Breakdown of Chinese Central Bank Digital Currency. What can we expect from CBDC?

Chinese Central Bank Digital Currency(CBDC) is a centralized digital currency that will be launched by the People’s Bank of China. The digital currency will provide features such as manageable anonymity and encryption of the transactions.

China is all set to become the first-ever country to launch its digital currency. This was announced on 10th August by officials of PBoC that they were close to launching their digital currency. The digital currency will be backed up by the PBoC and controlled by them as well.

Breakdown of China’s CDBC

As CDBC will be backed up by the People’s Bank of China, it could have a basic core format of working that will be following the guidelines of the central bank. This will be done to ensure that the monetary sovereignty and efficient transmission of monetary policy is maintained correctly. The bank itself will issue the currency, which will give them the ultimate legal status as tender.

CBDC will follow the two-tier operating system, which means that the first layer of the system will include the direct interaction between the commercial banks and PBoC. The second layer of the system will consist of the CBDC being distributed by commercial banks. By accepting the two-tier system, PBoC will solve the problem of removing be paper money while still being able to function within the guidelines.

Financial Features and Uses

CBDC would focus mainly on three things. These are:

1. Interbank Clearing: A new system of the inter-bank ledger will be formed in the institution’s system which will help in clearing of the system more efficient.

2. Retail Payment: China’s CBDC shares its properties and features with cash, so it would have to meet the need of both portability and anonymity.

3. Cross-border transactions: With the introduction of CBDC, we can expect the faster and lower cross-border cost of payments, which will ultimately lead to global promotion and acceptance of the coin.

4. Lower operating costs: The issuance, operation, and maintenance of the paper currency are very hard, and for coins, it’s even higher. Adoption of digital currency can help people fight this issue.

5. Improved anti-money laundering policies and reduced illicit uses: Cash is considered as one of the easiest ways to be used to engage in illegal activities and digital money can try to solve this problem.

Technical Features and Uses

China’s CBDC is planning to adopt a loosely-coupled design for the management of fund transfer as with this; they can proceed to allow transactions without a bank account.

The ultimate goal for CBDC is to show a turnover rate as high as cash while achieving “managing anonymity.” CBDC would be stored in digital wallets as digital ledgers, which will be verified by consensus and cryptography algorithms.

Blockchain is an option, no preset roadmap

The CBDC will be a two-tier system, and the first layer of the system is based on the centralized distributed ledger. However, there is not much information on whether the second layer will be based on a blockchain network or not.

The reason is that various financial institutions will operate the second layer so CBDC can be spread across different networks. The two-layer system aims to provide ‘300,000 transactions per second’ speed, which are hard to achieve with blockchains but the process of “off-chain relay, on-chain settlement” mechanism can help them achieve these speeds.

Availability of Smart Contracts

People’s Bank of China suggested that CBDC could function with smart contracts, but it won’t go beyond the necessary monetary requirements contracts. The reason is that it might reduce its stability in the market and affect the plans of internationalization of the digital currency.

Privacy and anonymity of the transactions

The transactions made using CBDC will be anonymous to the users as it will provide them with the privacy that they need and expect from the digital currency. Along with this, the currency will also try to prevent money laundering, tax evasion, and terrorist funding.

In case of any suspicious transactions, PBoC and tier two financial institutions will have the power to freeze the transaction and the accounts associated with that. The transaction will be anonymous at the user level, but since it is centralized, the history of transactions will be available for every single CBDC unit.

The PBoC has not disclosed the date of the launch of CBDC, but we can expect it to be launched by the end of this year. An anonymous source told Forbes that the launch would take place on 11th November, but those claims were called ‘baseless guesses.’

Vineet Chaudhary
Vineet Chaudhary
Vineet Chaudhary is a content writer with computer applications as his background field. His interests range from writing and photography to going out for trips and rides on weekends.

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