China must prevent abuse as it develops CBDC, says former PBOC governor

Zhou Xiaochuan, a former governor of China’s central bank, said that China needs to pay attention to security, keeping costs low and prevention of abuse as it develops its central bank digital currency.

Zhou said Thursday during a forum in Beijing that security has always been a critical issue in finance, especially in the realm of currency. “As technology costs continue to decrease and systems become more convenient, the cost of misuse also decreases,” he added.

“When I mention preventing abuse, it includes efforts to combat money laundering and arms trading,” Zhou continued. “Many arms trades in military conflicts, as well as drug trades involving substances like fentanyl, are often facilitated using cryptocurrencies and stablecoins for payments, making this an area that requires focused prevention.” 

The People’s Bank of China, the central bank, has been testing its CBDC, or e-CNY, and rolled out a pilot app in January 2022. Since the inception of the digital yuan pilots in late 2019, the PBOC has expanded its digital yuan trial to at least 26 locations in 17 provincial-level cities and regions, including Beijing, Shanghai, Shenzhen and Suzhou, state media Xinhua reported in April. 

E-CNY development

Zhou explained that China must continue to operate the e-CNY in a two-tier system. The e-CNY system is built on a two-tier architecture, with the PBOC on the first layer for issuance. Commercial institutions, including commercial banks, internet platform companies and telecommunications operators make up the second layer.

That design ensures the “dynamic evolution” of the digital currency, Zhou said, meaning it's a system that improves service levels and fosters innovation through mutual competition, which “may be particularly important for a large nation.”

Zhou also mentioned that cross-border transactions is one of the important directions of exploration for CBDCs. “It involves both technology and systems, as well as policy orientation,” he said.

Hong Kong, for example, is actively testing the e-CNY for cross-border payments and has already entered the second phase of technical testing to incorporate a predominant local payment system, a government official said last month.