What makes the e-CNY different from bitcoin? Central bank digital currencies share little with cryptocurrencies

China’s digital yuan was seen as a response to Facebook’s cryptocurrency project, but central banks are unlikely to use blockchain for minting digital currencies

Since CBDCs are centralised by design, they do not require a decentralised ledger, and custom solutions may be more secure

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China’s official app for the digital yuan seen on a mobile phone next to 100-yuan banknotes in this illustration picture taken October 16, 2020. The digital yuan was seen as a response to cryptocurrencies, but the underlying technology is quite different. Photo: Reuters

Published: 10:00am, 19 Jun 2022Updated: 6:01pm, 20 Jun 2022

When China announced in 2019 that it was working on its own national digital currency, there was widespread speculation about what role, if any, blockchain would play in a digital yuan, or e-CNY. One reason for this was that news of the digital yuan came just after Facebook announced its own digital currency called Libra, later renamed Diem and killed after its assets were sold off.

While the warning signs of regulatory hurdles facing Facebook were apparent from the beginning, it was not clear three years ago that Facebook, one of the world’s largest tech companies, would fail. So Beijing moved up its timeline to launch the e-CNY.

Mu Changchun, head of the People’s Bank of China’s (PBOC) digital currency research institute, said that year that the digital yuan “isn’t bitcoin and is not for speculation”. While authorities have promoted the use of blockchain for cross-border financing and settlements, cryptocurrencies like bitcoin and central bank digital currencies (CBDCs) typically have very little in common.

Facebook’s Libra was a short-lived experiment in digital currencies. It was eventually rebranded as Diem, but it failed to get off the ground because of regulatory hurdles. Photo: DPA

China, as the only large economy to have trialled a national digital currency, is demonstrative of this fact, and other central banks are showing little interest in using blockchain to manage digital cash. Here is why.

What makes a CBDC different from cryptocurrency?

While the digital yuan attracted broad attention with comparisons to blockchain-based cryptocurrencies, the reality is that CBDCs are almost as different from each other as bitcoin is from the cash in your bank account.

This is because blockchain is unlikely to be used to mint CBDCs. Other database technologies are better suited for scaling across entire populations. When it was created in 2009, blockchain’s biggest asset was that it was the first peer-to-peer currency that did not need a central authority or server. CBDCs obviously do not operate like this, as they would be part of the greater money supply that is directly managed by a central bank.

“If we look at modern database technologies, they’re good enough for securing transactions,” said Jan Ondrus, associate dean of faculty and associate professor of information systems at the ESSEC Business School’s Asia-Pacific campus in Singapore, who has studied mobile payment technologies for two decades. “And that’s what banks are using. That’s what most of us use on a daily basis when we use any kind of applications. When you check your emails on Gmail, or when you write on Google Docs, texts, all of this is stored in a centralised, secure way. So it works.”

Most of today’s money supply is already little more than numbers on a computer. In some ways, CBDCs are an extension of that. The main difference is that the central bank’s backing means that it is a liability directly held by the government institution.

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