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Yifan He: decentralize the eRMB to make it useful

Red Date Tech’s CEO says China can boost the power of its CBDC at home if it decentralizes digital-ID checks.



Yifan He, Red Date Technology

One of China’s leading blockchain executives says his company is running proofs of concept to decentralize use of China’s digital yuan – by tackling how digital identity works.

Yifan He is CEO of Beijing-based Red Date Technology, which operates the Blockchain Service Network (BSN), which is designed to make other blockchains compatible.

There’s a big need for interoperability in China, where hundreds of provincial and municipal governments, ministries, and enterprises are launching blockchain networks.

This flurry was set off by President Xi Jinping, who extolled blockchain in a 2019 speech. DigFin recently collated some of the more notable endeavors.

Yifan He says most of these are just for show. “No one can say what these projects are supposed to do,” he said. “It’s not like in Hong Kong, where the technology actually gets used.”

Rethinking CBDCs

Nonetheless he thinks some of the enterprise projects – such as BSN, along with developments by leading tech firms such as Alibaba and Tencent – have the potential to spearhead a change in the architecture of information technology.

The two use cases he sees making an impact are not about private enterprise, however: it’s about helping make big government initiatives more effective.

One is to augment the promulgation of the eRMB. The other, related project is to make the government’s centralized identity database more reliable and convenient.

China has partially deployed its eRMB, a central-bank digital currency, which it has been working on since 2014. This is a centralized system that feeds into centralized databases run by the state.

Although the system has notched some big user numbers, these are mostly the result of either subsidies or mandates: for example, in Beijing, civil servants are now being paid just with eRMB.

For the vast majority of Chinese consumers and merchants, eRMB is indistinguishable from the electronic form of money they already use in their Alipay or WeChat Pay wallets.

“The government is starting to see that to encourage circulation of the eCNY, it needs to decentralize the system to enable individual wallets to access it,” He said.

Outsourcing digital ID checks

Right now the only way for people to get their hands on eRMB is through the app of one of the participating commercial banks. This is a patchy experience, as banks need to budget for maintenance. Given the current economic downturn, neither local governments nor state-owned banks have the luxury to make this a priority, He says.

He says decentralization doesn’t mean using something like a permissionless blockchain. The solution, He says, is to address digital identiy.

The Ministry of Public Security operates a national database covering the citizenry. This is the source that banks and other enterprises use to verify identities, conduct KYC, and onboard users. This system originated as a paper-based one, with bank branches serving as loci for handling identity papers.

This is being digitized, so if a user wants to conduct banking or payments activity via a bank’s app, they can. From the user’s perspective, they just log on to their banking app. But behind the scenes, the bank needs to verify the user’s credentials. It does this by zipping the message to the Ministry’s database.

The upshot is that this only works when there is an internet or Wi-Fi connection. The government has been looking at ways to use a CBDC when connectivity is down – say, in the wake of a natural disaster. So long as a smartphone has battery life, the user can still log on and use the bank app – if their credentials are on the phone itself, rather than online in a government database.

He says BSN is testing such a system with a number of banks, starting next month. “This basic form of verification will impact many IT systems,” he predicted – with a hedge. “It will take a while.”

Verify by device

Red Date Tech has already been working on a version of this for the international stage. Its Universal Digital Payment Network (UDPN) is meant to allow transactions involving multiple CBDCs, so they can effect cross-currency transfer and settlement.

Now Red Date is trying something similar for the domestic environment, only now in the context of enabling devices to operate wallets with individual verification data.

Under this version, the first time a user wants to use a bank app, she would still have to be connected online, so her credentials would zip to the bank’s website, which in turn would connect to the Ministry of Public Security. But once she was verified, that information would be remembered on her device, like a private key. The second time she logged onto the bank’s app with the same device, it would remember her (with the aid of biometrics, such as facial recognition).

He says there’s nothing groundbreaking about this: “Verification is something IT systems handle all the time.” What’s new, though, is putting the verification power on the device. This has implications for how commercial banks relate to their customers.

In theory, a user with a Bank of China app, that is verified on her phone’s wallet, could use that to communicate with other banks or enterprises. This could allow her to transfer money, or even open a new account with a different organization.

Cash 3.0?

But the bigger change is that the electronic money on the device’s wallet – be it eRMB or commercial bank money or an Alipay account – adopts the property of cash.

“If you have money in the wallet on the phone, you control your own balance sheet,” He said. “The central bank doesn’t have control of it in that form.”

The eRMB is still traceable, however, so the government can track its movements – which is not the same as physical cash.

Yifan He envisages this will lead to a dual-account system in China.

One belongs to the commercial bank. Money accessed through the bank’s app sits in the bank’s electronic ledger. It pays interest on deposits, it manages its own balance sheet, and the deposits fuel the traditional fractional-reserve banking system.

The other is decentralized, the money exists on the device’s own wallet, it is connected to the user through biometrics but the user is responsible for her own “balance sheet”, and the wallet’s operator – a bank, a telecoms company, or a fintech – charges transaction or service fees.

He says it’s not necessary to have a CBDC to realize this system: existing forms of electronic money can become the new “cash”. But if this is applied to the eRMB, and that becomes the sole form of “cash” on the device, it gives the CBDC a unique purpose.

But until commercial banks can touch and feel such a product, they have a hard time getting their head around it, He says. “We tell them the money is no longer on the bank’s balance sheet, and they don’t understand. They’ll need new account measures and other regulations, to define when and where the money moves.”

Decentralizing the eRMB isn’t likely to occur any time soon, He acknowledges. “The big banks and corporations have no incentive to build this,” he said. “The benefits will become more obvious once we have more CBDCs in the next five years.”

Making these work for cross-border transfer and settlement will encourage enterprises to design for similar benefits domestically, he argues.

“Then you won’t have a need for a username or a password,” he said, echoing a vision by many players in the payments and crypto world. He even cites Google’s password manager as an example.

In this, Red Date is just another fintech. But China isn’t about to replicate Google, and decentralization in China is not the same as decentralization elsewhere: it’s outsourcing the identity-verification process to the local device to better serve the state’s digital controls over money.

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