Abstract: E-CNY, as a digital form of legal tender, provides three benefits that facilitate the application of smart contract– trust, interoperability, and the late-mover advantage. The digital RMB smart contract ecology could be constructed according to the following routes: 1) adhering to centralized management and a two-tier operational structure, 2) ensuring the legitimacy and validity of the contract template, 3) maintaining openness and open source, and 4) constantly upgrading technology to prevent technical risks.
Distinguished guests, colleagues, ladies, and gentlemen, good afternoon. It’s a pleasure to be here at China International Finance Annual Forum 2022.
I want to take this opportunity and part of the theme – "openness and inclusiveness" – to reflect on smart contracts and the design of an open ecosystem of the e-CNY smart contract.
Ⅰ. THE ORIGIN AND DEVELOPMENT OF THE SMART CONTRACT
I'll begin by reviewing the history of smart contracts.
To "reduce the risks of contract non-execution and default," many sophisticated and costly institutional arrangements have been put in place: on the legal level, there are laws and regulations, as well as legislative, juristic and enforcement systems that protect contract formation and execution; on the commercial level, there are safeguards like mortgages and guarantees. Even with these arrangements, defaults are still difficult to avoid. Both the default itself and the ensuing rescue measures are quite expensive. Smart contracts were created as a result to mitigate these risks through technical means.
The term "smart contract", a computer code that records the obligations of the parties to a contract and enforces performance of the obligations under agreed conditions, was coined by the American computer scientist Nick Szabo in 1994. But he presented the concept without explaining how it would be implemented. In 1996, Ian Grigg proposed the "Ricardian contract", which could be read by humans and analyzed by programs, giving smart contracts legal properties and becoming the main route for subsequent exploration of smart contract.
For a smart contract to be effectively delivered, the following conditions must be met:
? Consistency: Smart contracts must be consistent with the original contract’s text and compliant with existing laws.
? Observability: The content of the contract and its execution should be observable and transparent, with the parties to the contract able to view, record, and verify the status of the contract through the user interface. A contract cannot be altered once it has been made.
? Verifiability: The outcomes produced by a smart contract should be verifiable, with some fault tolerance; the code runs following the contract and can be executed repeatedly to get the same results to be qualified as judicial evidence.
? Privacy: Knowledge of the identity of parties involved and the content of the contract should be limited to the minimum necessary scope to protect business information confidentiality and personal privacy.
? Self-execution – the essence of a smart contract: Once the conditions of a contract are in place, the contract should be able to perform its obligations without interference or repudiation. The execution need not rely on legal enforcement.
Even after smart contracts had been around for ten years, it was difficult for the old IT to meet all of the aforementioned demands simultaneously. When "Ethereum" leveraged the disintermediation and immutability features of the blockchain to make them operational, smart contracts are somehow "tied" to the blockchain, to the extent that it is believed that only the blockchain and Defi can fully realize the potential of smart contracts.
The "Ethereum" smart contracts haven't yet contributed to the real economy as they have only been applied to a small number of industries, including gambling, gaming, NFT, and crypto assets. Their use is restricted by the lack of a scalable application ecosystem and the speculative nature of virtual currencies. In fact, the idea of smart contracts was developed long before blockchain, and blockchain is not the only technology that can support smart contracts.
II.THE ADVANTAGES OF E-CNY SMART CONTRACT
Smart contracts have huge potential in cutting costs and enhancing efficiency of the digital economy as well as facilitating service innovation. With the rapid development of fintech, technology is no longer an obstacle to the operation of smart contracts. The extensive application of smart contracts depends more on the establishment of a reliable and open ecosystem.
In the top-level design of e-CNY, smart contracts can be uploaded without affecting the currency’s functions to realize the programmability of e-CNY, enabling automatic payment based on the conditions and rules agreed by transaction parties while ensuring security and compliance. As a digital form of legal tender, e-CNY has great advantages in building an ecosystem that supports the application of smart contracts.
