Blockchain Decentralisation at Odds with Needs of Chinese Central Bank’s Digital Currency

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An article published by the official media outlet of the Chinese central bank says that the decentralised nature of blockchain ledgers is contrary to the needs of a central bank digital currency.

Prior to his retirement former People’s Bank of China (PBOC) head Zhou Xiaochuan revealed that the Chinese central bank had established a research unit for the development of its own Digital Currency Electronic Payment (DC/EP) system with the State Council’s approval.

An article recently published by Financial News – PBOC’s official news outlet – point out that the blockchain may not be the ideal technology for the deployment of a central bank digital currency, despite being all but synonymous with the concept of virtual money.

The article by Yu Chunqi (于春奇) entitled “Differences and Correspondences between Blockchain Technology and the Needs of Central Bank Digital Currency” (区块链技术与央行数字货币需求的分歧和应对),says that the blockchain is certainly one of the technologies under consideration for the development of PBOC’s digital currency.

“The overall development process for a central bank digital currency is steadily progressing, and the blockchain is undoubtedly a hot contender for the technological basis,” writes Yu.

Yu points out however that there is a fundamental conflict between the decentralised nature of the blockchain and the “top-level” structure of a central bank digital currency.

“While [blockhains] are meet the needs of a central bank with respect to digital currency in certain areas, there are an even greater number of divergences.

“Central bank digital currency cannot even slightly waver in its intrinsic character as the national statutory currency, while simultaneously using new technology to achieve transaction optimisation.

“The central bank serves as the ongoing foundation of a national statutory currency…and within a blockchain system it should enjoy the highest authority and macro-control capability overriding other nodes.

“This is directly contrary to the decentralised design concept of the blockchain.”

Yu further points out while the accessibility of transaction information provided by a blockchain brings benefits, it can also run contrary to the confidentiality needs of central bank digital currency.

“All information for token products can be known to members of the decentralised system…for a central bank digital currency this is both an extremely important advantage, as well as a hidden hazard that requires cautious handling.

“The advantage is that central banks can use big data analysis to acquire a deep understanding of economic behaviour on the foundation of digital currency information, grasping the macro from the perspective of the micro, raising the efficiency of macro-prudential regulation, and effectively preventing systemic financial risk.

“The hidden danger is that the blockchain mechanism requires that this information be shared by all nodes of the consensus system instead of exclusively held by the central bank, while a further consideration is that central bank digital currency will inevitably require the address and real name verification of users.

“This information is not only a microeconomic account of national economic activity for a given timeframe, but also a detailed account of the receipt and expenditure activity of token holders, possessing extremely important political, economic and social significance.

“If leaked, this not only means that critical data on the state of the national economy has been revealed externally, it could also cause widespread sensitivity and concern amongst token holders about privacy.”

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