Central bank digital currencies: From design to issuance and distribution — A case study of China’s sovereign digital currency

There has been an increasing volume of research and discussion on central bank digital currencies (CBDCs) over the last four to five years, but no central bank of a sovereign country has been able to launch its national digital currency on a large scale. This paper uses China’s national digital currency (digital currency electronic payment, DCEP) as a case study to explore the growing pains of launching a new digital currency. Our findings reveal that central banks need to design CBDCs with an eye to not only technological innovations but also business values and priorities that underpin monetary policies and operations of their country, together with effective circulation of money flows in the economy. This paper proposes three innovations: first, it shows the difference between digital wallets and bank accounts and sets different real-name authentication requirements for the respective users. Second, it suggests replacing the existing ‘know your customer’ with a ‘know your coin’, thus protecting user privacy and commercial viability while satisfying the Anti-Money Laundering/Combatting the Financing of Terrorism (AML/CFT) requirements. Third, a 1+M+N operating mechanism is recommended to substitute DCEP’s existing two-tier operating mechanism, and the justification is provided.