- A review of over 50 patent applications submitted by the People's Bank of China shows tthe design of its central bank digital currency will resemble a limited cryptocurrency.
- A senior central bank official said the effort will be useful to "curb public demands for cryptographic assets and strengthen the country's sovereign currency".
- Far from emulating the decentralized aspects of ether and bitcoins, the official stressed that the issuing of the central bank's digital currency will adhere to a centralized management model.
China may be about to launch a fiat digital currency, but in all likelihood it will only look like a cryptocurrency on the surface.
And you probably won't use a blockchain. Although inspired to some extent by bitcoins and the like, the effort is explicitly defined as a strategy to reject them.
The project was highlighted last weekend when a senior official of the People's Bank of China (PBoC) stated in a closed-door conference that the digital currency of the country's central bank (CBDC) is ready for launch.
In his speech, widely covered by the press, Changchun Mu, deputy director of the payment division of the PBoC, stated in particular:
"From last year, staff at the Digital Currency Research Lab worked 996 to develop the system. We can say that the CBDC is now ready for launch on a call. "
(996 is a phrase commonly used in the Chinese technology startup scene, which refers to work from 9am to 9pm, six days a week.)
The CBDC aims to replace M0, which means cash in circulation, through a two-tier system: the central bank issues the digital yuan only to commercial banks, which will further distribute it to the public, Mu said. This approach is perhaps surprising since Yao Qian, a former head of the research laboratory, mentioned this project in an editorial published in CoinDesk in 2017.
However, a comment by Mu that has been overlooked by many is that he believes that "the two-tier issuing system will be useful to curb the public's demands for cryptographic assets and strengthen the country's sovereign currency".
Mu did not elaborate on how common users would interact with this proposed mechanism or to what extent the CBDC really employs distributed accounting technology. And it is not clear when the central bank intends to test it and implement it or, at its launch, if it will be optional or mandatory for Chinese consumers.
But dozens of patent applications submitted by the research laboratory to China State Intellectual Property Office reviewed by CoinDesk offers a window on the thinking of the PBoC on how the system could work and its similarities and (above all) differences with cryptography.
The PBoC Digital Currency Research Lab was formally launched in the summer of 2017 and led by Yao Qian, although Mu has indicated that the work has been going on for five years. yao left the location for another agency around October 2018.
To date, the laboratory has submitted more than 50 patent applications, all invented or co-invented by Yao, and about 20 of these focus on the design specifications of a so-called digital currency portfolio.
Each document covers a specific technological functionality of the proposed system, ranging from how to request and create a portfolio, how to transfer money to and from savings accounts, how a peer-to-peer transaction is verified, etc.
The goal is to build a portfolio to store the digitized yuan that is different from the electronic wallets of any bank or third-party payment application. Those portfolios, says a patent document, are "simply an extension of the assets held in a bank account". The approach borrows the idea from the bitcoin of a peer-to-peer transaction system in which users have private keys to control the asset.
A patent application, entitled "a method and system for requesting information on digital currency transactions" filed on December 28, 2017, describes a digital currency portfolio that aims to bridge the gap between existing electronic portfolios and "private portfolios quasi-digital currencies, like bitcoin. "
The first is not an independent portfolio, which can lead to security problems, and the second, while allowing users to own their own assets, does so anonymously with transactions that cannot be canceled, the document also states.
Another patent application added:
"The emergence of digital currency is an inevitable trend. So far, the privately issued digital currency has the characteristics of anonymity and volatility. Central banks must take their impacts on payments, monetary systems and financial stability seriously. Therefore, it is inevitable that central banks push for digitized legal currencies to optimize their circulation ".
KYC digital Yuan
And a crucial way to optimize this circulation seems to be to eliminate the cryptocurrency anonymity feature and to include a client knowledge process (KYC) required by other payment methods.
So far, physical liquidity is probably the only form of legal currency in China that can remain anonymous, compared to bank transfer or third-party methods offered by companies like Alibaba or WeChat – both of which require a verification of the real name authenticated by user IDs and information banks.
"Existing M0 (banknotes and coins) are subject to risks of counterfeiting and money laundering. … The [CBDC] the system should follow the existing rules on anti-money laundering and counter-terrorism financing imposed in cash and should report to the PBoC on large quantities and suspicious transactions, "stressed Mu during his speech.
His note echoes the design specifications involved in various patent applications for the proposed peer-to-peer digital currency portfolios.
For example, the patent application on how to apply and create digital portfolios filed on December 28, 2017 stated that the system allows users to apply through their banks and that the creation of such digital currency portfolios will be registered at the ; issuing organization.
Another document that describes in detail how to redeem the CBDC from savings accounts stored on 26 June 2017 explained that after a user submits a request to withdraw money from their savings accounts – similar to the withdrawal from an ATM, except due to the fact that now it is not cash but in a p2p wallet – the corresponding issuers will need to verify a user's ID before granting the refund.
Then, when a user initiates a payment transaction from the independent digital wallet, a third party will verify who is sending as to who.
A third document that describes this method in detail states:
"A sender would authorize a request to deduct the payment on a recipient's digital currency wallet. The recipient will verify this request, which will then be sent to the CBDC emissions registration system. The payment will be completed after verification of this request [by the system]".
In addition, another document specifies a system that aims to customize a tracking solution to make the CBDC traceable even among multiple owners and levels.
All this, of course, is very different from bitcoin, where there is no central authority, anyone can download software and create a portfolio without presenting IDs, and payments can be made without the permission of the intermediary.
No more decentralized?
Another open question is to what extent the PBoC digital currency system can include the functionality of the blockchain, if at all.
One of the first patent documents filed over two years ago described in detail that the central bank explored the idea of using a distributed network to manage the nodes for transaction verification.
"This technology would allow smart contracts on a blockchain infrastructure to dynamically manage nodes in the network to ensure that they share and exchange the same data with security and scalability," said the doc.
Mu's speech also referred to this approach, but added that the strategy has actually changed over the years. In the beginning, the research laboratory built a prototype completely on the blockchain infrastructure, but later found the scalability problem, he added, adding:
"Since we are using the fiat digital currency to replace M0, to achieve a retail adoption, the first problem we cannot get around is the demand for high-volume transactions."
Mu used the example of a popular holiday shopping among young people in China to show how blockchains are not suitable for mass adoption:
"Our network of payments during the sale of the day of last year to the maximum managed 92,771 transactions per second. In comparison, bitcoins and ethereum manage seven and 10-20 transactions per second respectively. [Facebook’s] Libra, based on its recently released white paper, is 1,000 transactions per second. For a country as large as China, it is impossible to achieve a high scalability based solely on the blockchain. Therefore, we have decided to remain technologically neutral and not necessarily rely on a fixed technological path. "
He concluded in his speech that although cryptocurrencies have the natural characteristic of decentralization, the digital currency of the PBoC, according to the two-tier system, must adhere to a centralized management model.
"Only designated organizations can make the reimbursement and must be centrally managed to avoid excessive issuance and to secure the central bank's management position," he said.
Yuan image via Shutterstock