Zhou Xiaochuan on Central Bank Digital Currency and Payment System Digitization

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The evolution of digital finance is reshaping the global monetary landscape, and central bank digital currencies (CBDCs) are at the heart of this transformation. As digital payment systems become more sophisticated, the distinction between currency digitization and payment system digitization blurs—yet understanding their interplay is essential for building a resilient, inclusive, and future-ready financial ecosystem.

Zhou Xiaochuan, former People's Bank of China governor and current Vice Chairman of the Boao Forum for Asia, offers valuable insights into the development of digital currencies and the digital transformation of payment infrastructure. Drawing from his experience and recent reflections, he emphasizes a holistic, flexible, and forward-looking approach to digital finance.

The Dual Nature of Digital Transformation: Currency and Payments

One of the most fundamental ideas in digital finance is that payment system digitization and currency digitization are two sides of the same coin. While they are often discussed separately, they are deeply intertwined in practice.

From a technological standpoint, payment systems are undergoing rapid digitization through innovations such as blockchain, distributed ledger technology, real-time settlement protocols, and secure mobile platforms. These advancements transform how transactions occur—shifting from paper-based instruments like cash and checks to instantaneous digital transfers.

At the same time, the form of money itself is evolving. Central bank digital currencies like China’s digital yuan (originally known internally as DCEP—Digital Currency Electronic Payment) represent a new form of sovereign money that exists in digital form. But crucially, the digitization of money cannot be fully realized without a corresponding upgrade in payment infrastructure.

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As Zhou notes, early electronic payments were not fully “digital” in today’s sense—they were digitized records of analog processes. However, modern electronic systems increasingly merge with true digital architectures, making the line between "electronic" and "digital" nearly indistinguishable. Therefore, it's more productive to adopt a broad definition of digital currency and digital payments, rather than clinging to narrow or rigid interpretations.

This broader perspective allows room for innovation while ensuring interoperability across platforms and services.

Conceptual Evolution: From Isolation to Integration

The digital currency ecosystem is still maturing, and with that comes an ongoing refinement of concepts. One key development is the gradual fusion and upgrading of technological models and operational frameworks.

Currently, most CBDC initiatives—including China’s digital yuan—are built on account-based models, where users hold balances in identifiable accounts managed by financial institutions or central banks. This contrasts with token-based models, which resemble physical cash—where ownership is determined by possession of a cryptographic token rather than an account record.

While account-based systems dominate today due to their compatibility with existing regulatory frameworks (such as anti-money laundering compliance), token-based designs may offer advantages in privacy and offline usability. The future may see hybrid models emerge, combining the strengths of both approaches.

Another critical debate centers on centralization versus decentralization. Although some cryptocurrency advocates champion fully decentralized systems, real-world financial stability often requires oversight, accountability, and systemic resilience—qualities best ensured through centralized or semi-centralized architectures.

That said, the underlying technologies powering digital payments—especially internet protocols—are constantly upgrading. These improvements directly impact transaction speed, security, scalability, and cross-platform integration. As such, continuous innovation in infrastructure is not optional—it's imperative.

Hardware also plays a role. Payment terminals—including desktop systems, mobile devices, and IC-based prepaid cards—can complement digital wallets and expand access to underserved populations. When integrated properly, these tools enhance financial inclusion without sacrificing security.

The Importance of Financial Infrastructure

Underpinning all digital financial activity is robust financial infrastructure. This includes real-time gross settlement (RTGS) systems, clearinghouses, identity verification mechanisms, and data exchange protocols.

While RTGS enables immediate, final settlement of high-value transactions, not all payments require real-time processing. In many cases, near-real-time or batch processing can offer sufficient speed while reducing system load and cost—making them more scalable for mass retail use.

Interoperability remains a core challenge. For digital finance to reach its full potential, different systems must be able to communicate seamlessly. This means:

Cross-border transactions present even greater complexity. While private sector firms often provide front-end services (like remittance apps), they rely on central bank-backed clearing systems for final settlement. Strengthening international cooperation in infrastructure design will be key to enabling faster, cheaper, and more transparent global payments.

