Detailed analysis of China’s new digital currency ‘DC/EP’ and what the Middle Kingdom is doing when it comes to designing and implementing a nation-wide digital currency.

The recent news about the People’s Bank of China’s development of the upcoming digital currency “DC/EP” has striked global interest and enthused cryptocurrency enthusiasts in the wake of June’s announcement of Libra. In this blog post, we will review the evolutionary history of money, the advantages of digital currencies, analyze Libra’s positioning and planning, then compare it with the advantages and disadvantages of DC/EP in order to explore the value and commercial significance of stable currencies. And of course, we will discuss what PPIO can use for reference when designing their own economic models.


On August 2, the People’s Bank of China held a video conference to discuss the second half of 2019. Of note was the discussion on the subject of the development and acceleration of a new legal digital currency: DC/EP (Digital Currency, Electronic Payment). The high-profile meetup examined the research and development of the digital currency, the developmental trends of digital currencies both domestically and globally, and finally what can be done to strengthen Internet-based financial risk management.

On August 18th, the Chinese government’s Central Committee and the State Council issued the “Opinions on Supporting Shenzhen’s Pioneering Demonstration Zone with Chinese Characteristics” white paper. It mentioned that by seeking to build a modern economic system that reflects the requirements of high-quality development, it supports the development of innovative, future-minded applications such as digital currency research and mobile payments. The paper, bearing in mind the strong Hong Kong and Macao financial markets, promotes interoperability between these markets and the mainland, as well as the mutual recognition of financial (fund) products. It also came to light, by way of research from the local press, was that research into a centralized digital currency was first started back in 2014. To better understand what the digital currency represents for Shenzhen (and China, and then perhaps the world), let’s take a quick look at the historical background of currencies.


1.1 Currency Evolution

Monetary forms over time have ranged from shells, beads, metals, paper money, and now a digital currency. History students will be aware that money has always been a weapon and tool amongst countries in both war and peacetime, with money helping to decide who prospers and who declines. It was after World War II that the US dollar quickly established itself as the dominant global currency. When it comes to China, the renminbi has seen constant growth and China has emerged as the world’s second largest economy.

1.2 Bitcoin

Compared with traditional sovereign currencies, a digital currency has a unique advantage. As of now, Bitcoin, as the originator of digital currency, occupies a unique place in popular consciousness.

As per Wikipedia, Bitcoin is a “decentralized digital currency without a central bank or single administrator that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries. Transactions are verified by network nodes through cryptography and recorded in a public distributed ledger called a blockchain”.

1.3 Advantages

So the relative advantages and disadvantages of a digital currency are:


  1. Decentralized. Digital currencies use blockchain technology, use direct point-to-point transactions, and there are no transactions with bank agencies. Technologically, it relies entirely on a P2P network to run without a central server, which means outside forces do not affect it unless there is a global power outage or the entire Internet is paralysed.
  2. Exclusive ownership. The operation requires a private key that no one can access except the user.
  3. Anonymous, tax-free, and free of supervision. It may be widely used in underground black market transactions, money laundering activities, as well as gambling and cross-border transactions.
  4. Convenient transactions. No cumbersome quotas or formalities for point-to-point payment. Payments can be made simply by knowing the other party’s address.
  5. Global circulation and cross-border remittances are more convenient, and handling fees are cheaper. If you send money through a traditional central bank, cross-border transactions can be up to 10%.
  6. The total amount is certain. As there are a fixed amount of coins in circulation (e.g. 21 million for Bitcoin) it can be used as an investment hedging tool to resist inflation.
  7. It can be metered and divided infinitely. Traditional currencies always have a minimum unit, whereas digital currencies can be infinitely divided into smaller units.

1.4 Disadvantages

  1. Prices fluctuate greatly. Due to the involvement of a large number of speculators, the price of coin such as Bitcoin is like a roller coaster. This makes Bitcoin more suitable for speculation than for anonymous trading. So the premium is much greater than the value of use.
  2. The transaction confirmation time is longer. When a digital currency is traded, the transaction data is broadcast and interacts with the P2P network. After the confirmation of the whole network, the transaction is completed. It takes a certain amount of time, which is what we often call the TPS problem.
  3. The vulnerability of the trading platform. The cryptocoin network is very robust, but trading platforms can be fragile. For example, exchanges are often hacked or shut down by authorities.
  4. Lack of broader public adoption. The public’s lack of understanding of the principles of cryptocurrencies and the resistance of traditional financial institutions has led to this situation. As we’re currently in the early stages before mass adoption, only a small number of markets and people are actively using digital currencies.

