If you’ve been keeping an eye on the world of digital currencies, you’ve probably heard about China’s big move into the space with the e-CNY, also known as the Digital Yuan. This cutting-edge digital currency, backed by the People’s Bank of China (PBC), is one of the most advanced central bank digital currencies (CBDCs) out there. But what exactly makes the e-CNY tick? How is it designed to function, and what sets it apart from other digital payment systems? In this post, we’ll take a deep dive into the nitty-gritty of the e-CNY’s design, exploring its key features, architecture, and the technology that powers it all. Get ready to geek out with us as we break down the ins and outs of this game-changing digital currency!
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The e-CNY’s Two-Tier Distribution System
The e-CNY is designed with a unique two-tier distribution system that sets it apart from traditional currencies. At the top tier, the People’s Bank of China (PBC) issues and redeems the e-CNY to commercial banks and other authorized entities like Ant Group and Tencent. These authorized entities then distribute the e-CNY to the general public, which makes up the second tier.
This two-tier setup is different from how traditional fiat currencies work. Usually, commercial banks and other “second-tier” entities are responsible for clearing transactions. But with the e-CNY, the PBC keeps the sole authority to clear transactions. This design choice helps avoid disintermediating the financial system by letting commercial banks and other entities handle user interactions. It also reduces the responsibilities and risk exposure of the central bank.
So, how does this two-tier system actually work in practice? First, the PBC issues a certain amount of e-CNY to the authorized entities based on their needs and the PBC’s quota management. These entities then open different types of digital wallets for their customers. The type of wallet a customer can open depends on the strength of their personal information identification. Basically, the more info you provide, the higher the transaction limits and balance you can have in your wallet.
Once customers have their digital wallets, they can start using the e-CNY for transactions. The authorized entities are in charge of providing e-CNY exchange services, which means they help customers convert their traditional currency into e-CNY and vice versa. They also work with other commercial institutions to offer e-CNY circulation services and retail management. This includes things like designing payment products, developing systems, expanding use cases, marketing, business processing, and operation and maintenance.
The two-tier system is designed to increase public acceptance of the e-CNY. Since people are already used to accessing financial services through commercial banks, having these familiar entities involved in the e-CNY distribution makes the transition feel more natural and trustworthy.
Overall, the e-CNY’s two-tier distribution system is a key part of its design. By separating the roles of the central bank and commercial entities, it aims to balance the need for centralized control with the benefits of a more distributed ecosystem. This unique approach could serve as a model for other countries looking to develop their own CBDCs in the future.
The Functionality and Customization of e-CNY Digital Wallets
Digital wallets are a crucial component of the e-CNY system, serving as the main interface for users to store, send, and receive the digital currency. The People’s Bank of China (PBC) has released a significant amount of information about how these wallets work and the features they offer.
One key aspect of e-CNY digital wallets is that they come in different “strengths.” The strength of a wallet determines the per-transaction and daily transaction value limits, as well as the maximum balance the wallet can hold. This tiered system allows for different levels of access based on the user’s needs and the amount of personal information they’re willing to provide.
For example, customers can open wallets with the highest restrictions anonymously, without providing any personal information. These wallets will have lower transaction limits and balance caps. If a customer wants to upgrade their wallet to a higher strength, they’ll need to provide proper identification. This approach balances privacy concerns with the need for risk management and compliance with regulations like know your customer (KYC) and anti-money laundering (AML).
Another important feature of e-CNY digital wallets is their customizability. Users can tailor their wallets to have specific functions based on their needs. This flexibility allows for a wide range of use cases and makes the e-CNY more adaptable to different scenarios.
Digital wallets in the e-CNY system can be categorized along three main dimensions: personal/corporate, software/hardware, and parent/sub-wallets. Individual users can open personal wallets, with the wallet’s strength determined by the level of personal information provided. Institutions, on the other hand, can open corporate wallets.
In terms of access, software wallets are accessed through mobile payment apps, software development kits (SDKs), and application programming interfaces (APIs). Hardware wallets, meanwhile, are accessed through physical devices like IC cards, mobile phones, wearables, and Internet of Things (IoT) devices. This variety of access methods makes the e-CNY accessible to a wide range of users and compatible with different technologies.
Finally, the e-CNY’s digital wallet system allows for the creation of parent and sub-wallets. A main (parent) wallet can be divided into several sub-wallets, each with its own set of features and restrictions. For instance, sub-wallets can have specific payment caps, payment conditions, and personal privacy protection settings. Corporate wallets, in particular, can use sub-wallets to pool and distribute funds, making it easier to manage finances within an organization.
