According to the scheme big data technologies will be used to combat money laundering

10 min readNov 11, 2020

In August 2019, representatives from the People’s Bank of China said the country’s sovereign digital currency was almost ready to launch after five years of development.
Mu Changchun, deputy head of the payment division at the central bank, stressed that a digital currency prototype (CBDC) is ready, and the department’s research group has fully worked out the blockchain architecture for it.
Notably, this announcement was made shortly after the publication of the Libra documentation from Facebook. Thus, it is possible that the Chinese authorities saw some kind of threat in the means of payment from the world’s largest social network and accelerated the arms race.
So far, NBC has not published any official document detailing the operating principles and objectives of the CBDC launch, and information from open sources is fragmented and often contradictory.
Nonetheless, ForkLog has studied publicly available information, including statements from experts close to NBC, and invites readers to familiarize themselves with the key characteristics of the Chinese digital currency.
Contrary to Libra and the USA
According to CoinDesk’s Wolfi Zhao, NBC has stepped up its efforts to create a new means of payment recently in hopes of getting ahead of Facebook with its Libra initiative.
Away from the central office of the regulator, a dedicated team from the Digital Currency Research Laboratory is working on the CBDC. The work has been taking place in a closed environment since at least the beginning of summer, therefore, the team is fully focused on the project.
As already mentioned, much of the information about CBDC is still under wraps. Information about the timing of the launch of the digital currency is also contradictory, as well as about the participation of large Chinese companies in the project.
However, it has recently become known that NBC may grant unique digital currency rights to seven entities:
the largest financial institutions of the country — China ConstructionBank, Industrial and Commercial Bank of China, Bank of China, Agricultural Bank of China;
conglomerates Alibaba and Tencent;
international payment system Union Pay.
One of the sources close to the NBС emphasized that the list of organizations could be expanded.
It is noteworthy that Tencent soon denied its participation in the project, and the People’s Bank of China did not confirm the information on the timing of the asset’s release.
CBDC may be positioned as a kind of “Chinese answer” to Libra. The latter, according to Sun Tianqi, a spokesman for the State Administration for Foreign Currencies of the PRC, could significantly affect cross-border capital flows and become an obstacle to the internationalization of the yuan.
A similar opinion is shared by the former head of NBC, influential economist Zhou Xiaochuan. He stressed that Libra could pose a threat to Chinese payment systems and the national currency, and also advised the PRC authorities to take appropriate “precautions.”
According to some experts, the Chinese CBDC is intended not only to become legal tender within the country but also to promote the internationalization of the yuan, which is especially important against the backdrop of an escalating trade war with the United States.
Key characteristics of digital currency
The Bank for International Settlements (BIS), in one of its studies, proposed the “Money Flower” model, which characterizes various types of digital currencies of central banks.
Key characteristics of digital currency
Graph: BIS
According to the BIS classification, the digital currency of NBC can be public funds and digital tokens of the central bank. Based on the April statement of the Deputy Director of NBC’s Digital Currency Research Institute, Di Ganga, the CBDC will most closely match the two Money Flower categories highlighted in yellow dotted lines.
In other words, the currency issued by CBDC will be centralized, but also publicly available. The payment instrument will be used not only by the general public in retail transactions but also in large interbank transactions, as well as in securities settlements.
According to analysts at Binance Research, it is the centralized emission that is designed to ensure the CBDC status as legal tender and improve the efficiency of the transmission mechanism of NBC’s monetary policy. The latter is endowed with absolute control over the new means of payment.
The Chinese CBDC will circulate within a two-tier monetary system:
The Chinese CBDC will circulate within a two-tier monetary system
Graph: Binance Research
At the first level, NBC interacts with commercial banks directly, issuing and retiring CBDCs. At the second level, as is customary in traditional finance, commercial banks interact with people and organizations.
“With a two-tier digital currency system, the People’s Bank of China could achieve fiat currency replacements without undermining the foundations of the existing monetary system, which is also built on two tiers,” Binance Research researchers noted.
Thus, in its essence and the most general principles of circulation, the Chinese digital currency will not differ much from the usual fiat money.
Why does the Chinese financial system need CBDC?
The People’s Bank of China plans to replace the M0 monetary aggregate with a new means of payment, that is, paper money and coins in circulation.
This could have a positive impact on the following areas:
Retail payments — the portability of money would be noticeably improved and anonymity at the user level would increase (according to NBC);
