RegTech

China’s Central Bank Digital Currency won’t be Blockchain-based or rival to Alipay- Rich Turrin

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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.

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.

“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.

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“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.”