Chi­na’s cen­tral bank dig­i­tal cur­rency (CBDC) will not be based on Blockchain tech­nol­ogy, expert says

Shang­hai-based fin­tech vet­eran Rich Tur­rin says that de­spite the wide­spread as­so­ci­a­tion be­tween dis­trib­uted ledger tech­nol­ogy and cryp­tocur­ren­cies, Chi­na’s hotly awaited dig­i­tal ren­minbi will not be based on blockchain tech­nol­ogy.

In an in­ter­view with China Bank­ing News Tur­rin said Chi­na’s cen­tral bank dig­i­tal cur­rency (CBDC) will in­stead mark an evo­lu­tion from pre-ex­ist­ing pay­ments sys­tems cre­ated by tech gi­ants such as Ali­pay and WeChat, as prac­ti­cal chal­lenges mean that the blockchain is not the best tech­nol­ogy to use for its un­der­ly­ing foun­da­tion.

“Here’s the amaz­ing thing, for a coun­try that is a leader in blockchain adop­tion, Chi­na’s cen­tral bank dig­i­tal cur­rency does not mean blockchain,” said Tur­rin.

“Many be­lieve that cen­tral bank dig­i­tal cur­rency equals blockchain, but it re­ally does not. In fact Chi­na’s PBOC has been very clear that blockchain does not have the per­for­mance re­quire­ments for the front-end re­tail-fac­ing in­ter­face and the trans­mis­sion of cash across their net­work.

“To give you an ex­am­ple, Ali­pay’s net­work on Sin­gle’s Day reached up to 500,000 trans­ac­tions per sec­ond, which is well be­yond any­thing that blockchain could ever pos­si­bly han­dle.

“Blockchain net­works sim­ply can­not go any­where near that, so PBOC is very clear that this is not a blockchain so­lu­tion on the front end.”

Tur­rin be­lieves that PBOC’s CBDC in­stead marks an evo­lu­tion of pre-ex­ist­ing dig­i­tal pay­ments sys­tems that were de­vel­oped by tech gi­ants Ali­Pay and WeChat Pay last decade, and had a trans­for­ma­tive im­pact on the Chi­nese econ­omy.

“In my com­ing book Chi­na’s Dig­i­tal Cur­rency Rev­o­lu­tion I talk about dig­i­tal cur­rency 1.0 and 2.0

“You re­ally have to think that cur­rency is al­ready dig­i­tal, with things like cheques and cred­its cards. Money does­n’t sit in a bank or a box, it’s al­ready a dig­i­tal ledger item at a bank.

“The first gen­er­a­tion for Chi­na’s dig­i­tal cur­rency was re­ally Ali­pay and WeChat Pay, they re­ally started this whole rev­o­lu­tion.

“It was so suc­cess­ful that the Chi­nese gov­ern­ment looked at it and said – okay then – peo­ple want dig­i­tal pay­ment and 85% of all pay­ments in the coun­try are al­ready dig­i­tal.

“So why not take the next leap to make a true cen­tral bank cur­rency. And that’s ver­sion 2.0 of dig­i­tal cur­rency in China.”

While the CBDC will not be blockchain-based, Tur­rin nonethe­less ex­pects dis­trib­uted ledger tech­nol­ogy to play an im­por­tant an­cil­lary role in Chi­na’s CBDC at a lower level of the sys­tem.

“There are dif­fer­ent lay­ers of the cen­tral bank dig­i­tal cur­rency and it is prob­a­ble that one of those lower lev­els will have blockchain,” he said.

“This is a two-tier cen­tral bank dig­i­tal cur­rency. Cen­tral banks gives the dig­i­tal cur­rency to bank or fi­nan­cial in­sti­tu­tion, and the fi­nan­cial in­sti­tu­tion de­liv­ers it to con­sumers.

“They’re still work­ing out ex­actly how the cen­tral bank will record and no­tify the fi­nan­cial in­sti­tu­tions of their al­lo­ca­tions of cen­tral bank dig­i­tal cur­rency. This is the layer where they’re think­ing about us­ing blockchain.”

Given that the Chi­nese CBDC marks an evo­lu­tion of pre-ex­ist­ing dig­i­tal pay­ments de­vel­oped by the tech gi­ants, ob­servers have spec­u­lated that its de­ploy­ment could ren­der its pre­de­ces­sor sys­tems ob­so­lete.

Tur­rin does not con­sider this to be likely given that the in­fra­struc­ture cre­ated by the likes of Al­ibaba and Ten­cent still plays a vi­tal role in en­sur­ing the se­cu­rity of hold­ings and the fa­cil­i­ta­tion of trans­ac­tions.

“The CBDC gives peo­ple a very in­ter­est­ing new ca­pa­bil­ity – di­rect dig­i­tal pay­ments from me to you with­out an in­ter­me­di­ary,

“This means no bank as an in­ter­me­di­ary, no Ali­pay is an in­ter­me­di­ary and no WeChat Pay is an in­ter­me­di­ary.

“I can take my phone and put it near yours to trans­fer money by means of near-field com­mu­ni­ca­tions – you can di­rectly trans­fer money.

“That’s won­der­ful, but the re­al­ity is that if you have large amounts of dig­i­tal cur­rency on your phone it also means that if you lose your phone you lose your dig­i­tal cur­rency/

“You will still want to keep your dig­i­tal cur­rency in a wal­let pro­vided by ei­ther a bank or an Ant Fi­nan­cial or a Ten­cent, be­cause you cer­tainly don’t want to keep a large amount of dig­i­tal cur­rency on your wal­let on your phone”

Tur­rin fur­ther points out that the plat­forms that Al­ibaba and Ten­cent have cre­ated play a ma­jor role in the eco­nomic lives of Chi­nese cit­i­zens, and pos­sess the req­ui­site “stick­i­ness” to re­tain cus­tomers.

“What Al­ibaba and WeChat have both done is build these tremen­dously ef­fi­cient plat­forms that are what we call in the plat­form busi­ness sticky – peo­ple use them and they want to use them.

“I have my house­hold bills paid par­tially on WeChat Pay and an­other part on Ali­Pay, and I use them every month all the time.

“Even if you give me a dig­i­tal cur­rency my billing is still go­ing to go through those en­ti­ties. It’s al­ready set up, so why would I bother chang­ing them.

“Go­ing to cen­tral bank dig­i­tal cur­rency makes it so that you can pass dig­i­tal cur­rency around with­out the need for a third party.

“But these par­ties firstly pro­vide some sort of se­cu­rity, and sec­ondly they pro­vide plat­forms which al­low you to con­nect and more eas­ily in­ter­act with who­ever it is that needs pay­ment. They’re not go­ing away by any stretch of the imag­i­na­tion.”

Rich Tur­rin is the au­thor of the best-sell­ing “In­no­va­tion Lab Ex­cel­lence” and soon to be pub­lished “Chi­na’s Dig­i­tal Cur­rency Rev­o­lu­tion.” He pre­vi­ously headed IB­M’s Fin­tech In­no­va­tion Lab in Sin­ga­pore and IB­M’s bank­ing risk tech­nol­ogy team in China af­ter a 20 year ca­reer in bank­ing.

Source: China Baking News

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