Project 1: Retail Digital Yuan
Focus Area:
Digital Yuan for every transaction
Overview:
Since 2014, the People’s Republic of China has been actively engaged in the creation of a digital currency known as the digital yuan, which is also referred to as e-CNY, digital renminbi, or digital RMB. The objective of the Chinese government is to establish the digital yuan as the primary method of payment for its vast population of 1.4 billion.
China launched the pilot of its e-CNY program in 2020. The pilot has 260 million wallet users. China intends to make e-CNY a mainstream currency which can be used pretty much anywhere in the country to transact.
Motivations:
- The needs of the new digital economy calls for a new retail payment infrastructure that is safe, inclusive and adaptive to the digital era.
- To satisfy the public’s demand for digital cash because of high mobile payments usage.
- To boost financial inclusion.
- To support fair competition, efficiency and safety of retail payment services.
- To be at par with the international trends.
- To improve cross-border payments.
- Improve the efficiency of the central bank payments systems, providing a back-up to the commercial retail payments system.
Use Cases:
Following use-cases have been piloted in China so far with e-CNY –
- Public Transportation — Buying subway, train tickets in parts of Zhejiang province with digital yuan.
- Facilitating Foreign Financial products trade— For buying foreign financial products with China’s biggest bank ICBC acting as a cash custodian and integrating the digital yuan with a digital wealth management wallet.
- Employee Salaries — Public sector workers in one of the eastern Chinese city are paid fully in digital yuan.
- Interoperability with existing systems — Integration with existing popular payment systems — Both Alipay and WeChat supporting the digital yuan.
- Cross-border trades — Transact cross-border trades on Belt and Road Initiative with digital yuan. A city of Xuzhou, which serves as the departure point for numerous goods trains from China to 21 nations in Asia and Europe.
- Shopping Rewards — Meituan, a chinese app offering retail and food delivery services offered a lucky draw to their customers. A smart contract would get triggered whenever a user placed an order and paid with e-CNY wallet. It would search for certain keywords. If it was found, they go in the draw to win part of a prize. The prize was a share of a “red envelope” known locally as hongbao containing 8888 yuan. Hongbao are small packets traditionally used for gifting money around Chinese New Year as a gesture of good luck.
- Student Card — Hainan Luxun Middle School implemented the digital renminbi smart student ID card. Its RMB hardware wallet provides a convenient and safe digital RMB payment experience for schools, parents and students.
- Social security card — The Beijing Municipal Market Supervision issued digital yuan on Beijing Minsheng Card. The Beijing Minsheng One Card has integrated Beijing’s social security, benefit distribution, public transportation, medical health, pension preferential treatment, disability protection, preferential treatment, financial services, park annual pass, and education management.
- Senior card —ICBC launched the Elderly Love Card — a digital RMB hardware wallet. Through the elderly care card, relatives can check and locate the location of the elderly through the platform, and the cover records of the elderly’s medical history, home address and other information, so that passers-by can provide timely assistance.
Financial institutions involved:
- People’s Bank of China
- ICBC
- Agricultural Bank of China
- Bank of China
- China Construction Bank
- Bank of Communications
- Postal Savings Bank of China
- China Merchant’s Bank
- WeBank (WeChat Pay)
- MyBank (Alipay)
Design considerations:
e-CNY is a central bank digital currency (CBDC) issued by the People’s Bank of China (PBOC) and valued the same as the standard renminbi (RMB). It is a legal tender and a liability of a Central bank just like physical renminbi.
e-CNY is built on a centralised system and follows a 2-tier structure. The right to issue e-CNY belongs to the Central bank. The PBOC issues e-CNY to commercial banks and manages e-CNY through its whole life cycle. It is the authorized operators and other commercial institutions that distribute e-CNY to the public.
E-CNY is an account-based, quasi-account-based and value-based hybrid payment instrument. The e-CNY pays no interest. It is a substitute to physical cash. The e-CNY is loosely coupled with bank accounts, and thus payments through e-CNY wallets are settled upon payment.
E-CNY follows the principle of anonymity for small value and traceable for high value. The e-CNY incorporates several technologies such as a digital certificate system, digital signature, and encrypted storage to effectively prevent activities like double-spending, illegal replication and counterfeiting, transaction manipulation, and repudiation from being feasible.
E-CNY can be programmed via smart contracts such that it can be used only for certain uses. The e-CNY is stored in digital wallets, which themselves may have different characteristics. Each wallet may be personal/corporate, software/hardware, or a parent/sub-wallet.
Conclusion:
China came up with a number of strategies to market digital yuan. They handed out 40 million renminbi ($6.2 million) of its digital currency to citizens in Beijing in a lottery. Similar lottery hand-out schemes were implemented in few other cities.
Bank of China’s Hong Kong arm (BOCHK) launched a digital yuan (e-CNY) shopping festival in July 2023. Visitors from mainland China can shop in Hong Kong using the digital yuan at more than 200 merchants.
There are more than 260 million wallets as on June 2023, however, majority of them are not active. Transactions using the currency totaled100 billion yuan ($14.5 billion) by the end of August 2022, equivalent to an average of 3.6 billion yuan per month since the trial started. Since January 2023, China started including e-CNY in their currency circulation reports, and the digital yuan represented 0.13% of cash and reserves held by the central bank. The currency is yet to gain the right traction. With a large push from the government across the country covering different use-cases, the usage is expected to grow. There is a psychological aspect of people being used to certain payment methods and as they say old habits die hard. The shift is happening and will continue to happen at a growing scale.
