China’s digital currency - a brief comparison with The Bank of England’s model

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Central bank digital currency (CBDC) is a hot topic both in the blockchain industry and among global central banks. From the BIS January 2020 report, 70 percent of the major central banks surveyed were already engaged — or soon to be — in CBDC research effort. And around half have reportedly moved to experiments and hands-on proof-of-concept work — a 15 percent increase on 2017 levels.¹

People’s Bank of China (PBoC) and the Bank of England (BoE) are two of the most active and prominent central banks engaging with CBDC activities. PBoC has significantly accelerated its CBDC pilots and experiments in a large number of Chinese cities, driven both by the emergence of Facebook Libra and China’s national strategy to take a global lead in blockchain ². The Bank of England published a paper earlier this year including the most holistic design and analysis of CBDC recognised by the industry so far.

I have followed CBDCs for some time now and it is interesting to compare how central banks approach the creation of their own digital currency. For instance, there are some important similarities and differences between the approaches the BoE and PBoC have taken for CBDC and the likely future scenarios of CBDCs³. Many of these similarities and differences are also found across other CBDCs in the world.

Both approaches share the same core design…

Similar to the architecture presented in the BoE’s paper, the digital Chinese yuan will adopt a platform with a “layered” structure separating the central bank, the commercial banks/fintechs and the end users⁴. This layered architecture ensures good operational efficiency as it significantly reduces the workload for the central bank, which only needs to provide a minimum level of functionality for CBDC payments in the top layer. Commercial banks and fintechs will then provide all customer-facing payment services and additional services such as KYC, fraud management, anti-money laundering, and some as yet unforeseen emerging services in the second layer, while also connecting to the central bank’s CBDC platform. Besides PBoC and BoE, major centrals banks like the European Central Bank (ECB), Bank of Japan (BoJ), Riksbank (Sweden central bank) and US Federal Reserve also plan to adopt a similar layered structure which can be a global applicable standard for CBDC architecture.

… but there are key differences:

1. Scope:

The BoE’s CBDC model focuses on domestic, retail payments while the digital Chinese yuan is likely to include retail and wholesale cross-border payments. The PBoC will likely leverage the Project Ubin-Jasper reference models when designing its CBDC platform and consider complex cross-border and wholesale payment functionalities⁵. A cross-border CBDC needs to involve other central banks. Given the rising China-US tensions, China’s CBDC could play a key role in building China-led cross-border payment networks. In this case, China will likely prioritise collaborations with central banks from countries in Belt & Road regions to promote its digital Chinese yuan. Collaborating with the West, for instance the G7, for the cross-border CBDC is not a realistic short-term goal for China. Lastly, as I wrote in a previous Forrester report , blockchain technologies, cryptocurrencies or CBDCs can only partially solve problems of cross-border payments and it will take many years for these technologies to blossom⁶.

2. Data privacy:

The PBoC will have less stringent privacy requirements. A key benefit and reason why a central bank would initiate a digital currency is so it can monitor cash flow more precisely. As a central bank with strong sovereign power, the PBoC will likely put more weight on enabling the traceability of its CBDC than on protecting customers’ data privacy. By contrast, to align with GDPR and open banking, as well as the revised Payment Services Directive (PSD2) and Strong Customer Authentication (SCA) mandates in the UK, the BoE is very likely to focus more on protecting the anonymity and consumer data privacy of its CBDC.

3. Customer adoption:

China’s CBDC will experience faster customer adoption. Most Chinese consumers are progressive pioneers, as evidenced by their unique ability to quickly - and in large numbers - embrace digital payments and money market funds offered by tech giants⁷. Their strong trust toward new technologies and the seamless digital experience of switching or moving money between different bank or fintech accounts will accelerate their adoption of China’s CBDC. We also see earlier adoption in countries where residents are more open and receptive to new digital technologies, for instance with The Central Bank of The Bahamas’ ‘Sand Dollar’, circulated in the Exuma region. In contrast, in the UK, despite initiatives like open banking and PSD2, customers have mostly remained loyal to traditional banks. This will likely slow the adoption of retail use cases for CBDC in the UK. This slower adoption scenario will also apply to other nations like Japan, the US and Canada where consumers are less aware of new digital payments, and have concerns about using them.

In addition to releasing a testing interface in April, the PBoC has proactively worked with leading Chinese digital platform companies such as Didi, Bilibili and Bytedance to experiment with different digital Chinese yuan use cases⁸. Though details about the platform architecture and underlying technologies of the digital Chinese yuan are still lacking, I believe that the world’s second largest economy is well placed to officially launch its CBDC with practical and scalable retail use cases by end of this year.

¹ https://www.bis.org/publ/bppdf/bispap101.htm ² Forrester blog: President Xi’s Calls For A Strong Development Of Blockchain In China: What’s Next? https://go.forrester.com/blogs/president-xis-calls-for-a-strong-development-of-blockchain-in-china-whats-next/ ³ https://www.bankofengland.co.uk/-/media/boe/files/paper/2020/central-bank-digital-currency-opportunities-challenges-and-design.pdf ⁴ https://www.sohu.com/a/335237209_175647 Speech from Mu Changchun, PBoC’s official who oversees Chinese digital yuan, on the digital Chinese yuan adopting a layered operating system. The PBoC first exchanges digital currency to banks or other operating institutions, and then these institutions exchange to the public, a layered operating system.⁵ https://www.mas.gov.sg/-/media/Jasper-Ubin-Design-Paper.pdf ⁶ Forrester Report: Blockchain Is Years From Curing Cross-border Payment Pains. https://www.forrester.com/report/Blockchain+Is+Years+From+Curing+CrossBorder+Payment+Pains/-/E-RES144618 ⁷ Forrester's Empowered Customer Segmentation defines five distinct behavioral customer profiles: Progressive Pioneers, Savvy Seekers, Convenience Conformers, Settled Survivors, and Reserved Resisters. The segmentation can be used to gauge the rate of customers' evolution and to anticipate their demand for innovation. Progressive Pioneers are the most digitally empowered segment. Source: Forrester Research, The Rise Of The Empowered Customer.Chinese money market fund becomes world’s biggest. https://www.ft.com/content/28d4e100-2a6d-11e7-bc4b-5528796fe35c Chinese depositors flock to fintech in flight from low bank rates. https://www.ft.com/content/69a267aa-c880-11e7-aa33-c63fdc9b8c6c ⁸ Didi Partners with Central Bank on Digital Currency Trial. https://www.caixinglobal.com/2020-07-09/didi-partners-with-central-bank-on-digital-currency-trial-101577321.html