Types of Digital Currencies

There are many ways to classify digital currencies based on different dimensional criteria. One classification method has five dimensions: purpose, use, legal status, underlying value, and technology layer.

At present, the main method of classification is to distribute according to the legal rules (which may change with the development of the industry).

2.1 Digital Currency Classification

Digital currencies can be divided into the following categories:

  1. Security Tokens

● Security tokens are digital assets that comply with federal security laws. In layman’s terms, they are the intersection of digital assets (tokens) and traditional financial products — a new tool to improve old things. Any assets under the ownership can and will be a token of, including public offerings and private equity, debt, real estate and so on. A security token represents a kind of ownership of real property, which is in line with an investment target stipulated by the China Securities Regulatory Commission.

● In the United States where regulations are relatively radical, sales and investments in these tokens are subject to the Securities and Exchange Commission Securities Regulations. The US Securities and Exchange Commission (SEC) has developed guidelines to determine compliance with such financial operations and is subject to security regulations.

2. Utility Tokens

● Also known as a functional token, these tokens provide users with access to products or services. Utility tokens represent purchases (excluding arbitrageurs) for access or use rights to the platform or underlying protocols, using an unregulated crowdfunding model.

● There are several ways in which tokens can create practicality for the holder:

○ Give the holder the right to use a certain network, or to obtain certain services (usage tokens)

○ Give the holder the right to work for the system (right to work tokens, or “work tokens”)

○ Two kinds of rights at the same time (hybrid tokens). Of course, there are also tokens that do not have any practical use.

3. Equity Tokens

● Equity tokens are based on Ethereum smart contract technology and are considered one of the most promising applications. Start-up companies can issue their own tokens through public offerings, or they can be regarded as assets of the company.

● Due to the current lack of supervision, few start-up companies are selling such equity-based tokens. The law is very vaguely defined. Companies generally do not dare to mess. However, a bill has recently been passed in Delaware, USA, recognizing the use of blockchain technology as a way to create and manage corporate records.

2.2 Utility Tokens

Out of the three types of tokens, utility tokens are generally regarded as the best means of utilizing blockchain technology with the real world. It is no coincidence then that this type of token occupies the largest share. Yet at the same time, a corresponding problem has also appeared. That is, when the token model has investment potential in addition to its use-value, the price can become unstable, which in turn will greatly affect the usability of the platform and may limit the development of the platform.

An example of this would be with the fictional distributed economic storage platform G and their utility tokens: Gtokens. At this time, there are two kinds of users for the platform: the demand side Alice (A), and the supply side: Bob (B). As A is based in France, she must use Euros to purchase Gtokens in order to access storage space on the network.

According to normal logic, two situations may occur:

  1. When the price of Gtoken is very low, a large number of users like A will buy Gtokens in exchange for services. As the demand side has more users, the price of Gtoken will increase in the secondary market. The result is that more service providers like B will join the market.
  2. When the price of Gtoken is high, users like A will not use the platform and will sell Gtokens for Euros. In the secondary market, the price of Gtoken will decrease, which will lower the profit of B. With lower profits, the fewer people will assume the role of the supplier.

It seems that there is nothing wrong with this. It relies solely on the market to adjust prices and services to achieve a relative balance between supply and demand. However, the reality is that Gtoken, which has both use and investment attributes, is difficult to be used in real life when the investment value is greater than the use value.

There are several potential reasons why this may occur:

  1. The service is not well designed. This can mean it does not perform properly or was not even ready when launched. It also could be that the currency was solely issued for the purpose of issuing coins.
  2. Investment attributes affect both supply and demand side. Because of the investment properties, it will be abused. It is not uncommon for the project side to be harmed by the capital party or the banker.
  3. Poor user experience due to large price fluctuations. Price is the most important part of the product, directly affecting the product use expectations, the product experience, the promotion and popularity of the product, and the circulation of funds for platform ecology.
  4. Real-life scene products are different from blockchain usage scenarios. Although some businesses have accepted the payment of digital currencies at present, in real life, they still use legal digital currencies as the benchmark. Because tokens need to be bought or stored on exchanges or digital wallets, both sides of the transaction need to use the same trading environment. This, coupled with excessive price fluctuations, makes it difficult to link effectively with real life.

Therefore, a utility token that is easier to use came into being: Stabilized Coins.

