China’s Digital Currency Will Be Two-Tiered, Replace Cash: Binance

A new research report from crypto exchange Binance says China’s digital currency will most likely be a two-tiered system replacing notes and coins in circulation.

The report, issued yesterday, claims the People’s Bank of China (PBOC) central bank digital currency (CBDC) will be backed 1:1 by renminbi fiat as well as follow a two-tiered structured system with the bank, commercial banks, and retail market participants.

The first tier will connect the PBOC with commercial banks for currency issuance and redemption.

The second layer will connect those commercial banks with the greater retail market. A technical roadmap—including the questioned use of blockchain technology—has yet to be addressed, Binance said.

PBOC image via Binance

Binance claims the PBOC’s system will allow fund transfers without the need for a bank account, what it terms ‘decoupled’ banking.

“The end goal for the CBDC20 is to display a turnover rate as high as cash, while achieving ‘manageable anonymity,’” Binance says in the report. “In other words, in the first-layer network of the CBDC, real-name institutions are expected to be registered while the transfer in the second-layer network would be anonymous from the perspective of users.”

The PBOC is working towards transactions of up to 300,000 transactions per second, currently not possible with blockchain technology. Binance said smart contract architecture has also been discussed.

Under the Bank of International Settlements money taxonomy, the PBOC has labelled the new CBDC both a central bank account and a central bank digital token.

Money Flower via Binance 

The PBOC’s CBDC is purposed with replacing China’s notes and coins in circulation, also known as the M0 money supply. In other words, the CBDC is not meant to replace funds within the central bank or money holding institutions.

The PBOC listed retail payments, interbank clearing, and cross-border payments as practical reasons for replacing the M0 with a CBDC.

Yesterday, unconfirmed reports cited Alibaba, Tencent, the banking consortium UnionPay, and four central banks including the world’s two largest, the Industrial and Commercial Bank of China and China Construction Bank Corporation, as the first in line to receive the cryptocurrency.

The recipients would then be responsible for disbursing the currency into circulation. Tencent News later said the Forbes’ report was speculatively citing a source close to the central bank.

Mao image via Shutterstock