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China Aims to Replace Cash with Two-Tiered Digital Currency, Says New Binance Report

A fresh research report from the major cryptocurrency exchange Binance speculates over details on China’s upcoming digital currency. Specifically, Binance suggests that the digital currency will most likely have a “two-tier” system. As such, this system could replace the fiat paper notes and coins currently in circulation.

China’s digital currency will reportedly come with 1:1 fiat backing

This report was released yesterday. Furthermore, it delivers some interesting insights on the People’s Bank of China central bank digital currency. First and foremost, the report suggests that the CBDC will receive backing by the fiat currency of China, the renminbi.

In addition to this, however, the digital currency will supposedly also have a “two-tiered” structure.  This essentially means that the digital currency will have an intricate structure to support a myriad of actors. These include commercial banks, business and individuals, as well as the People’s Bank of China itself.

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Put simply, this system will use a “first layer” which connects the People’s Bank of China with commercial banks. This will allow for issuance of the currency, as well as for “redemption” of it. Consequently, this layer will only see interaction from the PBoC and commercial banking actors.

We know relatively little about what banks the People’s Bank of China digital currency will initially work with. Nonetheless, recent rumors suggest that it will launched with a few banks first. Specifically, these supposedly include online retail behemoth Alibaba and Tencent – along with various banks.

Chinese CBDC will use a “two-tier” system

However, the second layer will then see the commercial banks connect with individuals and the general retail market. Essentially, Binance predicts that individuals will be able to “withdraw” the currency from commercial banks. 

After this, the digital currency will supposedly circulate to businesses, which can deposit it back to commercial banks. The following illustration, from the Binance Research report, showcases a prototype for this system.

Image Source: Binance

According to Binance, this system could allow for fund transfers without needing a bank account. The report also says that the aim of this digital currency project is to create a CBDC “equal” to cash.

“The end goal for the CBDC is to display a turnover rate as high as cash, while achieving ‘manageable anonymity’. In other words, in the first-layer network of the CBDC, real-name institutions are expected to be registered while the transfer in the second-layer network would be anonymous from the perspective of users.“

However, some questions remain over how this system and technology would work. The system will reportedly be able to handle up to 300,000 transactions per second, a staggering amount. It is currently unclear how blockchain technology will acheive this. Moreover, Binance also reports that “smart contract architecture” has been on the table.