The launch of the central bank's digital currency ushered in a new round of development for banking IT

Source: Dazhong Securities News

The development of global digital currency has taken another step forward. Lithuania, located in northeastern Europe, recently issued the world's first CBDC, or "digital currency." In addition, my country's central bank is planning to test its digital currency on Meituan, taking a major step towards the widespread popularization of the central bank's digital yuan (DCEP).

Industry insiders said that the digital currency industry chain can be roughly divided into issuance, circulation, security and other links according to the currency link; according to the market entity, it can be roughly divided into the central bank, banks, the public and enterprises. The launch of digital currency will bring a new round of technological innovation and upgrading opportunities for bank IT from the underlying technical architecture, which is a new round of development for bank IT, and the bank IT industry is also expected to see a new round of valuation expansion.

Event-driven: The first year of legal digital currency has arrived

The development of global digital currency has taken another step forward. Lithuania, located in northeastern Europe, recently issued the world's first CBDC, or "digital currency."

In addition, my country's central bank is planning to test its digital currency on Meituan, taking a major step towards the widespread popularization of the central bank's digital yuan (DCEP). Previously, the central bank has cooperated with companies such as Didi, Bilibili, and ByteDance, and has conducted closed tests in pilot cities such as Shenzhen, Suzhou, Xiong'an, and Chengdu. The test of DCEP on the Meituan platform has a wider audience and richer scenarios than previous tests, and it is expected that the central bank will continue to promote the testing of DCEP on multiple high-traffic platforms such as Didi and Bilibili in the future.

In May this year, Yi Gang, the governor of the central bank, said that the digital currency will be tested in closed pilots in Shenzhen, Suzhou, Xiong'an, Chengdu and the Winter Olympics. The test scenarios in the four places are different. The pilot scenario in Chengdu is the merchants in Taikoo Li, the test scenario in Suzhou is the transportation subsidy payment for employees of enterprises and institutions in Xiangcheng District, the test scenario in Shenzhen is the party dues payment for internal bank employees, and Xiong'an invites merchants to hold a pilot promotion meeting for digital currency. This time, the central bank's digital currency will be tested on Meituan, which has 435 million users. The number of merchants and consumers involved has greatly increased, and the scenarios are more complex. This is another major progress in the central bank's promotion of digital currency, which means that DCEP is more mature and one step closer to landing.

It is worth mentioning that on July 10, the central bank issued the "Notice on Promoting the Standardized Application of Blockchain Technology" and the "Rules for the Evaluation of Financial Applications of Blockchain Technology" (hereinafter referred to as the "Rules"), requiring financial institutions to establish and improve risk prevention mechanisms for the application of blockchain technology. The implementation of the "Rules" is expected to promote the application of blockchain in the financial industry, and it is not ruled out that the central bank's digital currency DCEP will be combined with blockchain-related applications after its implementation in the future, bringing potential market space.

The implementation of the "Rules" means that when banks, securities companies, insurance companies and other financial institutions carry out financial applications of blockchain technology, product design, software development, and system evaluation will usher in unified standards, which will be conducive to promoting the application of blockchain in the financial industry. Blockchain cannot handle high-concurrency transactions and has low efficiency, so DCEP may not use blockchain in the main links, and may only introduce blockchain in the verification of authenticity. According to Lufax, blockchain verification can achieve up to 30,000 transactions per second with 4 nodes, 8-core CPU, and 256G memory. Considering the distributed, secure, and stable characteristics of blockchain, there is room for imagination in the future when DCEP is implemented and combined with blockchain in more links.

Industry Outlook: Global central banks accelerate digital currency research

In order to protect monetary sovereignty and legal tender status, reduce the issuance and circulation costs of banknotes and coins, improve payment efficiency, and enhance the central bank's control over money supply and circulation, my country began exploring the field of digital currency as early as 2014. In 2014, the central bank established a digital currency research group to demonstrate the possibility of the central bank issuing digital currency.

In July 2016, the central bank launched the development of a prototype digital bill trading platform; in January 2017, the China Digital Currency Research Institute was established, and the iOS version of the "Blockchain Electronic Wallet" (BOCwalet) was launched. The Digital Currency Research Institute under the central bank established the "Shenzhen Financial Technology Co., Ltd." in Shenzhen and participated in the development of projects such as trade finance blockchain.

