1.1 Background
The People’s Bank of China (PBOC) has long researched a central bank digital currency (CBDC), and its launch is imminent. Since 2014, the PBOC (hereinafter referred to as “the PBOC”) has organized experts to form a dedicated research team for the legal tender digital currency. At the end of 2019, Caijing Magazine reported that the PBOC’s Digital Currency Electronic Payment (DCEP) was undergoing pilot testing in Shenzhen and was on the “eve of birth,” poised to enter real-life application scenarios. In January 2020, the PBOC stated that it had largely completed top-level design, standard formulation, functional development, and joint debugging tests for the legal tender digital currency.
In April 2020, during the PBOC’s national video-teleconference on currency issuance, gold & silver management, and security protection work, the PBOC proposed strengthening top-level design, steadfastly advancing DCEP R&D, systematically reforming cash issuance and withdrawal systems, and accelerating the transformation of banknote processing operations, issue vault guarding, and issue fund transportation.
DCEP may currently be under testing. According to Caijing Magazine’s reporting on the DCEP pilot program, regulatory authorities and pilot arrangements have been clearly defined:
1) Regulatory authority: DCEP is led by the PBOC’s Department of Currency and Gold, with implementation carried out by the PBOC’s Institute of Digital Currency. The Department of Digital Currency and Anti-counterfeiting under the PBOC’s Department of Currency and Gold is the sole official department responsible for DCEP-related matters.
2) Pilot institutions: Includes the four major state-owned commercial banks—ICBC, Agricultural Bank of China, Bank of China, and China Construction Bank—as well as the three major telecom operators: China Mobile, China Telecom, and China Unicom.
3) Pilot use cases: Cover transportation, education, healthcare, consumption, and other areas targeting retail (C-end) users. Pilot banks may select use cases based on their respective competitive advantages.
4) Pilot locations: DCEP is currently piloted in Shenzhen and is also expected to launch in Suzhou. Recently, the Yangtze River Delta Financial Technology Co., Ltd.—a PBOC-affiliated company—has urgently recruited blockchain-related talent. All four major banks have established closed DCEP development project teams in Beijing.
5) Pilot timeline: Two phases—small-scale, closed-loop scenario pilots at the end of 2019, followed by large-scale rollout in Shenzhen in 2020.
6) Pilot progress: Testing of DCEP-related standards and payment system integration is proceeding concurrently.
Multiple factors drive the launch of DCEP. Based on public statements by PBOC officials, key motivations include:
1. Aligning with the digital economy wave and promoting digital economic development.
2. Addressing several issues inherent in the existing paper currency system—for example: (1) high costs associated with issuance, printing, withdrawal, and storage, along with a multi-tiered circulation system; (2) inconvenience of physical carrying; and (3) susceptibility to counterfeiting and uncontrolled anonymity, posing risks of money laundering and other illicit activities.
3. Curbing public demand for private cryptographic digital currencies and safeguarding national monetary sovereignty.
4. Creating room for negative interest rates, thereby resolving, at a systemic level, the constraint imposed on negative-rate policy by public cash withdrawals.
1.2 Contrarian Views vs. Market Consensus
Payment service providers with relevant experience and licenses are likely to become DCEP wallet operators. The market believes DCEP adopts a two-tier operational model (“PBOC–Commercial Banks”), excluding non-bank institutions from participation. However, according to PBOC patents, we find that DCEP “wallets” may enable transfer and payment functions without direct reliance on bank accounts. We believe payment service providers with proven expertise and requisite licenses could enter the DCEP value chain and potentially earn payment service fees.
DCEP may incorporate smart contract functionality to enable targeted issuance and monitoring. The market views DCEP merely as digitized fiat currency. We contend that the market underestimates DCEP’s vision and potential real-world impact. As digital cash, one core objective of DCEP is to resolve the difficulty of monitoring physical cash. Per PBOC-submitted patents, DCEP may embed smart contracts so that funds only become effective upon satisfying specific conditions—such as particular economic states, time points, interest rates, or recipient entities.
DCEP carriers may include chip-based smart cards. The market assumes DCEP carriers will be limited to mobile apps. Yet, per PBOC patents—including proposals submitted by the PBOC’s Institute of Printing Science and Technology—we believe chip-based smart cards are also under consideration. If implemented, chip manufacturers offering secure storage solutions would benefit.
Opportunities in transaction security and application development for DCEP must not be overlooked. The market perceives investment opportunities in the DCEP value chain as confined to identity authentication and payment services. We argue that opportunities in transaction security and application development are equally significant. For instance, since DCEP is safer than commercial bank deposits yet holds equivalent face value, an over-the-counter (OTC) market for DCEP may emerge—a risk warranting close attention. Additionally, per statements by Yao Qian, Director of the PBOC’s Institute of Digital Currency, and related PBOC patents, DCEP may facilitate matchmaking for investment & financing or other applications—opportunities vendors should monitor closely.
1.3 Investment Recommendations
We recommend focusing tightly on the value chain and prioritizing three core themes: “Bank IT,” “Identity Authentication,” and “Payment Services”:
1) Bank IT. Whether developing DCEP systems for the PBOC or commercial banks—or adding custom fields to DCEP, or building user-facing applications and systems—bank IT service providers remain indispensable to DCEP. Examples include Kingsoft Cloud Software, Changliang Technology, and Sifang Jingchuang.
2) Identity Authentication. Identity authentication is an essential component across PBOC-submitted digital currency patents, relying heavily on encryption technologies and Certificate Authority (CA) credentials. We favor companies with relevant capabilities, such as Wstnet, Digital Certification, and Gel Software.
3) Payment Services. Although DCEP follows a two-tier “Central Bank–Commercial Banks” operational model, our analysis of PBOC patents suggests third-party “wallet service providers” beyond commercial banks may play critical roles. Firms with electronic payment experience or licenses stand strong chances of inclusion in pilot programs—for example, Hailian Jinhuì and Newland.
Additionally, the four major state-owned commercial banks—ICBC, Agricultural Bank of China, Bank of China, and China Construction Bank—are tasked with delivering DCEP to the public. Meanwhile, China Mobile, China Telecom, and China Unicom may participate in upgrading and transforming bank IT systems. Institutions serving these major banks and telecom operators thus hold significant potential in the DCEP ecosystem.
1.4 Risk Warnings
Slower-than-expected progress in PBOC CBDC R&D; delays in DCEP rollout relative to expectations.