Distributed ledger technology will make interbank clearing more efficient;
CBDC has the potential to increase the speed and reduce the cost of cross-border payments, which would facilitate the internationalization of the RMB.
According to Binance Research, regarding M1 and M2, NBC is confident that these monetary aggregates have already been transferred to the digital field.
Other reasons for the CBDC to be issued by the central bank of China:
The decrease in operating costs. In existing systems, issuing and servicing cash is expensive.
Improving the effectiveness of combating money laundering (AML). As you know, cash is actively used in illegal activities, and the movement of funds in the digital currency is much easier to track.
More effective counteraction to the outflow of capital from the country — the problem has become much more urgent against the background of the trade confrontation with the United States, the slowdown in economic growth, and the devaluation of the yuan.
Thus, the CBDC from NBC is nothing more than an improved and much better tracked money supply M0, with the potential to reduce the volume of shady and questionable transactions.
Another important point is that instead of the fractional reserve traditionally used in the banking sector, the Chinese CBDC assumes 100% collateral. This is perhaps the most dramatic change in monetary policy since the current reserve requirement in the PRC is only 15%. As a result, the banking system loses its money multiplier.
Other components of monetary policy will not undergo dramatic changes. Overall, however, CBDC will clearly increase NBC’s presence in China’s financial system, increasing its impact on the economy. This, in particular, is stated in the aforementioned BIS report.
Holders of the new digital currency will not receive interest, as is the case with deposits. Consequently, CBDC will be a highly liquid means of payment and, unlike funds held in bank accounts, free from credit risks.
Specifications of the digital yuan
Binance Research experts argue that the CBDC circulation mechanism implies the possibility of payments without the need to open a bank account.
The coins will be stored in digital wallets, and the system itself will rely on cryptography and distributed ledger technology (DLT). Nevertheless, there are very few technical details in this regard. However, CBDC is likely to be available through mobile apps, personal computers, and smart cards.
As already mentioned, the digital currency will operate within a centralized two-tier system, the fundamental element of which will be NBC. However, it is not yet clear whether the second tier of this system will be DLT-based.
“Since the management of the second tier will be delegated to financial institutions, the Chinese CBDC could potentially operate on the basis of several networks at the same time,” Binance Research researchers said.
In announcing the final stage of work on the new means of payment, Mu Changchun stressed that the performance of the CBDC will reach “at least 300 thousand transactions per second.” This indicator is not yet available to any existing blockchain. On the other hand, such high performance can potentially be achieved with the help of off-chain solutions and other technical tricks like sharding and sidechains.
Also, according to representatives of the central bank, CBDC can function using smart contracts. The latter, however, will provide functionality that does not go beyond “basic monetary requirements”.
According to the Research Institute of Digital Currency at NBC, one of the key elements of the new system will be Big Data technology.
Schematic diagram of the Chinese CBDC prototypeSchematic diagram of the Chinese CBDC prototype
Graph: Binance Research
According to the scheme, big data technologies will be used to combat money laundering, tax evasion, and terrorist financing, as well as to assess payment behavior. Of course, this assumes ubiquitous identification (KYC).
Apparently, NBC and second-tier financial institutions will be able to freeze any CBDC account at any time if suspicious activity is detected. It is also likely that the personal data of users will be tied to their wallets, which completely excludes anonymity.
When is the launch?
The system already functioning in test mode and the head of the Central Bank of China reports about 4 million transactions in the Digital Yuan.
The Head of the Central Bank of China Reports 4 Million Transactions in Digital Yuan
Digital Yuan Growth in Transactions
medium.com
Is China ahead of the rest?
The possibilities of digital currencies of central banks are being studied in many countries, but hardly any of them has advanced in this matter as far as China.
For example, the other day the head of the US Federal Reserve System (FRS) Jerome Powell said that his department monitors the field of crypto assets, but does not plan to issue its own digital currency. According to him, CBDC is not a priority topic for discussion at the Fed and, in general, consumer demand for such a means of payment is insufficient, since “users already have many payment options.”
In Ukraine, there is a pilot project for the implementation of the platform “Electronic hryvnia” (e-hryvnia). The country’s National Bank is studying the advantages and disadvantages of digital currencies and the potential demand for them from organizations and individuals.
The Governor of the Bank of Lithuania Vitas Vasiliauskas is convinced that CBDCs can act as a means of exchange, payment, and value conservation. He is also confident that state cryptocurrencies can increase the efficiency of payments and settlements on securities and reduce various risks in the financial market.