The digital currency that the People’s Bank of China is developing is a kind of stable currency, and it is more advantageous.

The Stable Currency (Stablecoins)

3.1 Concept

A stable currency is a cryptocurrency with relatively stable value. This type of currency was birthed by the inconvenience caused by the huge price fluctuations found in other cryptocoins. It serves as a medium of exchange to connect the digital currency world with the legal currency world.

3.2 Stablecoin Classifications

There are three types of stable digital cryptocurrencies:

Fiat-collateralized coins for legal asset mortgages

Maintains a one-to-one ratio with their respective legal currencies. Usually, a certain amount of legal currency is required to be deposited as collateral, which is a very simple and robust method. However, it requires a centralized intermediary as the custodian to determine the issuance and convertibility of the stable currency. At the same time, it requires a regular audit process to ensure that the stable currency is fully collateral.

An analogy with the real world, this mechanism is like the dollar in the Bretton Woods agreement. For example, the USDT issued by Tether, the TrueUSD issued by the TrustToken, and the two stable tokens GUSD and PAX recently approved by the New York Financial Services Authority, are all linked to the US dollar. The most representative of these is the USDT which is most familiar to the public.

● Crypto-collateralized coins for encrypted asset mortgages

Much like the stable currency guaranteed by legal currency, its collateral is not an asset in the real world, but a digital asset. The collateral is deposited in a smart contract, so the user redeeming these assets does not have to rely on any third party. In order to resist the volatility of digital asset prices, the total value of the collateral is generally required to be higher than the stable currency created. In other words, it is over-collateralized. Examples of this is Bitshares BitCNY, MakerDAO’s Dai, and Haven Protocol’s XHV.

● Non-collateralized coins

As a non-collateralized stable currency, this type of coin relies on an algorithm to change the supply volume in order to maintain the price as per the asset it is pegged to. This more innovative stable currency model is based on smart contracts, allowing smart contracts to act as central banks, constantly adjusting the supply of stablecoins through algorithms and price contractions to maintain a relatively stablecoin value.

3.3 Usage Scenarios

As stable currencies are the medium of exchange between the digital currency world and the legal currency world, we can look at what role they play in terms of trading, payment, and investment:

1. Trading

  1. Users can use a stable currency instead of legal currency to trade, realizing a true peer to peer payment method
  2. Users can use a stable currency instead of legal currency to trade with other digital currencies
  3. Users can trade a digital currency e.g. Bitcoin for stablecoins to avoid losing money if that digital currency’s price drops. This works as the stablecoin is tied to a real-world currency so the stablecoin’s price will remain constant

2. Payments

  1. Save time on payments, especially for cross-border payments
  2. Transaction records are stored on the blockchain for better tracking and transparency
  3. Effectively reduces the payment cost under cryptocurrency payment scenarios

3. Investments

1. Other encrypted assets are mortgaged to obtain stable currencies for investment and financial management, and to enjoy the double appreciation of assets

2. Transaction records are stored in the blockchain and cannot be tampered with, thus eliminating accounting disputes

3. To develop long-term intelligent contracts based on blockchain technology for loans, derivatives, forecasting markets, and other needs that require price stability by using the characteristics of stable currencies

3.4 Libra

Now that we’ve covered the value and significance of a stable currency, it’s time we mentioned the most well-known stablecoin — Libra.

Overview: Libra is a stable digital currency initiated by Facebook subsidiary Calibra. It consists of a collection of currencies as an asset reserve. Its mission “is to enable a simple global currency and financial infrastructure that empowers billions of people”. Simply put, it is a digital currency based on a blockchain that can easily be used globally and has a stable value.

Compared to other existing stablecoins, Libra has the following characteristics:

1) Decentralized distribution and management to enhance credit. The biggest difference between Libra and current mainstream stable currencies such as USDT and GUSD is that Libra is not a centralized issuer. This decentralized model can give Libra more credit, while also increasing the supply of money, making its reserves more abundant and more flexible.

2) Relies on a compliance trader, similar to the TUSD issuance model. Authorized resellers may become the middle layer between trustees and users to realize the real-time exchange of Libra and legal currencies.

3) It creates a new accounting unit. Libra’s price has an exchange rate with each currency. The exchange rate fluctuates within a small range. Libra could be regarded as a new unit of valuation.

4) Positioning itself as the de facto payment option for the Internet greatly broadens the ways it can be used by the general public.

