e-CNY: The Players

China’s tech crack down has truly reached mainstream in the US; even the Daily Show is talking about it.

With mainstream attention comes mainstream-level noise, confusion, and missing the forest for the tree. The biggest “forest” that people might miss is China’s development of its own blockchain-based digital currency, the e-CNY, amidst its broad ban on cryptocurrency (the “tree”). Granted, this “forest” isn’t big yet. So far, the e-CNY is deployed in 1.3 million endpoints across 10 cities and has only processed 70 million transactions. This adoption is meager, and thus easy to miss if we don’t pay attention.

China is both banning and embracing crypto.

Similar to our 3-part series on “Open Source in China: the Players, the Game, the Trends”, this post is Part I of a multipart series on the e-CNY, where we focus on the relevant players of this undertaking. Part II  focuses on the e-CNY’s technology. Part III focuses on its strategic value and implications (the Game, if you will). Part IV is a deep-dive on the e-CNY product.

Note on terminology: e-CNY is the current official name (though still subject to change), thus that’s the term we will use throughout this series. This digital currency used to be called the DCEP (Digital Currency Electronic Payment); the name changed when the People's Bank of China (PBOC) published a progress update whitepaper (in Chinese) this July.

Player 1: PBOC -- Currency Gold and Silver Bureau (Security Bureau)

The most important institution driving the e-CNY’s development is the PBOC -- China’s central bank. But just calling it a central bank diminishes its far-reaching power. To analogize it more accurately from a US perspective, the PBOC is more of a combo of the Federal Reserve, the Treasury Department, and certain divisions of the Justice Department in charge of cyber and financial crimes. It also built its own blockchain-focused R&D lab.

There are two divisions under the PBOC umbrella driving the e-CNY project:

• Currency Gold and Silver Bureau (Security Bureau)
• Digital Currency Research Institute (the R&D lab, more on it in the next section)

The Currency Gold and Silver Bureau (Security Bureau) is the more influential one among the two divisions. This was evident during the press conference releasing the aforementioned whitepaper in July, where two of the four officials present were from this division -- the bureau chief and his deputy. The other two officials were the PBOC’s deputy governor, who of course ranks above the bureau chief, and director of the Digital Currency Research Institute, who ranks below them all.

In short, the Currency Gold and Silver Bureau (Security Bureau) appears to be driving the “e-CNY bus”. This setup is important for two reasons.

Money flow: the Currency Gold and Silver Bureau (Security Bureau) is China’s mint. Among other things, it is in charge of issuing, managing, recycling, and destroying the CNY -- the basic responsibility of any mint. However, this responsibility becomes a lot less “basic” when a country’s currency usage is rapidly digitizing. That’s the case all over the world, but especially so in China. The Bureau has been having a hard time keeping up with the ubiquity of AliPay and WeChat Pay, as well as the many digital fintech services they have spawned. Building the e-CNY on a blockchain has obvious appeals to this Bureau. In plain English, a blockchain’s core use case is an unchangeable, incorruptible way to keep track of something (in this case, currency).

Financial crime and public security: beyond keeping track of the CNY currency, this Bureau also has a security portfolio, thus the “(Security Bureau)” part of its official name that I have not addressed until now. This is the only bureau under the PBOC that has a security portfolio. This mandate could range widely, from financial crimes and money laundering, to any currency-related behaviors that may affect public security. What constitutes “security” is intentionally vague. And what is a “crime” and how certain behaviors affect “security” means different things in different countries with different governing systems. Regardless of how “security” is defined, just keep in mind that the PBOC bureau that’s driving the e-CNY development has a strong interest in “security” of all flavors.

Player 2: PBOC -- Digital Currency Research Institute

The second important player, which I alluded to, is the PBOC’s Digital Currency Research Institute. This in-house R&D lab is tasked with researching and developing the necessary technology to make e-CNY real.

This Institute was founded in December of 2016. The timing is important to contextualize. From mid-2015 to February 2016, China experienced several stock market crashes, when trading would halt multiple times a day or completely stop. The volatility was a global issue, as these crashes affected other stock markets around the world.

