China’s Digital Currency May Come With Hardware Wallets as Well

Mobile apps may not be the only medium for storing and transacting China’s digital yuan, according to the Terms and Services agreement from a major Chinese bank. The roll-out of China’s central bank digital currency may include hardware wallets as well. 

Over the weekend, China Construction Bank (CCB), one of the country’s big-four state-owned commercial banks, opened up a wallet service to public users within its mobile app for testing China’s central bank digital currency (CBDC), also known as DC/EP. 

While various nations are discussing the potential of CBDC to increase financial inclusion, China, the world’s second-largest economy, is poised to become the first country to digitize a sovereign currency. 

Despite on-going tests in several Chinese cities, CCB did not seem prepared for the high level of attention to the wallet service on its mobile app service, which was activated widely before being disabled.

Before the service was taken down, CoinDesk kept a copy of and analyzed the Terms and Services that users were required to agree to follow when signing up.

The “Definition” part of the Terms, which has since disappeared along with the service, showed that apart from DC/EP wallets within CCB’s mobile app that was offered, separate hardware wallets for DC/EP may also be in the works.

One of the advantages of a national digital currency is that users can hold their own currencies digitally, rather than keep them in a bank. With the addition of a hardware wallet, users could keep custody of larger sums of their digital yuan off-line without relying on a third-party mobile app. Then they could make smaller transactions by using their DC/EP mobile app.

According to CCB’s Terms, a DC/EP hardware wallet is a physical medium that is activated upon users’ request at a bank’s counter or a digital channel for carrying DC/EP. 

The idea would be similar to an actual wallet that stores physical cash. There is one key difference, however. The DC/EP hardware wallets can be traceable and would strip off the anonymity feature of paper cash as users would need personal information such as IDs and phone numbers to activate the wallet in the first place. 

Basic functions will include making payments, depositing to or withdrawing from bank accounts and initiating transactions between wallets, the Terms added. 

However, the Terms indicated China’s DC/EP wallets could be offered in the future in a four-tier system, which would potentially put a cap on how much users can spend their digital yuan.

Under the Terms, for instance, a user could only maintain a balance of up to 10,000 ($1,500) yuan in a tier-2 DC/EP wallet. The cap for a single transaction would be less than 5,000 yuan daily and annual accumulated spendings could not exceed 10,000 yuan (around $1,500) and 300,000 yuan (or $42,000), respectively.

Similarly, tier-3 and tier-4 DC/EP wallets would have tighter caps on wallet balances as well as daily and annual spendings but the Terms did not indicate if there will be any limit on tier-1 wallets.

After CCB disabled the DC/EP wallet registration, users who had made deposits to digital yuan over the weekend found their wallets dissolved, with balances credited to their respective bank accounts, according to Chinese state media. 

CoinDesk reported last year that in addition to major Chinese commercial banks, payments giants Ant Financial and WeChat Pay have been involved in the development and implementation for China’s DC/EP initiative. 

In fact, Ant Financial disclosed in its initial public offering prospectus in China last month that it has been participating in the development and internal test for the last two years. 

“In accordance with the arrangements by the People’s Bank of China, the Company is preparing for DC/EP’s internal test in Shenzhen, Suzhou, Xiong’An, Chengdu and the upcoming 2020 Beijing Winter Olympics,” Ant Financial said in the document.