● Different from other trading medium-based stable currencies, such as USDT, GUSD, USDC, etc. which are only for specific payment scenarios, e.g. JPMCoin’s cross-border bank settlement used for its internal systems

● Libra is more like a global network currency. Payment is the most important function. Libra has a strong partner and user base to expand digital currency payments into more common and more general scenarios. For example, many associated companies will build their own services in the process of using Libra — from Mastercard, PayPal, and other payment companies to popular high frequency services such as Booking, eBay, and Uber.

Based on the above characteristics, if Libra can obtain relevant policy approval, it will quickly open the market. The technology and user base can quickly attain commercial use, and at the same time, due to the mortgage economy model, a huge currency reserve will be obtained. It is even possible to challenge existing sovereign currencies and become a larger non-sovereign currency.

Our first Code Talks coincided with the announcement of Libra so we wrote an analysis on Libra and PPIO including a detailed breakdown on how Libra works and what PPIO can learn from it.

3.5 The People’s Bank of China’s Digital Currency “DC/EP”

We can better interpret the design concept and the logical structure of the People’s Bank’s digital currency by analysing the following key issues:

  1. At present, the design of People’s Bank’s digital currency pays more attention to M0 than M1 and M2.

What is M0, M1, M2?

  • M0: Cash in circulation, that is, banknotes and coins. We can use it directly for retail consumption.
  • M1: Is M0 plus various demand deposits, representing the purchasing power of a country.
  • M2: M1 with the addition of resident savings deposits, unit time deposits, other unit deposit, and securities company deposit; refers to the total money supply

The People’s Bank’s digital currency design will focus on the replacement of M0 “cash in circulation”, i.e. banknotes and coins, rather than M1 and M2.

The M0 type of currency is easy to be anonymously forged, and there is a risk of money laundering or malicious financing. In addition, since existing electronic payments are tied to an existing bank account, the public’s demand for anonymous payment cannot be fully satisfied, therefore existing electronic payments cannot completely replace M0. The People’s Bank’s DC/EP addresses this deficiency and satisfies the need for portability and anonymity while preserving the attributes and characteristics of cash.

The current “currency in circulation” is the main concern for the design of DC/EP. Successful implementation of a state-run digital currency will solve the issue of physical cash coming with high loss costs as it is easy to forge. At the same time, a digital currency will be able to ensure the anonymity of cash transactions.

2. The People’s Bank will test various technology types for a successful implementation rather than rushing towards a technical solution that may only work best in theory

Since their focus is on M0, it can be seen that the design and implementation of DC/EP will be used for retail businesses. However, we know that pure blockchain architecture cannot achieve the type of performance that is required for retail. China’s biggest shopping day Alibaba’s Double 11 reached 92,771 transactions a second. As a contrast, the Bitcoin network can process 7 transactions per second, Ethereum about 10–20 per second, and Facebook’s Libra white paper reveals it can handle 1,000 transactions per second. For a country with nearly 1.4 billion people, if a national digital currency is implemented, it requires a very large number of transactions per second.

Therefore, when the technology is not mature, the People’s Bank will try different types of technologies and products in a survival of the fittest type scenario until the best technical solution is found. This is in contrast to other types of design based on theory but which ultimately does not work on the practical level.

3. DC/EP adopts a two-tier operating system, with the People’s Bank operating the upper layer and commercial banks operating the lower.

A single-tier operating system is the direct issuance of a digital currency by the People’s Bank of China. A double-tier system is where the People’s Bank of China first converts digital currency to banks or other operating agencies, which are then redeemed by the public. This is very similar to the organizational structure that Libra just introduced.

Why two tiers?

● China has a vast territory and a large population. The economic development, resource endowment, the population’s education, and the acceptance of smart terminals vary both within urban areas and down to rural areas. The IT infrastructure and service system of commercial organizations are relatively mature, and the processing power of this system is relatively strong. They have accumulated some experience in the application of financial technology. However, to cope with any difficulties, it is necessary to adopt a two-tier operation structure

● A two-tier operation helps to resolve risks and to avoid the potential for an excessive concentration of risks.

● A single-tier operational architecture may lead to financial disintermediation.

● The central bank acts as the upper level and the commercial bank acts as the second, lower level. This two-tiered system is suitable for China’s unique conditions. Furthermore, this system not only makes use of existing resources to mobilize the interest of commercial banks, but also to help usher in acceptance of a digital currency on a societal level.

