How is the central bank preparing for digital currency? The actions of partner institutions reveal the secrets

Text | Li Zheweng Editor | Tong Source | PANews

As the central bank held a meeting last Friday (April 3), it once again mentioned strengthening top-level design and unswervingly advancing the research and development of legal digital currency. Today (April 7), when the market opened after the holiday, the digital currency sector opened higher across the board, and many stocks hit the daily limit. By the end of the day, the increase was as high as 7.81%.

Huachuang Securities pointed out that the central bank's digital currency may be launched at an accelerated pace after the epidemic, and the digital currency pilot is expected to be launched first among the five major banks. Digital currency will bring new systems to banks. In addition, bank software and hardware including bank core systems, databases, and ATMs are facing transformation. Terminals such as personal mobile phones and POS machines also have replacement needs. At the same time, the issuance of digital currency will also promote the promotion of electronic bills. In addition, encryption technology will run through the entire industrial chain.

The overseas edition of the Global Times also recently quoted sources as saying that the People's Bank of China may have completed the basic functional development of sovereign digital currency in cooperation with some private companies, and is currently drafting relevant regulations to pave the way for subsequent issuance.

PANews learned through the National Intellectual Property Administration's "Patent Search and Analysis Platform" that as of press time, the People's Bank of China Digital Currency Research Institute, which is affiliated with the central bank, has obtained 76 digital currency-related patents. If the patents currently under review are included, the institute holds as many as 86 digital currency-related patents.

It is particularly noteworthy that since December 2019, the institute has successively announced four patents: "A method and system for recovering digital currency quotas", "A method and system for issuing digital currency quotas", "A method and system for circulating digital currency", and "A method and system for generating digital currency". Since the digital currency of the People's Bank of China (hereinafter referred to as CBDC) is a "two-tier issuance system", from the perspective of the central bank's role as "one-tier issuance", the technical preparations for the issuance of DCEP may have been ready.

However, the successful launch of the central bank's digital currency requires not only continued efforts at the central bank level, but also the support of supporting institutions in the issuance, delivery, circulation and other links.

PANews noticed through searching the "Patent Search and Analysis Platform" that Alipay and ICBC have many patents in CBDC in the past two years, forming the main force to help DCEP come into being. However, the three major telecom operators, other state-owned banks, and WeChat reported by the media previously did not disclose any patents directly related to DCEP.

Based on public information, PANews sorted out the status of preparations made by third-party institutions for the launch of the central bank's digital currency.

Patent evolution: Research institutes take the lead, ICBC accelerates

According to public information, China's DCEP has accelerated significantly since the release of the Libra white paper in June last year. After nearly a year and a half of "silence", the DCEP Research Institute resumed patent applications in August 2019. In the same month, Forbes reported that China's DCEP will be released as early as the Double Eleven Shopping Festival that year, and confirmed that several institutions including Alipay, WeChat Pay, the four major banks, and the three major operators will be the first to participate in the issuance of the central bank's digital currency.

However, in December of the same year, a financial report stated that the institutions participating in the pilot project of the central bank's digital currency were the four major banks and three major telecom operators, and Alipay and WeChat were not on the list.

It is somewhat unreasonable that national-level financial technology products such as Alipay and WeChat Pay are absent from the "Genesis Block" of DCEP. The disclosure of a series of patents by Alipay after the Spring Festival this year also seems to be in preparation for DCEP.

Since February 2020, Alipay has successively announced five patents related to DCEP, covering issuance, transaction records, digital wallets, anonymous transaction support, and assistance in supervising and handling illegal accounts. It has basically achieved full support for the issuance of DCEP.

Alipay’s patents directly related to DCEP | Source: National Intellectual Property Administration, PANews tabulation

Unlike Alipay's "latecomer advantage", ICBC, as the leader of the Big Four banks, continues to maintain its leading position in DCEP-related patents.

China's DCEP has multiple features: M0 attributes, centralized management, legal compensation, non-repeatable spending, controllable anonymity, non-forgeability, dual offline payment, etc. If the first few items can be achieved through legislative and operational means or there are relatively mature technical solutions, then dual offline payment is a difficult point - it is hard to imagine how to complete the payment and collection between the two parties in a place without any signal?

ICBC published two sets of patents in 2018 and 2019 to facilitate the realization of this feature. The "offline payment method, terminal and agent delivery device based on digital currency" and the "offline payment system and method based on blockchain" each use non-blockchain and blockchain methods to achieve the "dual offline payment" feature through key technologies such as payment and collection identification, digital certificates, and asymmetric encryption.

Combined with the patent of the Central Bank's Digital Currency Research Institute in this regard (methods and systems for offline payments using digital currency chip cards, mainly using chip cards such as Bluetooth IC cards, mobile phone security SD cards, etc.), ICBC's greater reliance on software-level design may have a greater foundation for market promotion.