Nevertheless, representatives of some countries are skeptical. For example, the head of the German Federal Bank Jens Weidmann believes that cryptocurrencies issued by central banks can destabilize financial systems and worsen the work of credit institutions, especially during a crisis. Besides, the demand for CBDC could negatively affect the efficiency of the central regulator and contribute to a fundamental shift in the banking business model.
The analytical center Avenir Suisse proposes to the Swiss National Bank to create a so-called “franc-token”. Experts are confident that the new coin will facilitate the trading of tokenized securities, increase the efficiency of international settlements, and create new business models.
However, Swiss National Bank President Thomas Jordan recently said that fiat-pegged stablecoins could negatively impact the effectiveness of monetary policy and pose risks to the country’s financial stability.
The report of the Bank of Russia “Is there a future for digital currencies of central banks?” states that government cryptocurrencies can reduce transaction costs, as well as perform well in an environment of low-interest rates and low inflation. Also, interest can be charged on CBDC accounts, making such coins an attractive store of value.
On the other hand, the document separately notes that “today there is not a single successful, fully functioning and accessible to the general public CBDC, including those based on data storage using distributed ledger technology.
In general, about 70% of central banks in the world are researching the possibility of creating state digital currencies, but only a few of them have started the practical implementation of projects.
Conclusions
Designed to replace cash, China’s CBDC is expected to be backed by reserves at a 1: 1 ratio. It will be issued exclusively by NBC and, therefore, the value of the currency will be based on public confidence in the central regulator, the financial system, and the economy as a whole.
A bank account is not required to use CBDC, however, identity verification is likely to be required.
The digital currency will circulate within a two-tier monetary system:
central bank ↔ commercial financial institutions
commercial banks ↔ organizations and individuals.
The first level of the system is a permissioned blockchain. However, it is not yet clear what technology the second level of CBDC is based on.
The launch of a digital currency can bring several benefits from NBC perspective:
Possibility of a more accurate calculation of macroeconomic indicators, for example, the inflation rate.
Expanding the ability to collect real-time information about the features of CBDC circulation, which can be useful for the implementation of monetary policy.
Prevention of money laundering, terrorist financing, and tax evasion, in particular, through the use of Big Data capabilities.
Reducing information asymmetry between financial institutions and regulators.
In general, the CBDC assumes a much stronger role for NBC in the economy and excludes the financial privacy of users. At the same time, it is not completely clear under what circumstances the funds on the wallets of Chinese users can be frozen.
On the other hand, completely free anonymity and a centralized CBDC can hardly be considered a direct competitor to existing cryptocurrencies such as Bitcoin, Litecoin, Monero, etc. The latter will increasingly compete with fiat money, which will cause serious changes in the monetary policy of regulators and banking systems of various countries, as well as a further tightening of regulation of the crypto industry.

On Monday, Canadian Prime Minister Justin Trudeau was the first foreign leader to have spoken over the phone with the US President-elect.
Biden thanked President Emmanuel Macron of France for his congratulations and expressed his desire to strengthen relations between the United States and France, its oldest ally.
Biden conveyed his interest in reinvigorating bilateral and trans-Atlantic ties, including through NATO and the European Union, according to a readout of the call issued by Biden-Harris Transition.
During a phone call, Biden expressed gratitude to German Chancellor Angela Merkel for her congratulations, praised her leadership, and noted that he looked forward to strengthening relations between the United States and Germany and revitalizing the trans-Atlantic relationship, including through NATO and the EU.
The President-elect in his call with British Prime Minister Boris Johnson offered his thanks for his congratulations and expressed his desire to strengthen the special relationship and re-double cooperation on issues of mutual concern.

According to the scheme big data technologies will be used to combat money laundering

Written by rokie hasan