A Comparison of China’s Central Bank Digital Currency DCEP with Sweden’s e-krona
Central banks are looking at creating their own digital currencies as a countermeasure to the rise of cryptocurrencies issued by the private sectors.
Days ago on February 20, Sweden’s central bank Riksbank said it had begun testing an e-krona and the pilot will run until February 2021; last December, China’s central bank who has been engaging in digital currency R&D since 2014, said its digital currency, dubbed Digital Currency/Electronic Payment (DCEP), would soon be piloted in the country’s tech hub Shenzhen and Shanghai’s neighboring city Suzhou. Both the two have been a step close to the creation of the world’s first central bank digital currency (CBDC).
While China’s DCEP and Sweden’s e-krona adopt two different technology routes, which could provide varied solutions for the future issuance of CBDC from other central banks.
In December 2016, the establishment of Digital Currency Research Institute of The People’s Bank of China (PBoC) marked the beginning of China’s digital currency. In the same year of 2016, the UK and Canada also carried out specific research on their central bank digital currency, but the two countries slowed down in the research and development of digital currency for some reasons. Instead, the Riksbank who started a year later caught up with them (the Riksbank officially launched its digital currency project in mid-march 2017).
At present, China and Sweden are taking the lead in CBDC developing (though late last year Turkey’s President Recep Tayyip Erdogan directed the government to finish testing the country’s central bank digital currency (CBDC) in 2020. However, from the perspective of technical implementation, there will be some difficulties).
According to the Global Consumer Insights Survey 2019 released by PWC, China leads the world with 86% of its population tapping mobile payments. Sweden, where cash was used for only about 2% of all transaction volumes in 2018, is the least cash-dependent country in the world. The advanced cashless payments have provided rich soil for the two countries to carry out digital currency research and application.
There are also many similarities between the two countries’ digital currencies. For example, both are designed with a two-layer structure, that is, the central bank will issue and convert the digital currency to commercial banks or other operating institutions where the public could acquire CBDC, instead of single-layer structure where the central bank issues digital currency directly to the public, which could fully mobilize the enthusiasm of the market.
Both their CBDC is purposed with replacing the country’s notes and coins in circulation (known as the M0 money supply), instead of M1 or M2 (include the less liquid forms of money supply) which have already been digitized and could be tracked.
Central Banks in both countries also have prejudices about privately issued digital currencies such as Bitcoin and Ethereum. The Riksbank, for example, argues that the concentration of digital currency in private institutions will have a long-term impact on social development, with social payment systems vulnerable to shocks. The People’s Bank of China believes that private digital currencies could influence the country’s payment system, economic operation and financial stability due to their features of anonymity, low cost, trans-region, decentralization and high volatility.
In terms of technology, China and Sweden are taking varied tech in their CBDC development.
According to a recent post titled “Blockchain Development and Management” from PBoC, China’s digital currency does not adopt blockchain, stating that blockchain is not suitable for high concurrency scenario in traditional retail pay as it sacrifices system processing efficiency and part of the customers’ privacy for a large number of redundant data synchronization and computing.” Judging from the relevant patents on digital currency published by the central bank, it is still a centralized system.
While Sweden’s e-krona is leveraging blockchain solution which is developed by Accenture using the Corda enterprise blockchain.
Back in 2017, the Swedish central bank was not willing to take a leap on the still-developing tech, describing that DLT (often referred to as blockchain) as weak, troublesome and untried in its first report about e-krona.
In that year, blockchain technology did fail in the field of central bank digital currency. The Bank of Canada had experimented and found out that blockchain-based digital currency was not easy to use. The central bank then published the report “Central Bank Digital Currency: drivers Motivations and Implications” which concluded that blockchain-based CBDC is not as good as the centralized system with few costs saved but high risks in security.
Compared with China’s DCEP, the e-krona may lag behind in terms of large-scale transaction performance. China’s digital currency supports dual offline payment, which means that the technology is superior in an environment where there is no signal.
It is noteworthy that this January, the central banks of Britain, the euro zone, Japan, Sweden and Switzerland have joined forces to assess the case for issuing CBDCs. If the trial of e-krona goes well, it is likely to be adopted by the countries above.
And whether would China’s DCEP scheme be exported to other countries, it remains to be seen.