China’s adoption of digital payments has been astonishing. Alipay, owned and operated by Ant Financial, has more than 600 million average monthly users, an amount of people that is almost twice as large as the population of the United States. Now, the People’s Bank of China, the central bank that runs China’s monetary policy, is announcing that its own “cryptocurrency” is about to be launched, replacing the physical Chinese Yuan that is currently in circulation.
While like Libra, the announcement being billed as a new cryptocurrency by press such as Bloomberg may bring excitement and momentum for cryptocurrency in general including bitcoin and ethereum — the new digital currency will have many traits that make it more akin to a centralized digital currency then a true cryptocurrency. It might be more accurate to say that the PBOC is looking to release digital cash with extra surveillance.
As the former governor of the PBOC Zhou Xiaochuan argued in response to Libra, the Chinese state should “make good preparations and make the Chinese yuan a stronger currency.” The digital currency proposed by the PBOC looks exactly like that.
1- Commercial banks and the PBOC will be the only issuers. In China, the distinction between commercial banks and the state is very thin. Unlike Libra, which offers some degree of nominal decentralization through the assortment of companies and organizations that are part of its central organization, that veneer may not simply exist in China.
As the Congressional Research Service indicated in 2012, three out of China’s largest banks are wholly state-owned (the China Development Bank had a limited IPO for one of its lending units since) and four out of five, while offering shares to the public and foreigners, still had the Chinese government as their largest shareholder.
In practice, many of the partners the PBOC could have will be controlled by the state or be very heavily influenced by it. Issuance of the cryptocurrency will probably be a very centralized affair, and it’s unlikely members of the public will be able to be a part of the mining process or governance decisions as is the case with bitcoin and ethereum.
It’s likely that the Chinese central bank (which needs to have all of its major decisions approved by the top bodies of the Chinese Communist Party) will operate much as it has with commercial banks before: with some liberalization but largely in lockstep with the CCP’s political goals. After all, the CCP still appoints bank directors, and the PBOC itself must listen to the State Council, and ultimately, Xi Jinping.
2- The PBOC will likely design all wallets and will have access to all data on the transactions. It’s unclear here if private partners can get involved in terms of analyzing the data or assembling the wallets. Patents filed by the PBOC indicate they want to take end-to-end control of the process, making it unlikely (especially since it’ll be regarded as a central bank currency) that there will be many services given permission to access the data generated here or that there may be public records akin to a blockchain.
It’s unlikely there will be a blockchain component at all to this new digital currency. Deputy director of the People’s Bank of China’s payments department Mu Changchun notes the “blockchain platform just couldn’t deliver the throughput needed for retail.” Given that, public display of data, blockchain explorers, a decentralized consensus algorithm, and mining are likely to be moot points. It’s likely that the PBOC will use the same governance structures it uses in coordination with commercial banks to release CNY into circulation — meaning that the issuance will be controlled and governed not by decentralized stakes or proof-of-work but rather by the same mechanisms as have existed for fiat currencies.
Moreover, given that the PBOC is ultimately accountable to the Chinese state, it is exceedingly likely that financial transactions and data will be stored for state purposes, perhaps even in the vein of adding an additional layer for social credit.
3- China’s central bank seems intent on shoring up and make the Chinese Yuan more versatile rather than to launch a separate cryptocurrency. As one of its patent claims notes “The virtual currencies issued by private entities [have] fundamental flaws given their volatility, low public trust, and limited useable scope. … Therefore, it’s inevitable for the central bank to launch its own digital currency to upscale the existing circulation of the fiat currency.” It seems clear that from the central bank’s perspective, it is launching a digitized version of the Yuan rather than a cryptocurrency made to compete with it, Libra, and “private-entity” cryptocurrencies.
The PBOC is using some features of cryptocurrencies, from private keys to multi-signature authentication. Users will be able to hold accounts without having to register their amount with a central entity — instead, their private key, like other cryptocurrencies, will hold access to the funds they control.
However, most indications drive to the conclusion that the PBOC is unlikely to be building a cryptocurrency similar to bitcoin and ethereum or even Libra — but rather its own version of centralized digital cash with extra surveillance on top.