Digital Euro Association Blog

OPINION – The technology behind the Digital Yuan


Exactly one year ago, in early January, the People’s Bank of China (PBOC) launched the Digital Yuan wallet apps for Android and iOS.

More recently, the People’s Bank of China included the country’s digital currency in calculations of the amount of currency in circulation in December, a first for one of the early adopters of a central bank digital currency (CBDC) and the world’s second-largest economy, according to data released by its central bank two weeks ago. 

As stated by the PBOC, “Starting from December 2022, e-CNY in circulation has been included in the amount of currency in circulation (M0). At end-December, e-CNY in circulation stood at RMB13.61 billion. The revision has not caused notable changes to month-end M1 or M2 growth rates of 2022”. There is 13.61 bn yuan (roughly $2 bn) in circulation, which represents roughly 0.13% of the 10.5 tn yuan in circulation.

Also, last week the digital yuan was used to purchase securities for the first time: Soochow Securities enabled e-CNY payments on its mobile application, marking the first use case of the CBDC in securities market trade. 

The Digital Yuan is one more example of China being at the forefront of new technologies.

In July 2021, the People´s Bank of China working group published its first and only official report on the digital yuan, “Progress of Research and Development of e-CNY in China.” The report, albeit short, walked through the government’s research and development (R&D) process and took care to distinguish the e-CNY, which is a Central Bank Digital Currency (CBCD), from cryptocurrencies and stablecoins.

Specifically, the report defined e-CNY as the digital version of retail fiat currency with a two-tier operating model: in the first tier, the PBOC issues and controls its supply and doles it out to authorized entities such as commercial banks, telecom operators, and payment service providers; in the second tier, only those authorized entities may distribute it and activate its use in the economy.

When it comes to the role of Blockchain in the Digital Yuan, the PBOC chose a conventional approach to the CBDC design because of the performance and scalability challenges that blockchain presented.

But the PBOC did not totally rule out distributed ledger technologies. In a September 2021 speech, Di Gang, deputy director of its Digital Currency Institute, said that the PBOC was exploring the use of blockchain in three areas: First, in the core layer of Project Inthanon-LionRock prototype blocks, and maintain CBDC balances. Second, in the digital yuan issuance layer, as in the mCBDC project. Here tamper-resistant distributed ledgers could help with reconciliation. Third, in trade finance, as in the proof of concept (POC) linking Hong Kong Interbank Clearing’s blockchain-based eTradeConnect and the PBOC’s trade finance platform.

Here in this case of Trade Finance, blockchain in combination with artificial intelligence and robotic process automation could minimize paper-based and people-driven processes, lower administrative costs, and extend services to small and medium-sized enterprises that typically use open account transactions, where sellers ship and deliver goods before buyers’ payments are due.

In addition to that, China is already very advanced in terms of digital payments and the digital yuan doesn’t disrupt the way to pay (QR code and face payments being already widely used through Alipay and WeChat Pay). Users can use their bank app or wallet (Alipay, WeChat) to connect with the official “digital yuan” wallet to be activated. 

However, the biggest innovation is the usage of smart contract technology. 

Through smart contracts, users can agree on the use time, use scope and use rules: non-transferrable, non-redeemable, time-out recovery, targeted use, targeted crowd, targeted scene, consumer welfare, coupon reduction, designed merchant consumption, etc.

The digital yuan incorporates a variety of elements. For security, it combines a digital certificate system, digital signatures, and encrypted storage to reduce the feasibility of counterfeiting, transaction falsification or reversibility, and double spending, which refers to the risk—particularly when parties exchange digital currency—that one party could concurrently send a single unit of currency to two different accounts. The PBOC has not detailed how its technology solves the double-spending problem, but it claims that its “multi-layer security system” will manage such risks and guarantee the safety of the e-CNY life cycle, from password and data security to privacy of financial information and business continuity.

The Double Spending Problem makes reference to the risk (particularly when a digital currency is exchanged) that a person could concurrently send a single unit to two different sources.

Furthermore, the digital RMB wallet app allows dual offline payments, meaning that payments can be made from the payor to the payee while neither is connected to the internet

For financial inclusion, the system requires no bank account or Internet connectivity (actually, the digital yuan app for android rolled out offline usage and use with a dead battery). Users can obtain and use “smartphone-free hardware wallets” with security chips and based on integrated circuit cards without a bank account; and they can make “dual offline payments,” meaning that the payer can transfer funds to the payee, likely through near-field communications technology. Smartphone users can download the free software wallet app, but it requires linking to one of the “authorized operators”.

Since CBDCs are “programmable money,” each government and central bank must determine where they want to put their focus. Regarding programmability, the PBOC references the use of smart contracts, but not in terms of their inventor Nick Szabo’s definition, “an application that runs in a distributed and trust-minimized manner on a blockchain,” that is, running “on a secure consensus protocol across a network of computers rather than on an individual remote computer or centralized server” and running without reliance on a particular person or organization to secure it.

Payments in e-CNY may be programmable in the way that payments with credit cards are programmable, for example, through application programming interfaces.

A big concern when it comes to CBDCs in general is that of anonymity and privacy. When it comes to China, Mu Changchun, the Director General of China’s central bank Digital Currency Research Institute, explained in a conference that “There’s actually a big misunderstanding about the anonymity issue of the eCNY system.” 

In August 2021, the Chinese government formally passed the Personal Information Protection Law (PIPL). “Under that law, the telecom companies cannot release any information, any identity information, to any third parties, including the central bank,” said Mu.  

Consequently, neither the central bank, commercial banks, nor payment providers can access the personal information linked to that number. The only transactions accessible to the central bank are via the institutions.

Separately the digital yuan aims to enhance transaction privacy, making it harder for private firms to track a user’s activities between separate merchants. Consequently, all wallets have a sub wallet function (which will use tokenization and encryption) in which each online retail store can have a separate wallet to avoid linking a person across retail outlets. 

“The eCNY system collects the least transaction information compared to traditional electronic payment systems,” said Mu. “The concern personally I have is how to effectively prevent and combat money laundering, terror financing and tax evasion under an effective anonymous eCNY system.”  

To sum up, China is at the forefront of new technologies. The Digital Yuan is a great example of new technologies applied to the area of payments, but China is at the forefront of Blockchain technology as well as AI.  

*This author originally appeared on

This article was prepared by the author. The views expressed in this article are the author’s own and do not necessarily reflect the views of the Digital Euro Association.



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