In October 2015, the PBOC also launched a CNY-based Cross-Border Inter-Bank Payments System. The goal is to further “internationalize” the CNY by promoting it as a currency that can be used to settle cross-border transactions. This launch did not go well, because the stock market crash that happened shortly after made China’s financial system look unstable. The timing was bad; in comes the Digital Currency Research Institute.

Digitizing a national currency on a centralized blockchain could make the CNY a more efficient, cost-effective, and thus attractive option for cross-border settlement. In fact, that is the main use case of many USD-tracking stablecoins, like Tether, which is widely used to settle payments between merchants in China and Latin America. They just exist outside PBOC’s jurisdiction. The PBOC’s desire to “internationalize” the CNY has been many years in the making; the e-CNY is the latest iteration.

As the e-CNY’s official R&D lab, the Institute is responsible for most of the blockchain-related patents filed in China, which now number in the hundreds. Other state-owned enterprises like China Telecom and payment products like AliPay are also actively contributing patents, likely under the Institute’s guidance.

Player 3: Ministry of Industry and Information Technology

It’s clear that the PBOC has centralized most of the authority connected to the e-CNY. However, there is another government body that may also have a role to play: the Ministry of Industry and Information Technology (MIIT).

I’ve discussed MIIT in detail in my “Open Source in China” series. It has a broad mandate in regulating and shaping the technology industry. It is also heavily involved in open source. The vast majority of crypto and blockchain projects are open source projects, from Bitcoin and Ethereum, to Dogecoin and Solana. Thus, MIIT’s involvement in the e-CNY is natural, though the e-CNY will likely never be an open source project.

So far, MIIT is leading the process of building a national blockchain standard. Last April, it formed the National Blockchain Committee to develop this standard. This committee consists of representatives from elite universities (Beida, Tsinghua, Fudan), tech companies (Tencent, JD, Baidu, but no Alibaba), and the vice-director of the Digital Currency Research Institute.

Player 4: Universities

In order for e-CNY to live up to its lofty ambition, China needs blockchain technical talent, which is in short supply. Beyond the elite universities who are members of the National Blockchain Committee, many of which offer a blockchain course here and there, second and third-tier universities also see this talent demand gap as an opportunity.

One of the more visible universities in this space is the Chengdu University of Information Technology (CUIT), which announced the country’s first bachelor’s degree program in blockchain in 2020. Chengdu, home of the giant pandas and capital of the Sichuan province, may seem like an unlikely location to foster blockchain education. But Sichuan, with its cheap power, was also one of the hotbeds of Bitcoin mining until the recent ban.

It’s too early to tell whether this four-year bachelor’s degree in blockchain will yield the talent the e-CNY needs, if only because its first graduate won’t step into the job market until 2024. The business competition among second and third-tier universities in China is also fierce, often resulting in poor-quality programs that glom onto buzz words to attract tuition money.

Nevertheless, these university programs are a crucial element to China’s larger blockchain story. By issuing its blanket ban on crypto, China has decided to rely solely on its domestic talent to build the e-CNY and other blockchain applications, while effectively shutting out all foreign talent. It’s a high stake, high risk bet.

No Startups or VCs?

Astute readers may have noticed that I have not mentioned any startups or VCs in this discussion. Sadly, the startups, VCs, and private tech sector won’t be much of a factor in shaping China’s blockchain agenda in my view. If I had written this post last year, I would’ve mentioned a handful of startups, large crypto exchanges, the miners, and some investors. The recent ban changed everything.

The e-CNY is arguably the largest CeFi (centralized finance, as opposed to decentralized finance or DeFi) project in the world. Whatever shape the e-CNY takes will largely be what the rest of China’s blockchain industry takes. The only thing startups and VCs can do is wait for clarity, then follow along.

I hope this Part I of our multipart series on e-CNY gives you a solid overview of the relevant players.  See Part II (Technology) and Part III (Strategic Value and Implications) of this series.

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