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🇬🇧5🔻Analysis: Architecture Of DCEP, the Chinese Digital Currency

How Chinese CBDC Works

Mongolia Coal Worker, Photo by Lu Guang, Dissident Photographer, Thank.

Following what William Gibson says (he has something to say about perspective visions):

“…the future is already here, it’s just not very evenly distributed.…”,

we try to understand the functioning of DCEP, considering the operating structure of the Chinese CBDC as prologue of what, progressively in the next ten years, will spread in the world in the field of fiat currency payments.

In fact, the latest BIS estimates indicate that among the 66 central banks (referents of countries that together cover 90% of the global economic production) with projects at various levels on CBDC, about 10% will be the protagonist of issuance in the next three years: of these, the majority will be emerging economies.

The heads up is that information is not yet exhaustive to draw a complete picture, due to the real-time progress of the product and its necessary fine-tuning.

One Currency…Two Serial and a Binary System

DCEP is M0, money supply. It is issued by PBC that creates and holds the issuance addresses (serial number if compared to the corresponding paper number) and distributes M0 to commercial banks at their request and through reserve elasticity (the issuance corresponding to decrease, the return to increase). This is the first circuit, the issuing one, separate from the distribution one: the address database, including the recipient banks, is managed by PBC.

The second circuit, the distribution, is composed of the commercial banks that give DCEP to customers. While it is certain that the management of the distribution database is in the hands of the single commercial bank, it is not clear if the issuing address is replaced with a new address (new serial number in mirror with the PBC one), issued by the commercial operator, or if it implements the one that identifies the Yuan issuing by PBC.

Therefore, at the level of the user’s terminal there is a single currency to which two banks, the commercial bank and the central bank, refer to for the identification of the digital banknote, unlike the corresponding paper one where the identifier is exclusively the serial number printed by the central bank.

Three fundamental aspects at user level should be emphasized.

The first, the DCEP wallets, present through apps on the terminals, will be issued only by authorized intermediaries: the correspondence with the paper money is the POS systems used for fiat currency.

The second, the exchange of DCEP between different wallets can take place even if the devices are not connected to the Internet and, therefore, via NFC. That seems to bring DCEP closer to paper money, preserving the anonymity of the transaction, but it is just an illusion: as soon as one of the devices connects to the network, which sooner or later is an obligation if you want to have the money on account, the exchange parameters are recorded by the system.

Also hypothesizing a wallet on terminal never connected beyond the first time (necessary for the download of the app), the anonymity would be preserved only in the case in which all the payments and the collections had as reference terminals that have adopted the same preventive measure, context a little difficult to figure above all in case of systematic illegal.

The third party, when an exchange is recorded, the money is not transferred from one wallet (account) to another (as for example in cryptocurrency transactions) but, on the payer side, the DCEP is destroyed in the database of the commercial bank (and the account reduced by the same amount); on the collection side the equivalent amount is created in the database of the receiving bank (and the account increased). The destruction and creation parameters are recorded by the system.

Also in this case the intent is to protect the privacy of the exchanger but, unlike paper money, we are faced with a ‘restricted anonymity’: it will always be possible, if necessary, to reconstruct the entire path of a digital Yuan.

Therefore, a binary management system in which the issuance and settlement are institutional and the management of customers is left to the intermediaries.

One Currency…Three Centers and Four Nodes

Three control centers are provided.

The first is the certification center: it authenticates and manages the certificates in charge of users; the second is the registration center: it traces the entire path of the single DCEP Yuan; the third is responsible for the management of KYC and AML regulations.

The four systemic nodes are:

  • the emission system:

receives the release request from the user to the commercial bank;

receives the release request from the commercial bank for reserve variations;

issues a request voucher in both cases;

  • the control system: checks that the requests are in line with PCB parameters and, if so, validates the request vouchers of the issuing system. In addition to the reserve elasticity parameters, there are also holding and spending limits for individual users;
  • the central management system:

receives the issuing vouchers;

receives control validation;

issues DCEP;

  • the user terminal that receives the currency.
by finance sina

Also in this case a substantial difference compared to cash that does not require any authorization to be exchanged.

The information for now suggests a ‘first release system’, composed by the control system and emission/release of currency to the user, unbalanced in the management towards commercial institutions and a ‘delivery system’, composed by the control system for its competence, the central management system and the emission/reserve system that hangs towards PBC.

A Currency…On Blockchain, DLT or Other?

Here the discussion becomes difficult. The data available indicate the centralized management of databases: the logic behind the choice of this option is that, being one of the purposes of DCEP regulate especially micro-payments, a solution entirely based on DLT (authorized variously) could give, in perspective, problems of systemic scalability depending on the number of transactions.

However, PBC claims to have recourse to the blockchain protocol for the design of the asymmetric cryptographic component of the peer2peer, for UTXO management and that the central management system works on a DLT. In addition, although the programmable function is not available at the time of release, the entire system is porous to the regulation of smart-contract. The will in this case is to channel in DCEP the payments data-based B2B, facilitating the business use, and B2C, starting from those related to utilities.

In this context, and with defining necessities, DCEP can be considered a no-block DLT operating also on hybrid blockchain protocol.

Opinion

The overall design still suffers from the lack of information necessary to be weighted. The innovation operatives (ISO 56002) seem to be observed: the logic of emission, distribution and control seems to be quite articulated but we must not forget the territorial and quantitative range that the line-up involves.

For now the DCEP destruction/creation solution at the commercial banks linked to each payment stands out: in this way the ceiling, linked to the monetary policy, available to the intermediary remains always the same and, with subtlety of intuition, they act exclusively on the final product for the fine-tuning management.

Of the geo-economic, social and geopolitical intentions, we have already begun to reflect and we will continue to pay attention to them: operationally it will be necessary to observe how the different design components will be combined (and with which technical solutions), and what adjustments will be necessary by the massive adoption, considering the upcoming exit from beta-tests with defined perimeters.

Work in progress…

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Blog logo by Cathy Moser

This is an English adaptation of a neuronal Italian/English AI translation by DeepL

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