Shanghai-based fintech veteran Rich Turrin says that despite the widespread association between distributed ledger technology and cryptocurrencies, China’s hotly awaited digital renminbi will not be based on blockchain technology.
In an interview with China Banking News Turrin said China’s central bank digital currency (CBDC) will instead mark an evolution from pre-existing payments systems created by tech giants such as Alipay and WeChat, as practical challenges mean that the blockchain is not the best technology to use for its underlying foundation.
“Here’s the amazing thing, for a country that is a leader in blockchain adoption, China’s central bank digital currency does not mean blockchain,” said Turrin.
“Many believe that central bank digital currency equals blockchain, but it really does not. In fact China’s PBOC has been very clear that blockchain does not have the performance requirements for the front-end retail-facing interface and the transmission of cash across their network.
“To give you an example, Alipay’s network on Single’s Day reached up to 500,000 transactions per second, which is well beyond anything that blockchain could ever possibly handle.
“Blockchain networks simply cannot go anywhere near that, so PBOC is very clear that this is not a blockchain solution on the front end.”
Turrin believes that PBOC’s CBDC instead marks an evolution of pre-existing digital payments systems that were developed by tech giants AliPay and WeChat Pay last decade, and had a transformative impact on the Chinese economy.
“In my coming book China’s Digital Currency Revolution I talk about digital currency 1.0 and 2.0
“You really have to think that currency is already digital, with things like cheques and credits cards. Money doesn’t sit in a bank or a box, it’s already a digital ledger item at a bank.
“The first generation for China’s digital currency was really Alipay and WeChat Pay, they really started this whole revolution.
“It was so successful that the Chinese government looked at it and said – okay then – people want digital payment and 85% of all payments in the country are already digital.
“So why not take the next leap to make a true central bank currency. And that’s version 2.0 of digital currency in China.”
While the CBDC will not be blockchain-based, Turrin nonetheless expects distributed ledger technology to play an important ancillary role in China’s CBDC at a lower level of the system.
“There are different layers of the central bank digital currency and it is probable that one of those lower levels will have blockchain,” he said.
“This is a two-tier central bank digital currency. Central banks gives the digital currency to bank or financial institution, and the financial institution delivers it to consumers.
“They’re still working out exactly how the central bank will record and notify the financial institutions of their allocations of central bank digital currency. This is the layer where they’re thinking about using blockchain.”
Given that the Chinese CBDC marks an evolution of pre-existing digital payments developed by the tech giants, observers have speculated that its deployment could render its predecessor systems obsolete.
Turrin does not consider this to be likely given that the infrastructure created by the likes of Alibaba and Tencent still plays a vital role in ensuring the security of holdings and the facilitation of transactions.
“The CBDC gives people a very interesting new capability – direct digital payments from me to you without an intermediary,
“This means no bank as an intermediary, no Alipay is an intermediary and no WeChat Pay is an intermediary.
“I can take my phone and put it near yours to transfer money by means of near-field communications – you can directly transfer money.
“That’s wonderful, but the reality is that if you have large amounts of digital currency on your phone it also means that if you lose your phone you lose your digital currency/
“You will still want to keep your digital currency in a wallet provided by either a bank or an Ant Financial or a Tencent, because you certainly don’t want to keep a large amount of digital currency on your wallet on your phone”
Turrin further points out that the platforms that Alibaba and Tencent have created play a major role in the economic lives of Chinese citizens, and possess the requisite “stickiness” to retain customers.
“What Alibaba and WeChat have both done is build these tremendously efficient platforms that are what we call in the platform business sticky – people use them and they want to use them.
“I have my household bills paid partially on WeChat Pay and another part on AliPay, and I use them every month all the time.
“Even if you give me a digital currency my billing is still going to go through those entities. It’s already set up, so why would I bother changing them.
“Going to central bank digital currency makes it so that you can pass digital currency around without the need for a third party.
“But these parties firstly provide some sort of security, and secondly they provide platforms which allow you to connect and more easily interact with whoever it is that needs payment. They’re not going away by any stretch of the imagination.”
Rich Turrin is the author of the best-selling “Innovation Lab Excellence” and soon to be published “China’s Digital Currency Revolution.” He previously headed IBM’s Fintech Innovation Lab in Singapore and IBM’s banking risk technology team in China after a 20 year career in banking.