4. Commercial institutions pay reserve to the central bank in full

The two-tier system will not change the relationship between creditor’s rights and liabilities of currency in circulation. In order to ensure that the central bank’s digital currency is not overrepresented, commercial institutions will pay the full amount of the reserve to the central bank. The mechanism of stabilizing the currency is the same as that of Libra. The difference is that Libra is a package of currencies and bonds, while the People’s Bank issues guarantees with RMB and has unlimited legal remuneration.

In addition, the two-tier system will not change the existing currency delivery system or the dual account structure, and it will not compete with money deposited into commercial banks. Since it does not affect the existing monetary policy transmission mechanism, it will not have a negative impact on the real economy. It will also help curb the public demand for cryptographic assets and also strengthen China’s national currency sovereignty.

5. DC/EP adheres to a centralized management model

Encrypted assets are naturally decentralized, however, DC/EP must adhere to the centralized management model, why?

The People’s Bank’s digital currency is still their debt to the public. In order to ensure the the central position in the process of issuance, to strengthen the bank’s macroprudential and monetary control functions, to avoid currency oversupply of designated operating institutions, and to adhere to the centralized management model, then a centralized mortgage and monitoring is employed to ensure compatibility with the real world and social order.

As a supplement, it is important to understand that centralized management is fundamentally different from electronic payment tools. The People’s Bank’s digital currency can be easily circulated as cash, which is conducive to the circulation and internationalization of the RMB, while at the same time achieving controllable anonymity. In order to ensure anonymity of both parties, we should also ensure a balance between anti-money laundering, anti-terrorist financing, and anti-tax evasion.

6. The central bank’s digital currency is capable of loading smart contracts.

DC/EP can load smart contracts. As previously stated, it is a digital currency with unlimited compensation characteristics, so it will act as an alternative to banknotes and coins. Its monetary function (transaction, value storage, and an accounting unit) determines that if it is coupled with a smart contract that exceeds its monetary function, it will degenerate it into valueless tickets and reduce the usability, which will have a negative impact on the internationalization of the RMB. Intelligent contracts in favor of monetary functions will be applied, but a more cautious attitude will be maintained towards intelligent contracts that exceed monetary functions.

In summary, and based on the above interpretation, DC/EP is a centralized managed, M0-level digital currency, which can be separated from bank accounts, meet the needs of portability and anonymity, and improve payment efficiency without causing inflation expectations under the premise of maintaining the properties and characteristics of cash.

References for PPIO

In the design of this economic model, PPIO advocates a dual currency model according to its own business model and business characteristics: A combination of the relatively practical utility token and the investment potential afforded by a security token.

● For the supply side: the storage and bandwidth nodes of the network supply are given incentives with utility tokens. This is to ensure that the shared nodes get guaranteed benefits and provide stable network services.

● For the demand side: To ensure a better user experience on the PPIO platform, the relatively stable, easy-to-use utility tokens will be employed. At the same time, value investments can be made exchanging security tokens for utility tokens.

● For super nodes that maintain public chain operation: Super nodes not only are the main contributors to supply end nodes, but also are the leaders of the co-construction storage and delivery ecosystem. The super node is motivated by a securities-type equity token.

● For implementation: In order to ensure the high efficiency of platform services, PPIO will slowly transition from a centralized to a decentralized structure. We have previously wrote about this in detail in our article: Three Three Stages of PPIO: Moving Towards a Decentralized Structure.

In general, PPIO will use incentive securities tokens to globalize the public chain value network, and use efficient and stable practical tokens to achieve a commercial landing in the real world. At the end of the day, we are building a service-oriented, globalized decentralized storage and distribution platform that makes data cheaper, faster, and more private.

In this article, we used the announcement of the People’s Bank of China’s digital currency as a starting point to discuss the evolution of currency, the advantages of digital currencies, and the value and significance of a stable currency in the new world that is digital currencies. After that, we compared Libra’s positioning and planning, analyzed the basic logic of DC/EP, the superiority of the two-tier stable currency, and finally looked at PPIO and their approach to coins in their network. With the slow acceptance and use of digital currencies online and the physical world, we’re witnessing a period of history with rapid change as technology further intersects with our lives offering a type of paradigm shift as we move away from a physical currency into a bold new digital future.

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  1. Digital money has not yet been incorporated into mainstream economic laws and regulations systems. It is still regarded as a constructive social experiment, waiting to be verified by the market economy. This article does not represent any institutional attitude.
  2. Cover image source.