Entering 2019, the pace of research and development of digital currency (DCEP) has accelerated significantly. In August 2019, Mu Changchun, deputy director of the Payment and Settlement Department of the People's Bank of China, said that the central bank's digital currency is "about to be released"; in December 2019, the central bank's legal digital currency pilot project, led by the central bank and jointly participated by the four major state-owned commercial banks of Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China and China Construction Bank, and the three major telecom operators of China Mobile, China Telecom and China Unicom, was launched in Shenzhen, Suzhou and other places.

In January 2020, the central bank’s official microblog released “A Review of the Central Bank’s 2019: Financial Technology”, pointing out that the top-level design, standard setting, function development, joint debugging and testing of digital currency have been basically completed. In April, the People’s Bank of China officially announced that the digital currency was first tested in Xiangcheng District, Suzhou, and then in Shenzhen, Xiong’an, and Chengdu. Recently, the Central Bank’s Digital Currency Research Institute has cooperated with Didi, Bilibili, Meituan and other platforms to test digital currency. The launch of my country’s central bank’s digital currency is just around the corner.

In June 2019, the release of Facebook's Libra white paper and the proposal of my country's central bank's digital plan made central banks such as the United States, Japan, and Europe become active.

In February this year, a Federal Reserve board member said that the Federal Reserve is experimenting with electronic payment and digital currency technologies and has begun studying the feasibility of digital currency. In July this year, the Bank of England said it was evaluating whether to establish a central bank digital currency. The Bank of Japan established a digital currency group and South Korea established a central bank digital currency legal advisory group to accelerate the pace of research. The Bank of France selected eight fintech companies to participate in the digital euro trial, including HSBC, Accenture and Seba Bank, in an effort to modernize interbank settlement through central bank digital currency (CBDC).

Investment opportunities: issuance, circulation, and security links benefit from it

The digital currency industry chain can be roughly divided into issuance, circulation, security and other links according to the currency link; according to the market players, it can be roughly divided into central banks, banks, the public and enterprises.

Specifically: The central bank is responsible for the research and development of the underlying architecture and technology of digital currency. The central bank's digital currency system is divided into one currency, two libraries and three centers. The central bank's IT is a brand-new market and the cornerstone of digital currency. It is expected to be mainly based on the central bank's self-research, supplemented by large state-owned banks and core social IT companies, and may be open to relevant manufacturers in areas such as security encryption.

Banks are the main demand side of financial technology. With the promotion of digital currency, there is a broad space for IT transformation on the commercial bank side, including the establishment and transformation of digital currency systems, core business systems and other related systems. Bank IT renewal and transformation is a big opportunity for industry manufacturers and is highly open to industry-related manufacturers.

For the application end such as the public and enterprises, it mainly includes the update and transformation needs of POS, ATM and other equipment manufacturers, as well as the construction of new digital wallets. The payment and application ends are highly open, and related manufacturers are expected to share the vast majority of the market share.

Guotai Junan believes that the launch of digital currency will bring a new round of technological innovation and upgrading opportunities for bank IT from the underlying technical architecture, which is a new round of development for bank IT, and the bank IT industry is also expected to see a new round of valuation expansion. After the promotion of digital currency, banks must first establish a digital currency commercial bank library, and at the same time make supporting transformations for core business systems and other related systems for digital currency. It is recommended to focus on Yuxin Technology, Changliang Technology, and Shenzhou Information.

In addition, security technology is the guarantee of the digital currency system. The central bank's digital currency security technology includes basic security, data security, and transaction security technology. Typical application links include the certification center, digital wallet, and application terminal in the central bank's digital currency system. Security encryption and electronic certification manufacturers Digital Certification and Geer Software will benefit.

Market insiders said that the development of digital currency will be one of the important themes of the future of global financial technology, and may change the existing international payment system in the future. Related companies such as Hailian Jinhui, Uboxun, Feitian Chengxin, Oma Electric, Geer Software, and GRG Banking are expected to usher in development opportunities.