PBoC’s DCEP Design, Tech Worth Studying by Bank of Japan – NRI Report
The design concept and technologies behind the development and testing of the Digital Currency Electronic Payment (DC/EP) platform pioneered by the People’s Bank of China (PBoC) are worth studying by the Bank of Japan (BoJ) as the Japanese central bank, like several others, explores Central Bank Digital Currency (CBDC), a joint report by the Nomura Research Institute (NRI) and HashKey Capital has recommended.
NRI has been providing innovative solutions through insight-driven research, consulting and managed services in Japan since 1965. With HashKey, they explored the impact of digital currency on the BoJ in comparison to China’s DC/EP and concluded that Japan may have to settle with the pace of other major central banks like the European Commission Bank (ECB) and US Federal Reserve for its conservativeness when compared to China.
Assumingly set to adopt the unspent transaction output (UTXO) model with its various offline circulation processes, the Chinese CBDC will keep balances as well as the account holder’s information such as addresses. Unlike mobile payments like AliPay and WeChat which together account for 90% of the market, CBDC is a legal tender even if not transferred through a commercial bank account. It will use dual offline payment technology which allows for offline transfer of money (without internet access) and settles payments instantly unlike mobile payments which have to go through a clearing platform.
The DC/EP will differ from the prevailing third-party payment system in China from both a technical and financial standpoint, the report says. It should be noted that though cashless payments are on the rise in Japan – the government aims to achieve 40% by 2025 as against 21.4% in 2017 and aiming for 24.1% in 2020 – it is still far away from China which already has a 70% cashless payments share as at 2017.
The report also states, “However, the potential effect on payment methods and the financial system are still unknown as no official guidance on DC/EP has been released. Based on the prudent stand of the PBoC, DC/EP will likely be launched at a deliberate pace. We accordingly do not expect it to cause much change anytime soon.”
The BoJ has not announced its plans to issue a CBDC but it has worked with the ECB in the past to explore its opportunities and challenges including its related legal issues. The outcome of their joint research on distributed ledger technology raises points to be considered further when expanding the discussion on balancing confidentiality and the auditability of transactions for practical application.
In the past year, several other central banks continue to experiment or study the potentials of issuing a CBDC – The Philippine being the latest to the list. This is in line with the findings of the annual BIS survey in which it notes that central banks have been undertaking extensive work on CBDC based on the response of the 66 central banks participating in its survey. The BIS states that 80% of central banks are engaging in some sort of work on CBDC and 40% have progressed to experiments and developing proofs of concept.
Another crucial factor that has been fuelling China’s pursuit of the CBDC goal, making it the largest global economy at its forefront, is its prolonged tension with the U.S. which has led some insiders to suggest that a Chinese CBDC could be an alternative to compete with the U.S. dollar for global dominance.