Detailed Analysis of China’s Central Bank Digital Currency

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Earlier this month, China publicly confirmed that they have been working on a central bank digital currency (CBDC) and will look to roll out it sometime this year. Binance Research published a detailed review of the structure and issuance mechanism for the network and the underlying currency, August 28, 2019.

Digital Currency, Yet Cryptocurrency

China will be using cryptography such as hashing algorithms, signatures, and encrypted keys to help users solidify a claim over assets’. It is because of this very reason that it is considered a cryptocurrency. The catch? It isn’t decentralized.

Two of the top officials in China were embroiled in a debate regarding China’s Central Bank Digital Currency (CBDC). The first official revealed China has been working on its digital currency launch and are close to rolling it out, while the other bashed Libra and spoke of how it would cause capital flight from China and lead to less accountability on a country level.

A report from the Bank of International Settlements suggests that a CBDC would be far more effective than any other form of digital money; it is widely accessible, digital, issued by a trusted authority, and token-based (implying cheaper remittance cost). However, it is important to keep in mind that these assets will not be competitors to decentralized networks as bitcoin and ethereum were built to escape the fallacy of central bank monetary policy.

China’s CBDC would not compete with commercial bank deposits as they would not pay holders any interest. The issuance will be backed one-for-one by the Chinese Renminbi, and while the currency itself is not deployed via smart contracts, the network may support the deployment of smart contracts. This is unknown as of now as China has not decided if it will deploy it on a blockchain or a regular centralized ledger.

A very important detail drawn from this analysis is that the network will allow for a degree of anonymity as users transacting will be pushed onto a second layer with no identity, while the first layer would be registered based on a real institution’s wallet users are transacting through. Considering China’s history with anonymity, this should be taken with a pinch of salt.

Final Inferences

From an efficiency standpoint, nothing can come close to offering the instantaneous settlement and low remittance cost that a centrally issued digital currency would.

The benefits of this range from better economic accounting for inflation, GDP, real expenditure, etc, to preventing money laundering and reducing friction between citizens and financial institutions.

In the end, one would expect that this will allow the Chinese government to save money on remittance network maintenance costs, gain more control over the country’s socio-economic situation, and also wage war on the United States dollar.

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