By Director of NEXGO Digital Currency Research Team, Li Lin

In recent years, with the innovation of digital technology, the topic of digital currency is widely discussed and researched around the world. Especially after Facebook released the Libra plan in June 2019, it has attracted the attention of governments and central banks to the digital currency, and it has also catalyzed the research process of legal digital currencies by central banks in different countries.

Definition of CBDC

There is no clear definition of CBDC (Central Bank Digital Currency) currently. BIS, Bank for International Settlements, gives it a definition: the legal digital currency is a digital form of legal currency, based on national credit, and generally directly issued by the country central banks.

The developing power of CBDC

From the end of 2019 to the beginning of 2020, the attention to the CBDC of central banks and financial organizations has sharply increased, they have released research reports, monetary policies, technical analysis, etc., one after another. Among them, BIS (Bank for International Settlements) and IMF (International Monetary Fund), as international organizations, have formulated some guidelines for designing and developing, and have organizing international experience exchanges and share, and regularly publishing research reports. Countries represented by China, Sweden, and Canada are actively researching and developing CBDC, although United States, Japan, and South Korea claim they have no plan for CBDC, their attitudes have changed from waiting to embracing, they have frequently participated in the international CBDC seminars and basic research.

The reasons why central banks actively put efforts into the work of CBDC research and experimentation can be divided into external and internal motivations. The internal motivation mainly includes promoting the development of a cashless society, improving the effectiveness of monetary policies, strengthening financial supervision, promoting financial inclusion, etc. External motivation mainly includes the challenge of digital currencies issued by private institutions (represented by Libra) to sovereign currencies, risks of monopoly caused by private commercial institutions in the payment field, the country’s financial stability is threatened, and countries are noticing the positive impact on improving the efficiency of cross-border payments.

The current status of CBDC

For now, the research on CBDC by major central banks in the world is basically in the stage of proof of concept and experimental demonstration, and the design requirements of the central banks on CBDC are not completely clear. Central bank digital currencies can be divided into wholesale digital currencies and retail digital currencies, the former is provided to banks and large commercial institutions, while the latter is available to the public. Early research experiments on CBDC focused on wholesale CBDCs, such as Ubin in Singapore and Jasper in Canada. Recently central banks in different countries are focusing on the retail CBDCs and issuing the relevant research reports.

The People’s Bank of China has been developing its digital currency since 2014, and the research and development of digital currency have always been at the forefront of the world. The digital currency project that the People’s Bank of China is conducting now is named DC/EP (Digital Currency /Electronic Payment), as the name suggests, digital currency plus electronic payment. The DC/EP project plan may include several payment products that can be tried and promoted, these products are finally be called e-CNY, or digital RMB. DC/EP now is being piloted in China.

DC/EP adopts a dynamic two-tier system, the first tire is the central bank, the second tire includes commercial banks, telecom operators, and the third-party Internet platform payments service providers, etc. The main responsibility of the central bank is supervising and safeguarding the stability of currency value, promoting interoperability and switching facility among different payment products, etc. The second tier possesses the ownership of e-CNY and technology and its system. At present, during the pilot process, DC/EP supported multiple payment methods such as QR code scanning and NFC, the promotion of the DE/CP will probably break the monopoly of big-Fintech companies in the payment field and benefit user privacy.

Conclusion

As central banks around the world begin to consider the introduction of digital currencies, the impact of CBDC on currency demand and financial institutions has become increasingly prominent. There is no uniformity in the plan, countries will choose the best CBDC design plan based on the actual national conditions, issuing purposes, technical structure, etc. At the same time, the relevant legal system issued with CBDC can also satisfy its society requirements. With the deepening of global research on CBDC and continuous technological innovation, I believe that in the near future, a clear CBDC will be presented to people.

NEXGO owns over 20 years of experience in the electronic payment industry and has deep accumulation in the fields of the payment system, payment（POS）terminals, biometrics, big data, etc. NEXGO has also established a dedicated digital currency research team to follow up the global CBDC progress, and develop the corresponding technologies, products, and solutions. We’re looking forward to discussing the plans of CBDC with central banks, commercial banks, payment companies around the world to jointly promote the transformation of global digital finance, improve Fintech inclusion.