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Former Bank of China President Says China’s DCEP Has a Clear Structure

The massive effort China has been putting into the development of its upcoming digital yuan doesn’t mean that it has been blind to how other countries see the digitalization of their national currencies. According to the latest report from the Chinese magazine Money 163, the China Internet Finance Association concluded that there were only a handful of countries in the world that had a positive view of central bank digital currencies. Out of the handful of countries with favorable views, only a few have actually produced meaningful research about how a national digital currency would affect their monetary policies.

According to Li Lihui, the former president of the Bank of China and current leader of the China Internet Finance Association’s blockchain working group, China is the only country in the world that has established a clear and comprehensive structure for its central bank digital currency. This structure, Li explained in an op-ed written for Money 163, stands on three pillars—indirect issuance, centralized management, and loosely-coupled accounts. 

When it comes to issuance, central banks issuing national digital currencies can decide to choose two types of issuance—direct or indirect. The direct issuance mode means that the central bank creates and distributes the digital yuan directly to the public, removing the need for intermediaries such as other banks or payment processors. The indirect issuance model, on the other hand, adds intermediaries between the central bank and the public. These intermediaries are usually smaller, commercial banks, that remove some of the burdens from the central bank. 

By adopting the indirect issuance mode, the People’s Bank of China will implement an indirect issuance mode, introducing a two-tier operation and delivery system. Li explained that this model will enable the digital yuan to exist without having to recreate an entirely new financial infrastructure. Implementing this model allows the digital yuan to be cost-effective, exhibit risk-control, and ensure market stability.

Having centralized management over the digital yuan will ensure that the People’s Bank of China has a reliable monetary policy transmission mechanism. It will also ensure that the process of monetary regulation stays as efficient as possible. An important aspect of centralized management is the ability to utilize different types of blockchains and blockchain technologies. “The existing blockchain technology cannot meet the high concurrency demand of mega-market retail level, so the technology applied to the digital yuan should remain neutral,” Li said in the op-ed. 

And finally, the People’s Bank of China is set to adopt a loosely-coupled account approach when distributing the digital yuan. This means that the issuance of the digital yuan will be connected with the digital wallets of Chinese citizens. This means that the central bank will be able to achieve end-to-end value transfers from bank accounts and reduce the dependence on financial intermediaries in transactions involving the digital yuan. The current design of China’s central bank digital currency is limited to replacing cash in circulation, but applying these core principles will provide many more features and functionalities to the digital yuan. 

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