In addition, ICBC's patent for "a merchant acquisition method and system based on digital currency" allows merchants to receive digital currency from users even if they do not have a digital currency account. From the perspective of circulation, this removes obstacles for the "widespread penetration" of DCEP.

ICBC’s patents directly related to CBDC | Source: National Intellectual Property Administration, PANews tabulation

The central bank’s digital currency upstream and downstream, large enterprises are everywhere

Although no DCEP-related patents have been published by institutions other than Alipay and ICBC, they have also been active in the blockchain field in recent years, which may indirectly contribute to the popularization of DCEP.

Public information shows that China Construction Bank launched a blockchain trade finance platform in 2018. As of October 2019, the platform supported business worth more than 360 billion yuan. The Agricultural Bank of China launched the blockchain-based agricultural Internet e-commerce financing system "e-Chain Loan", and actively promoted the construction of a financial digital points system. Bank of China launched the BOCwallet e-wallet based on distributed ledger technology in 2017.

Between 2018 and 2019, China Unicom successively launched "Digital Currency Transaction Optimization Method and System" and "A Digital Currency Transaction Method and System", and conducted research on the opening of digital currency wallets and the transaction of digital currency.

Dozens of companies will be involved in the upstream and downstream of the central bank's digital currency. Others have been announced one after another. For example, Huawei signed a strategic cooperation agreement with the Central Bank's Clearing Center in November 2019 and signed a memorandum of cooperation on financial technology research with the DCEP Research Institute. On February 25, Changliang Technology said that the company has conducted regular research and technical reserves for DCEP.

It is worth noting that the listed company Sifang Jingchuang once responded to investors' questions in November 2019, saying that the company has the ability to develop similar businesses of "dual offline payment". According to the "Patent Search and Analysis Platform" of the State Intellectual Property Office, the company holds 8 patents related to blockchain, two of which are directly related to digital currency and wallets.

As more patents are published, I believe the list of companies related to the DCEP industry chain will continue to expand.

Blockchain or the promised land of non-DCEP?

As China's DCEP gets closer to being launched, blockchain, which inspired central banks to issue digital currencies, seems to be slowly being abandoned.

In February this year, the research team of the Digital Currency Research Institute of the Central Bank published a paper entitled "The Development and Management of Blockchain Technology", pointing out that "the decentralized nature of blockchain conflicts with the centralized management requirements of the central bank. The payment services provided by the central bank cannot leave the centralized account arrangement and must be built on a centralized system, which conflicts with the decentralized nature of blockchain. Therefore, it is not recommended to transform the traditional payment system based on blockchain at present." Yi Gang, the helmsman of the central bank, also stated at a press conference on September 24 last year that "the central bank's digital currency does not preset a technical route."

In other words, blockchain is not a must-have for DCEP, and other technical routes are also under consideration. ICBC’s solution to achieve “dual offline payment” through non-blockchain technology is a proof of this.

Coincident with the People's Bank of China, the Bank of England also released a discussion paper (Discussion Paper) this month, "CBDC: Opportunities, Challenges and Design" (Central Bank Digital Currency: Opportunities, Challenges and Design), stating that

“While many CBDCs are associated with distributed ledger technology (the technology used by blockchain), the UK CBDC does not have to be based on this, and there is no reason why a centralised institution could not build a CBDC.”

Relevant media stated that this is the first time that the Bank of England has stated that it may not adopt blockchain-related technologies since it began researching CBDC in 2014.

As the two most important central banks in the world, their views on the positioning of blockchain in CBDC at the same time obviously need to attract the attention of the market. What technical route will CBDC of major countries including China eventually take, how will they be linked with the upstream and downstream industries, and what impact will they have on the market, etc., still need to be examined.

However, it should be pointed out that neither China nor the United Kingdom has reached a final conclusion on the positioning of blockchain technology in CBDC.

Yao Qian, director of the Science and Technology Supervision Bureau of the China Securities Regulatory Commission and former head of the Central Bank's Digital Currency Research Institute, wrote in "First Financial Daily" today that the current CBDC research and development plan has not been able to give full play to the advantages of distributed operations under the central bank's central control. The problem is that the issuance perspective is top-down, and the perspective should be adjusted to achieve the goal of "centralized control and distributed operation."

Yao Qian pointed out that currently, central bank digital currency experiments based on blockchain technology in various countries are progressing rapidly, and the content has covered a wide range of issues such as privacy protection, data security, transaction performance, identity authentication, securities-to-cash settlement, and payments-to-cash settlement.

There is reason to believe that as the launch dates of various countries’ CBDC plans approach (such as China’s CBDC is expected to be launched in 2020 and Sweden’s CBDC is expected to be launched in 2021), and Libra becomes more mature, the upstream and downstream competition and cooperation around the CBDC front will become increasingly fierce.