Embracing the Two-Tier Operational Model

A defining feature of China’s CBDC strategy is its two-tier operational structure:

  1. Central banks issue digital currency and oversee the system.
  2. Commercial entities—including banks, fintech firms, telecom operators—distribute it to end users.

This model fosters competition, encourages innovation, and leverages private-sector efficiency while maintaining public oversight. It recognizes that no single entity can predict which technology or service design will ultimately succeed.

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Rather than picking winners, policymakers should allow multiple solutions to coexist and compete—a process Zhou describes as “selection through competition.” Over time, superior systems will gain adoption, while weaker ones fade or adapt.

But competition must be balanced with interoperability. Users should be able to transact freely across platforms without friction. Regular system upgrades can help integrate new technologies and strengthen connectivity.

Importantly, digital payment providers must operate as independent, sustainable businesses. This means establishing fair pricing models that allow service providers to charge reasonable fees—even if those fees are minimal.

Without proper monetization mechanisms, providers may resort to cross-subsidization, using payment data to fuel other revenue streams such as targeted advertising or data resale. Such practices risk data abuse, undermine user trust, and distort market incentives.

By enabling direct service fees, regulators can reduce these risks and promote healthier business models focused on genuine value delivery.

Core Principles: Security, Accessibility, and Integrity

Zhou underscores several guiding principles for digital currency development:

Digital assets have already been exploited in illegal activities such as money laundering, drug trafficking (e.g., fentanyl trade), weapons financing, and cross-border gambling. Law enforcement agencies worldwide—including China’s Ministry of Public Security—have made progress in combating fraud and tracking illicit flows through advanced analytics and blockchain forensics.

However, this remains an ongoing arms race: “As magic grows one foot taller, so does righteousness rise one zhang higher.”

Policymakers must remain vigilant, ensuring that technological benefits are not hijacked by malicious actors.

Cross-Border Payments: A Key Frontier

Finally, cross-border transactions represent a major area of exploration for CBDCs. Beyond technical challenges—such as interoperability across different jurisdictions—there are complex policy questions around capital controls, monetary sovereignty, and exchange rate stability.

Yet the potential rewards are immense: faster remittances, reduced transaction costs, enhanced financial inclusion for migrant workers, and stronger trade integration.

International collaboration will be essential to develop common standards and governance frameworks that balance innovation with stability.

Frequently Asked Questions (FAQ)

Q: What is the difference between CBDC and stablecoins?
A: Central bank digital currencies (CBDCs) are issued by central banks and backed by sovereign authority, making them legal tender. Stablecoins are typically issued by private companies and claim to be pegged to assets like the U.S. dollar—but their stability depends on actual reserves and transparency, which can vary widely.

Q: Why is interoperability important in digital payments?
A: Interoperability allows users on different platforms to transact seamlessly. Without it, digital payment systems risk becoming fragmented silos, limiting convenience and slowing adoption.

Q: Can digital currencies replace cash entirely?
A: While digital currencies may reduce reliance on physical cash, complete replacement raises concerns about financial inclusion, privacy, and resilience during outages. Most central banks aim for coexistence rather than elimination.

Q: How does the two-tier model prevent monopolies?
A: By allowing multiple commercial providers to distribute CBDCs under central bank oversight, the model promotes competition and prevents any single entity from dominating the payment ecosystem.

Q: Are CBDCs based on blockchain?
A: Not necessarily. While some CBDC pilots use blockchain or distributed ledger technology, others rely on centralized databases. The choice depends on performance needs, privacy requirements, and policy goals.

Q: How do CBDCs help fight financial crime?
A: CBDCs can enhance traceability of funds while preserving user privacy through tiered identity verification. This enables better monitoring of suspicious transactions without compromising legitimate anonymity needs.

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Core Keywords:

Through thoughtful integration of technology, policy, and market dynamics, the vision of a secure, inclusive, and efficient digital financial ecosystem becomes increasingly attainable.