People’s Bank of China central bank announces that they will be releasing a new digital currency that is backed by renminbi fiat in a ratio of 1 to 1. It will follow a two-tiered structure system with the central bank, commercial banks and the market participants. Continue reading for more information.
The Layers and How They Work
As mentioned earlier, the new cryptocurrency operating structure will be divided into two layers. The first layer will be featuring a direct interaction between the People’s Bank of China and the commercial banks. The Chinese Central Bank Digital Currency (CBDC) will be issued by the PBoC (People’s Bank of China) and then redeemed via commercial banks. The first institutions that are expected to receive the new crypto assets are the China Construction Bank, Industrial and Commercial Bank of China, the Bank of China and the Agricultural Bank of China. There is also information that there will be other partners who will be part of the first receivers of the assets – Union Pay and online payment providers like Tencent and Alibaba.
While the first layer consists of the relationship between the PBoC and commercial banks, the second layer is about the individuals and the businesses. The Chinese CBDC will actually be token-based and financial institutions will be responsible for distributing the new currency to the general public as well as to businesses. This will allow for the currency to circulate and the action of depositing and withdrawal for the parties involved will be similar to the interaction with domestic banks. With the adoption of both tiers, the PBoC could achieve their goal to replace paper money and coins without harming the economy.
The Chinese Central Bank Digital Currency
While Facebook’s Libra is still in its beginner phases of development, China’s cryptocurrency was ready for launch late in 2018 stated by Mu Changchun, deputy director of the Paying Division of the PBoC. According to him, the key difference between the two cryptocurrencies is that Libra is being developed to handle roughly 1,000 transactions per second, while the Chinese digital currency can handle 300,000 transactions per second. The technology involved in that will not be like something we have seen until now. Compared to the over 90,000 transactions per second made in china on their famous holiday, Singles Day, Libra will not be able to even compete with CBDC.
The end-goal of the new cryptocurrency is to have a turnover rate as high as cash, while still achieving anonymity and portability. There are other benefits to this system as the distributed inter-bank ledger would make confirmation and fund clearance more efficient for businesses. Additionally, CBDC will allow for faster and cheaper international payments as well as promoting the Renminbi to the world. CBDC will also adopt a “loosely-coupled” design that will allow transfers between parties without the need for a bank account. The CBDC currency, as well as the wallets that support it, will be verified and secured with cryptography and consensus algorithms, although there is little to no information regarding their operation. It is yet not fully discussed if the second tier of the operating structure would be blockchain driven and if smart contracts would be implemented.