publicly stated that its goal is to become the first country to issue a digital currency in order to reduce its dependence on the global dollar payment system.

From a global perspective, Venezuela officially launched the petro as early as 18 years, but it failed to achieve the desired effect due to various reasons. In the United States, not far away, Libra is trying its best to get out of the regulatory quagmire. On the other side, the digital dollar can only be regarded as a face-to-face encounter in Congress.

It can be said that our digital currency has achieved relatively leading results. In this way, 8 years of polishing is not a short period for DCEP, but it is very necessary. Because of this, my country may become a model worthy of reference on the CBDC track. Of course, DCEP still has a long way to go before that.

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