The functionality and customization options offered by e-CNY digital wallets are designed to make the system more user-friendly, flexible, and adaptable to a wide range of use cases. By providing different levels of access, multiple access methods, and the ability to create sub-wallets, the e-CNY aims to cater to the diverse needs of both individual users and institutions. As the system continues to evolve, we can expect to see even more innovative features and applications of these digital wallets.
The e-CNY’s Transaction Flow and Key Players
This image shared by yuanprime.org, illustrates the transaction flow of the e-CNY and highlights the key players involved in the process.
At the top, we have the People’s Bank of China (PBC), which has the final authority to monitor, trace, block, and reverse all transactions in real-time. This is a crucial aspect of the e-CNY’s design, as it allows the central bank to maintain control over the digital currency and ensures that it can be used in accordance with regulations and policies.
In the middle, we see the intermediaries, such as commercial banks and other authorized entities. These intermediaries provide the digital wallet infrastructure to end-users and have access to transaction records. They play a vital role in distributing the e-CNY to the general public and facilitating transactions between users.
At the bottom, we have the end-users, represented by the two figures exchanging digital currency. Transactions are processed between end-users’ digital wallets with peer-to-peer anonymity. This means that while the PBC and intermediaries can trace and monitor transactions, the parties involved in a specific transaction can remain anonymous to each other.
The red arrows in the image represent the flow of e-CNY, showing how the digital currency moves from the PBC to intermediaries and then to end-users. The blue arrows represent the flow of transaction data, which goes from the end-users’ digital wallets back to the intermediaries and ultimately to the PBC.
This transaction flow chart highlights the e-CNY’s two-tier distribution system, with the PBC at the top tier and intermediaries at the second tier. It also demonstrates the balance between the PBC’s centralized control and the relative anonymity provided to end-users in peer-to-peer transactions.
PRC’s e-CNY Taxonomy
- Access: Universal As far as we know, there won’t be any restrictions on who can hold the e-CNY. It’s designed to be accessible to everyone, which is a key factor in promoting widespread adoption.
- Anonymity: Quasi-anonymous While the e-CNY is fully traceable for intermediaries and the PBC, peer-to-peer (P2P) transactions offer a degree of anonymity. When users make P2P transactions, they only need to validate the exchanged tokens, not the accounts of the other party. This offers a level of privacy for smaller transactions.
Interestingly, the PBC has made a public commitment to data privacy. They’ve stated that the e-CNY will follow the principle of “anonymity for small value and traceable for high value,” and they’re putting a lot of emphasis on protecting personal information and privacy.
The e-CNY system is designed to collect less transaction information than traditional electronic payment methods, and the PBC has promised not to share this info with third parties or other government agencies unless required by laws and regulations.
- Intermediation: Hybrid The e-CNY uses a hybrid intermediation model. Intermediaries, like commercial banks and other authorized entities, are responsible for issuing the e-CNY and managing users’ digital wallets. While the e-CNY is technically a direct claim on the PBC, most users will interact with the digital currency through these intermediaries.
It’s worth noting that, currently, intermediaries are required to hold 100% reserves at the PBC, and the PBC handles the final clearing of transactions. This setup ensures that the e-CNY is backed by the central bank while still involving intermediaries in the distribution process.
- Settlement: Centralized The e-CNY operates on a “centralized-permissioned Distributed Ledger Technology (DLT)” system, which is maintained by the PBC. This means that the PBC has a record of all transactions and is responsible for clearing them.
In this type of system, only a network of approved validators can provide validation, unlike decentralized cryptocurrencies. This centralized settlement model gives the PBC full access to transaction data and the ability to cancel or reverse transactions when deemed necessary.
- Remuneration: Non-remunerative The e-CNY is non-interest bearing, which means users won’t earn any interest on their digital currency holdings. This is similar to how physical cash works and is a common feature among many CBDCs.
In addition to these five parameters, your research also mentions that the e-CNY uses token-based validation. Transactions involve exchanging tokens between digital wallets, but it’s important to note that these wallets are linked to accounts that can be identified by the PBC.
Overall, the design of the e-CNY reflects a balance between the PBC’s desire for control and oversight, and the need for a digital currency that is accessible, efficient, and provides some level of privacy for users. As the e-CNY continues to develop and roll out, it will be interesting to see how these design choices shape its adoption and usage in the real world.