There’s been plenty of buzz around China’s testing its digital renminbi. But its “digital-currency electronics payment”, or DCEP, project, as the People’s Bank of China calls it, represents electronic cash, which other nations can emulate. And a digital yuan is still the yuan.
But combine digital, programmable cash with the infrastructure to move it? Now we’re talking about a different and much bigger change.
Since Xi Jinping made a speech praising blockchain in October 2019, the country has been rushing to deploy it (such as its private-market stock exchanges). Every big city and enterprise is sponsoring projects.
It’s more of a cacophony than a strategy, though, as each of these blockchains has been developed in isolation, using its own programming language and protocols.
Order is being brought to this fervid output.
A group of telecom companies, payments and tech companies have been developing a model to unify these efforts. The Blockchain Service Network is being promoted by a core group including China Mobile, China UnionPay, the State Information Center of China (SIC), and Beijing-based Red Date Technologies, a developer that has driven the BSN since 2018.
The BSN’s mission is to promote interoperability among all of these independent blockchain projects, and thereby drive down the cost for developers.
The BSN Development Association, chaired by the SIC, has today announced Digital Asset has been mandated to unify the smart-contract technologies used by the various blockchain developers, using its DAML programming language. (Digital Asset’s clients include the stock exchanges of Australia and Hong Kong.)
That means developers can write their smart contracts once, deploy the application to their preferred network, and see it work across all blockchains. DAML is open source, so anyone can build smart contracts or add features to apps using it.
Here’s how it works. The BSN consists of “Public City Nodes”, the gateways developers use to build apps on a particular blockchain that represent local blockchain projects.
These protocols include Baidu’s Xuperchain and FISCO-BCOS, an initiative of Tencent’s WeBank, as well as global protocols like Hyperledger Fabric.
Sitting between the PCNs and the blockchains is a middle layer, of which DAML is part. (This layer also includes permissions, such as public and private keys.)
Now anyone building an app will write the smart contracts in DAML, and then deploy it to whatever blockchain they choose. Digital Asset says it will first begin integrating DAML with Fabric and FISCO-BCOS (with which it has a strategic relationship).
There are more than 100 PCNs in China – and currently 15 outside the mainland. That’s because the BSN, including Digital Asset’s role, is not limited to mainland China. The idea is to drive compatibility with international blockchains, such as Ethereum and EOS.
This is tricky because Beijing only tolerates private, permissioned networks that the Communist Party can monitor and control. Public, permissionless networks like Bitcoin and Ethereum, or hybrids such as EOS, are not permitted onshore (but they are allowed in Hong Kong and Macau).
Therefore the BSN has been split, with a mainland version firmly under government control, and an international one that is meant to be compatible with public chains.
This arm of the BSN is based in Hong Kong. Sources tell DigFin the people behind it are still debating what kind of infrastructure to use, as there is a preference for building off a mainland Chinese tech stack.
This would spook many potential users, particularly in light of U.S.-China political tensions. It’s hard to see a global bank putting sensitive data on such a network, so the BSN’s job is to develop safeguards that meet international expectations around privacy, security, intellectual property – in a word, trust.
However, enterprise-blockchain developers can see that BSN is poised to become the world’s largest ecosystem. Anyone who wants to be a part of, say, China’s international trade and investment flows will want to be compatible with BSN. There’s a lot at stake for both China and global business if the BSN can thread this needle.
Part of that involves relying on open-source development. In this sense, Digital Asset’s role is the beginning of BSN’s internationalization. It’s also what sets China apart from other countries considering digital currency projects: it is building the foundations for a global, compatible network of blockchains, which could emerge as a more efficient, transparent, fast, and cost-effective alternative to existing financial rails.
This is where DCEP comes in. The People’s Bank of China has been testing it with the big state-owned banks, telcos, and companies like Didi Chuxing, Meituan, Starbucks and McDonalds. In August 2020, the government announced it would set up bigger projects, including one for the Greater Bay Area, which comprises Hong Kong, Macau, and nine cities in Guangdong Province.
This could see DCEP begin to circulate in a global financial center. Although blockchain execs speculate that China’s immediate goal is to make a splash at the Beijing Winter Olympics of 2022, it has a bigger plan: to free itself from dependence on the U.S. dollar.
This is why, according to sources familiar with BSN in Hong Kong, it is developing ideas about harnessing the digital renminbi without involvement by the Hong Kong Monetary Authority.
Perhaps this is deliberate, reflecting fears that the U.S. will attempt to undermine the Hong Kong dollar’s peg – which would massively complicate China’s access to global capital. Or maybe it’s just that the Hong Kong dollar’s role will remain as a domestic, analog currency, while DCEP will serve for blockchain-based transactions.
A digital renminbi will be able to travel across BSN’s rails. The interoperability of BSN, using DAML for all smart contracts, means other businesses, governments, and multinational agencies will find it easy to connect.
Who wants digital renminbi?
On the one hand, DCEP is still just currency: legal tender, cash in electronic form – another expression of the same yuan. But digitizing the currency could bring Beijing benefits, both to itself and to outsiders.
Internally, a digital currency can give the People’s Bank of China access to real-time information that no other central bank has. This will improve its ability to supervise the banking system and the economy.
DCEP can be programmed to make Chinese monetary policy more effective than just setting overnight interest rates or other market operations.
Programmable money is traceable, which can be used to combat fraud but also to increase the government’s power over its citizens.
Finally it will propel innovation, as more fintechs, banks, and others develop payment, credit, and investment apps and customer experiences that take advantage of digital money.
Challenging the dollar
At the international level, DCEP by itself cannot pose a major challenge to the U.S. dollar, which dominates global payments and central-bank reserves, nor to conventional infrastructure such as SWIFT or credit-card networks. For that to happen, China would still have to liberalize its capital account, which seems unlikely for now.
But DCEP riding the rails of BSN is another matter, by offering incentives such as a yield on holding renminbi or preferable foreign-exchange rates or loan repayment terms. China could entice others to transact in yuan in order to build up usage and spark the kind of network effect that gives the dollar such an advantage today.
As other countries follow China’s example, we will see new use cases for digital currencies. Ditto for corporate initiatives such as Facebook’s Libra, a stablecoin meant to be pegged to a basket of currencies such as the dollar and the euro.
The more of these initiatives that transact across the BSN, the bigger the change to global trade, payments, and reserves management.