Latest Shanghai test gives preview of card-based hardware wallets for the digital yuan

China’s forthcoming central bank digital currency will be compatible with a hardware wallet that may eventually look like a credit card.

According to Chinese state-owned media reports this week, doctors in the Shanghai Tongren Hospital have been invited to test card-based digital yuan wallets in select shops and canteens within the facility. 

Based on the reports, the hardware wallet is of the size of a typical bank card and comes preloaded with digital yuan. The cards in the Shanghai hospital test appear to be made by the Postal Savings Bank of China, one of the country's state-owned commercial banks.

The prototype card has a small display window on its top right corner, which shows the current balance of the wallet as well as the amount of money spent on the latest transaction.

To pay for goods, doctors in the hospital can put their digital yuan cards against a sensor device and the display shows the amount of spending is automatically debited.

The process does not require the wallet to be connected to the internet. It's based on the digital yuan's offline touch-to-pay feature, which was also tested in the recent Suzhou trial.

Controllable anonymity

It's not news that China's digital yuan will come with a hardware wallet. Last August, when the China Construction Bank accidentally opened up digital yuan wallets for public users to activate via the bank's mobile app, the terms and services revealed that a hardware wallet — in addition to a digital yuan mobile app wallet — was in the works.

In both scenarios, the digital yuan would be in the user's custody instead of being held by a bank. But a hardware wallet is different from a mobile app wallet in the sense that it doesn't rely on a third-party app via a smartphone. To a certain extent, the distinction is similar to that between a crypto cold wallet and an HD (hierarchical deterministic) wallet.

China has so far conducted three city-wide tests by giving away free digital yuan to local residents via a lottery — first in Shenzhen, then Suzhou, and now back to Shenzhen for a second run.

In all three tests, lottery-winners were required to download a digital yuan mobile app on their phones via an invitation link and choose to activate the app via one of the supported Chinese commercial banks. By default, they must complete a know-your-customer process and submit real-name verification.

A digital yuan hardware card, on the other hand, can offer more privacy than mobile app wallets, according to another Chinese media outlet CLS. It is designed so that if a user wants to have a hardware wallet that's anonymous, there will be a cap on the balance. This is in line with previous assertions by central bank officials that the new digital currency would feature something they call "controllable anonymity."

But if users want to have a hardware wallet with a much higher balance cap, then the wallets must be linked to a real-name identification when users activate them at a designated bank.

The CLS report said users will be able to top up hardware digital yuan wallets via either a special terminal or using their phones.

In essence, the hardware card resembles a wallet with physical cash in it. Instead of handing out bank notes, users put the wallets against a sensor device to change hands of their digital yuan. Just like a physical wallet, if it's lost, it's lost. Anyone who can get their hands on it will be able to see and spend the balance.

Anonymity aside, Ma Jun, the chairperson of the Tongren Hospital, said one advantage of the hardware wallet is being more user-friendly for elderly people who may not be tech-savvy enough to use a mobile app.

"We do see a lot of senior citizens who are less acceptive to smartphones," Ma said in an interview with Xinhua News Agency. "The hardware digital yuan wallet can make it more convenient and comfortable for senior citizens to use since it's tangible with a clear visibility of the balance."