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China’s State Cryptocurrency Coming Soon, Featuring Two-Layer Structure

China is about to roll out its central bank digital currency (CBDC), which features two-layer operation mechanism, with China’s central bank – PBoC – running the top layer and business institutions composing the second layer, said Mu ChangChun, deputy chief at the Payment and Settlement Division of the People’s Bank of China (PBoC).

China’s central bank has initiated the study on digital currency and its central bank-backed digital currency early in 2014 when the cryptocurrency Bitcoin began to gain popularity in the country. After 5 years of research, the central bank officer recently announced the CBDC is ready to come out and revealed some design principles behind the upcoming state cryptocurrency at the third summit of China Finance 40 Group Meeting.

Two-layer operation system

Mu reveals that the CBDC leverages a two-layer operation system, which means the PBoC will 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.

He explains that a two-layer structure better suits the country’s national conditions considering that China is a complex economy with a vast territory and a large population, where economic development, resource endowment, literacy education and acceptance of smart terminals vary from place to place. Technically, a two-layer operation design avoids excessive concentration of risk in a single institution, meanwhile, it can also make use of existing resources to mobilize the enthusiasm of commercial banks whose IT infrastructure and service system have been relatively mature with large user bases.

Such a structure also ensures and strengthens the macro monetary control of the central bank. The officer stresses they insist centralized management despite the fact that cryptocurrencies are featured by decentralization.

Face retail scenarios, feature high scalability

Mu furthered that the coming CBDC (Central Bank Digital Currency) is a replacement of M0, and thus it charges no interest rate on cash. Given that, the CBDC will not trigger financial disintermediation, nor will it have a big impact on the existing real economy.

He also points out that the state-backed digital currency shall comply with the current legal framework, such as laws of cash management, anti-money laundering, and counter-terrorism financing. Any suspicious transaction or whale transfers are obliged to be reported to the People’s Bank of China, the central bank of China.

On top of the basic compliance, Mu detailed that China’s CBDC shall bear attributes of high scalability and high concurrency performance, which are essential to its applications in small retail and high-frequency business scenarios. He believes that to set transaction limits and balance limits in accord with the wallets by different levels will help promote its usage in the aforementioned cases. By doing this, there will be an extrusion effect of a lesser extent on deposits, and will avoid the pro-cyclical effect under arbitrage and stress environment.

“State-backed cryptocurrency is inevitable, though it is hard to implement”, commented China UnionPay chairman Shao Fujun.

The country has been taking the lead in developing state-backed digital currency, and many other countries have been in action to launch their own cryptocurrencies in an effort to tackle issues of low inefficiency, high latency, etc.

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