Digital renminbi if widely adopted would reduce dependence on established payments systems such as Alipay, Tencent Pay, and SWIFT.
Sources:
http://www.pbc.gov.cn/en/3688110/3688172/4157443/4293696/2021071614584691871.pdf
https://www.mpaypass.com.cn/news/202207/27101419.html
Project 2: Cross Border Trade – mCBDC (mBridge)
Focus Area:
To assess the capabilities of a widely accessible, cost-effective, and efficient multi-CBDC platform in establishing direct connections between central banks and commercial participants, thereby significantly enhancing the possibilities for international trade and facilitating cross-border business on a larger scale.
Overview:
mBridge is a joint project between the BIS Innovation Hub Hong Kong Centre (HKC), and four participating central banks in Asia and the Middle East — the Hong Kong Monetary Authority (HKMA), the Bank of Thailand (BOT), the Central Bank of the United Arab Emirates (CBUAE) and the Digital Currency Institute of the People’s Bank of China (PBCDCI).
Project mBridge conducted experiments on cross-border payments using a shared platform built on distributed ledger technology (DLT), enabling multiple central banks to issue and exchange their respective central bank digital currencies (multi-CBDCs).
Currently, cross-border payments rely on a global network of correspondent banks that involve numerous intermediaries scattered across different time zones and operating hours. This fragmented system leads to high costs, slow transaction speeds, operational complexities, limited accessibility, and a lack of transparency. Moreover, these inefficiencies introduce settlement risk, negatively impacting both financial intermediaries and end users.
Out of the 15 identified use-cases, international trade settlement was selected as the initial business scenario to be piloted on mBridge. This decision was driven by the significant trade value within the four participating jurisdictions and the crucial role of trade in the region.
The pilot tested the following three transaction types:
- Issuance and redemption of CBDC between central banks and their domestic commercial banks.
- Cross-border payment between commercial banks in local CBDC (for example, a UAE corporate paying a mainland Chinese corporate in e-CNY through their commercial banks participating on the platform).
- Cross-border PvP FX between commercial banks in local CBDC (for example, a Thai bank exchanging e-THB for e-HKD with a Hong Kong SAR bank on the platform).
Financial institutions involved:
- BIS Innovation Hub Hong Kong Centre (HKC)
- Hong Kong Monetary Authority (HKMA)
- Bank of Thailand (BOT)
- Central Bank of the United Arab Emirates (CBUAE)
- Digital Currency Institute of the People’s Bank of China (PBCDCI)
- Bank of China
- HSBC
- Standard Chartered
- First Abu Dhabi Bank
- Bank of Communications
- Agricultural Bank of China
- China Construction Bank
- Industrial and commercial Bank of China (ICBC)
- Bangkok Bank
- Kasikorn Bank
- SCB
- Krungsri
Design considerations:
In order to streamline the technical functionality of the pilot, the mBridge ledger was deployed and managed in a highly secure, centralized cloud infrastructure located in Hong Kong SAR. This setup allowed participants to conveniently access the platform as a software-as-a-service (SaaS) solution through a user-friendly web-based interface (UI).
Within the platform, commercial banks have the capability to engage in direct peer-to-peer transactions with any other commercial bank, eliminating the need for intermediaries.
Technical Solution:
Following extensive experimentation with various technology architectures during earlier stages, the project team successfully created a dedicated blockchain specifically designed for mBridge, known as the mBridge ledger (mBL). This native blockchain was developed to cater to the requirements of both central banks and commercial participants.
To enhance the accessibility, flexibility, and scalability of the mBL platform for existing and future users, a modular design approach was adopted. This design allows users and developers to leverage a service-oriented architecture that is familiar and easy to work with, enabling seamless integration and adaptability within the platform.
Conclusion:
As of 2022, this project marked the largest cross-border CBDC initiative, involving the issuance of over US$ 12 million worth of CBDCs onto the platform. Additionally, it facilitated over US$ 22 million worth of payments and instant FX PvP settlements across borders, while boasting the highest number of direct pilot participants.
Project mBridge effectively validated the hypothesis that an efficient, cost-effective, real-time, and scalable cross-border multi-CBDC arrangement could establish direct connectivity between central banks and commercial participants. This achievement significantly enhanced the potential for international trade flows and cross-border business on a larger scale.
The platform’s modular framework allowed for seamless integration with domestic payment systems, accommodating both manual and automatic processes. Leveraging the insights gained from the pilot and earlier project phases, Project mBridge will continue its efforts. This entails further technology development, testing, and improvement of existing functionalities, as well as the addition of new features to transition from the current pilot phase to an MVP (Minimum Viable Product) and eventually a fully operational system.
In 2023 and 2024, the roadmap for mBridge will focus on the following:
- Achieving automated interoperability with domestic payment systems;
- Integrating FX price discovery and matching into the platform;
- Introducing liquidity management tools such as transaction queueing and priority management;
- Evaluating the role of central bank participants in providing liquidity;
- Improving data privacy-preserving tools;
- Continuing to develop the legal framework, and platform terms and conditions;
- Taking further inventories of policy, regulatory and compliance considerations;
- Evaluating decentralised deployment through a lens of data-privacy and legal considerations, and in tandem determining the remit and structure of a centralised governance role;
- Testing and piloting more business use cases and transaction types;
- Including additional jurisdictions and participants; and
- Exploring more services that the private sector can add to the platform
Source: