China’s Digital Yuan Blurs the Lines Between CBDCs and Crypto

An in-depth analysis of China's digital yuan project reveals more similarities to crypto than you might think. Upshot: seismic disruption to the financial system.

AccessTimeIconOct 15, 2020 at 3:01 p.m. UTC
Updated Sep 14, 2021 at 10:10 a.m. UTC
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Central Bank Digital Currencies (CBDCs) are rapidly gaining prominence in discussions around the future of money. The many dimensions of debate, whether policy, economic or financial, whittle down ultimately to design choices.

With CBDC experiments in various stages of development globally, the norms of design are still being explored. It is in this environment that the Chinese digital yuan is readying for launch. 

Tanvi Ratna is the founder and CEO of Policy 4.0, a research and advisory body working on new policy approaches for digital assets. She has conducted  policy work for decision makers including India's prime minister, the U.S. House of Representatives Foreign Affairs Committee and several ministries and state governments in India. 

China’s digital yuan, or DC/EP, is not just important from the perspective of geopolitics and its implications for the current underpinnings of the global financial system. What is arguably as significant is the technical design of this system – the first production-scale retail CBDC system in the world.

As a result, the design choices of the DC/EP system are of high interest for the many central banks working on CBDCs. And as we discuss here, these design choices are also significant for the blockchain industry as a whole. 

Our team of blockchain engineers, economists, financial sector and policy experts at Policy 4.0 has spent some months reverse engineering and studying the implications of this system. What is evident in the DC/EP’s design is that China has pioneered technological processes that will revolutionize monetary and financial functions. Our overall findings will be launched soon in a detailed report series, and one highly significant conclusion is in the surprising similarities between the architecture of the DC/EP and cryptocurrencies. 

This is in wide divergence to many of the other deliberations we see around the world on CBDC design, where there is a clear demarcation between the world of cryptocurrencies and central bank issued money. This is even more significant since China is seen as being closed to cryptocurrencies and it is known the DC/EP system is not entirely blockchain-based.

However, our findings on the design of the DC/EP make it clear the Chinese government has been paying close attention to the technical capabilities of cryptocurrencies. I highlight below some such similarities.

First similarity

The first clear similarity is the use of both online and hardware wallets. Cryptocurrencies have hardware wallets to securely store private keys off-chain. Similarly, in the design of the DC/EP system, there is a unique feature of hardware chip-card wallets. The chip card functionality allows users to transfer digital yuan from their bank accounts or mobile wallets into an offline chip card. Users can use these chip cards to pay merchants at a range of PoS-like terminals. 

China has pioneered technological processes that will revolutionize monetary and financial functions.

While fiat to crypto conversion is restricted and regulated to various degrees globally, the legal tender status of the DC/EP enables another powerful suite of features for hardware wallets – seamless cash conversion. Citizens can convert cash to offline chip-card DC/EP deposits or get cash from chip-card DC/EP deposits using a range of ATM-like terminals. Linking the DC/EP closely to such existing models of digital payments will greatly enable adoption. The adoption dimension is clearly thought through and innovative, as we have examined in a recent blog post. 


A second similarity between the DCEP design and cryptocurrency is the use of two-key architecture to secure transactions. Cryptocurrency architecture leverages users’ public addresses and private keys to secure transactions. 

In a twist to this common practice, the People’s Bank of China (PBOC) has enabled a unique secure transaction signing system. For some transactions, users have the option to secure and encrypt transaction data by co-signing it along with the user who is a counter-party to the transaction, or the bank. This effectively seals off the transaction data from being read by parties outside the transaction, such as service providers, adding greatly to the security in the system in case of any data breaches. However, the privacy dimension of transactions, such as shielding information from banks and regulators, is managed differently and is discussed in the reports.


Another significant dimension of similarity is one more under-explored feature in the CBDC world – programmability. Cryptocurrencies manage to provide more features than fiat money because of the many degrees of programmability they leverage. For the first time in any CBDC design to date, the DC/EP leverages programmability extensively. 

The PBoC has created a unique data structure for the DC/EP notes (more accurately, strings). There is a welldefined lifecycle to the DC/EP notes from their generation to decommissioning. From the time of issuance, there are certain programmable components embedded in the data structure of the notes. There are also multiple levels of users within the digital currency system of the DC/EP. For each level of user, there are certain programmable functions enabled for DC/EP usage. These and many more technical dimensions of the digital yuan architecture are examined in depth in our reports. 

The architecture of the digital yuan could spur central banks all over the world into leveraging similar features. For the last decade, cryptocurrency has created an unprecedented competition for what constitutes money. Now, central bank digital currencies might compete by providing many of the same features. In the competition for money between sovereign digital currency and cryptocurrencies, the true jury – mass adoption – is still out. 


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