The future of central bank digital currencies (CBDCs) hinges on a robust, competitive, and independently sustainable digital payment ecosystem. At the 2023 China (Beijing) Digital Finance Forum, hosted by the Beijing Municipal Financial Supervision Administration, Fengtai District People's Government, and the People’s Bank of China Digital Currency Research Institute, former PBOC Governor and Vice Chairman of the Boao Forum for Asia, Zhou Xiaochuan, delivered a keynote speech outlining key principles for the development of digital finance — particularly the importance of maintaining a two-tier operational system, ensuring payment system independence, and building a secure, interoperable digital currency infrastructure.
Zhou emphasized that as digital finance evolves, so too must the frameworks governing its growth. His insights offer critical guidance for policymakers, financial institutions, and technology providers navigating the transformation of money and payments in the digital age.
The Interdependence of Digital Payments and Digital Currency
Zhou Xiaochuan opened by highlighting a foundational concept: digital payments and digital currency are two sides of the same coin. From a technological standpoint, payment systems are undergoing rapid digitization, shifting from paper-based transactions to digital platforms powered by advanced technologies.
“In the development ecosystem of digital currency, the digitization of payment systems and the digitization of money are inseparable,” Zhou stated.
As this evolution progresses, new digital payment products emerge. Over time, these systems must prioritize interoperability, enabling seamless integration across platforms. This leads to a natural process of convergence and optimization — where better-performing systems thrive, while less effective ones are phased out or upgraded.
Technological advancement accelerates this cycle. What was once impossible becomes feasible, driving continuous upgrades in functionality and user experience. Zhou cautioned against narrow definitions of "digital currency," advocating instead for a broader understanding that includes both account-based and token-based models.
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Account-Based vs. Token-Based Models: A Balanced Approach
While most current CBDC initiatives — including China’s digital yuan (e-CNY), originally known internally as DCEP (Digital Currency Electronic Payment) — are built on account-based architectures, Zhou acknowledged that token-based systems also hold potential.
However, he noted that account-based models remain dominant due to their compatibility with existing financial infrastructure and regulatory frameworks. These systems rely on centralized oversight, which enhances traceability, security, and compliance with anti-money laundering (AML) standards.
That said, decentralization remains a topic of debate. While some advocate for fully decentralized networks, Zhou pointed out that practical implementation often favors hybrid or centralized approaches — especially in large economies where stability and control are paramount.
Moreover, digital payments increasingly interact with diverse hardware terminals — from mobile devices and desktop platforms to IC-based prepaid cards. Integrating these tools into a unified digital payment framework enhances accessibility and inclusivity.
The Critical Role of Financial Infrastructure
Underpinning all digital financial activity is financial infrastructure — the backbone of real-time transaction processing, settlement, and cross-border transfers.
Real-Time Gross Settlement (RTGS) systems play a vital role, though Zhou noted that not all transactions require full real-time processing. In many cases, near-real-time solutions may offer greater scalability and efficiency.
Interoperability remains a top priority. Systems must be designed to connect seamlessly across institutions, platforms, and borders. For cross-currency transactions, market-facing services can be provided by private entities, but they should be supported behind the scenes by central bank-backed clearing mechanisms.
This layered approach ensures both innovation at the front end and stability at the core — aligning perfectly with the two-tier operational model.
Why the Two-Tier System Matters
At the heart of Zhou’s message was a strong endorsement of the two-tier operational system for digital currency:
- Tier 1: The central bank issues digital currency and oversees the system.
- Tier 2: Commercial banks, fintech firms, telecom operators, and other licensed institutions distribute digital currency to end users.
This structure fosters competition among service providers, driving innovation and improving customer service. It also supports pluralism — allowing multiple platforms to coexist and evolve based on market demand rather than top-down mandates.
“It’s difficult to predict which technology or system will ultimately prevail. Therefore, we should allow pluralism and let competition determine the best solutions.”
Contrary to claims that only central bank-issued tokens qualify as true CBDCs, Zhou argued that commercial bank deposits under proper regulation are already highly secure forms of digital money — far more reliable than unregulated stablecoins or crypto assets.
Ensuring Independence Through Pricing Mechanisms
One of the most crucial points Zhou raised was the need for digital payment systems to operate as independent financial services — not merely as loss-leading customer acquisition tools.
To achieve this, a pricing mechanism must be established that allows service providers to charge reasonable fees for payment processing.
Without such a mechanism:
- Providers may resort to cross-subsidization, using profits from other businesses to fund free payments.
- Payment platforms could become data gateways, monetizing user data through secondary activities like targeted advertising or data resale — raising serious privacy and abuse concerns.
- Some may treat payments as a traffic funnel, prioritizing user acquisition over service quality or long-term sustainability.
These distortions undermine trust and compromise user protection. By contrast, a well-designed fee structure — even if minimal — encourages accountability, transparency, and responsible innovation.
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Security, Anti-Abuse, and Regulatory Vigilance
Zhou stressed that security remains paramount in any digital currency system. As technology lowers operational costs, it also reduces the cost of abuse — making robust safeguards essential.
Key risks include:
- Money laundering
- Illicit arms trading
- Narcotics trafficking (e.g., fentanyl)
- Cross-border gambling
- Fraudulent schemes
He cited law enforcement successes in cracking down on fraud rings using encrypted assets for cross-border transfers — underscoring an ongoing battle between regulators (“the way”) and criminals (“the magic”).
New technologies bring immense public benefits but can also be exploited. Therefore, proactive monitoring, strong KYC/AML protocols, and international cooperation are indispensable.
Cross-Border Transactions: A Strategic Frontier
Cross-border payments represent one of the most promising applications of CBDCs. They involve complex technical, regulatory, and policy challenges — from interoperability standards to exchange rate mechanisms and capital controls.
While Zhou did not delve deeply into specifics due to time constraints, he affirmed that international collaboration and pilot projects in this domain deserve continued attention and investment.
FAQ: Understanding Digital Currency and the Two-Tier System
Q: What is the two-tier operational system in digital currency?
A: It refers to a model where the central bank issues digital currency (Tier 1), while commercial institutions distribute it to the public (Tier 2). This promotes competition, innovation, and financial inclusion.
Q: Why is interoperability important in digital payments?
A: Interoperability ensures different payment platforms can work together seamlessly, preventing fragmentation and enhancing user convenience across services and regions.
Q: Can digital payment systems survive without charging fees?
A: Not sustainably. Without a revenue model, providers may resort to data monetization or cross-subsidies, leading to market distortions and privacy risks.
Q: Are all stablecoins truly stable?
A: Not necessarily. Stability depends on underlying assets and design transparency. Market confidence and regulatory oversight are key determinants.
Q: How does digital currency combat financial crime?
A: Through traceable transactions, strict identity verification (KYC), and integration with AML systems — features more controllable in regulated CBDCs than in anonymous cryptocurrencies.
Q: What role do private companies play in CBDC ecosystems?
A: They serve as distribution partners and innovators in user interface design, customer service, and integration with retail platforms — all under central bank supervision.
Zhou Xiaochuan’s vision underscores a balanced path forward: one that embraces innovation while preserving stability, encourages competition while ensuring accountability, and leverages technology while safeguarding society.
As digital currencies mature, adherence to principles like system independence, pluralism, interoperability, and anti-abuse safeguards will be essential to building trustworthy, resilient financial ecosystems.
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