1. Trust
The trust that e-CNY offers is manifested in two dimensions: first, trusted payment and settlement. As a legal tender backed by the state, e-CNY can provide trustworthy payment instruments for automatic execution of smart contracts; second, trusted transaction environment. The development and operation of smart contracts require a trustworthy environment. To that end, rules and standards need to act as the support to guide and restrict participants and ensure that the “self-executing” feature of smart contracts is widely recognized and the legitimacy of these contracts is acknowledged by the authority and not self-proclaimed. E-CNY is a public good provided by the PBC, and the e-CNY system is a financial infrastructure built by the central bank. Based on e-CNY, we can foster a fair transaction environment with mutual trust to enhance the trustworthiness of smart contract execution.
2. Interoperability
The advantages of e-CNY’s interoperability are also two-fold: first, the interoperability between the smart contract system and external systems. Traditional IT systems tend to generate information silos since each system forms a closed loop. By comparison, a smart contract system needs to interact with other systems to share data on identity verification and compliance check so as to secure the trusted execution of the contract and transfer of value. As a legal tender, e-CNY can connect a wide range of ecosystems, which can help realize the connectivity and exchange of information and value; second, interoperability of operating environments. As smart contracts are intended to serve economic activities of various industries and scenarios, only when the operating environments are interoperable can we secure the universality of the contract template, i.e. the contract’s reusability by different institutions based on a single development. As a legal tender, e-CNY inherently has an edge in breaking down the barriers and realizing interoperability. Therefore, a smart contract system based on e-CNY makes it easier to realize the interoperability of the operating environments.
3. Late-mover advantage
The e-CNY system is a new type of financial infrastructure in the era of digital economy. By adopting long-term thinking about its development, constantly upgrading applied technologies, improving R&D and business models, we can build a smart contract ecosystem that is stable, flexible, efficient, innovative, open, and inclusive, without the burden of legacy systems.
III. PRINCIPLES FOR CONSTRUCTING THE E-CNY SMART CONTRACT ECOSYSTEM
The e-CNY smart contracts should not only have such features as “consistency, observability, verifiability, privacy, and self-execution”, but also utilize the business and technological advantages of the e-CNY system to better support the development of the digital economy. Therefore, the establishment of the e-CNY smart contract ecosystem should follow the following directions and principles:
1. Stick to decentralized management and a two-tier operational framework.
To secure a trusted operating environment for smart contracts, under centralized management by the central bank, we are pushing forward the establishment of a trusted e-CNY smart contract environment and setting up relevant business rules and technical standards so as to foster wide mutual trust and consensus. Meanwhile, as smart contracts aim to serve all kinds of businesses, they need to adapt to differentiated needs of various scenarios, and also provide convenience and a safe environment for contract development. In doing so, we can give full play to the business and technical strengths of designated operators and other market players, and unleash the enthusiasm and creativity of market entities to jointly build and improve the smart contract ecosystem.
2. Ensure the legitimacy and validity of the smart contract template.
Smart contracts are related to the economic interests of the participants, the business environment, and economic and financial stability. The legitimacy and consistency of the contract template is an important basis for a smart contract to ‘self-execute’. If the template management is insufficient, it may cause economic and financial risks. Therefore, smart contracts can only be registered as templates after review and testing, to ensure compliance with laws and regulatory requirements. We will build a service platform for the e-CNY smart contract ecosystem, on which the contract templates that have passed the review will be registered under uniform standards. We will also verify the consistency of the templates when smart contracts are called by institutions to make sure the templates cannot be altered.
3. Maintain system openness and open source.
In order to meet the all-encompassing and diverse needs, it is necessary to lower the threshold for the development and formation of e-CNY smart contracts, encourage the whole society to participate in the development of contract templates and innovation of applications, and establish a rich, efficient and convenient smart contract supply system. Therefore, the system must be open and insist on open source. The service platform for the e-CNY smart contract ecosystem can become an open platform like a mobile phone application market. On this platform, all types of institutions can provide services which, like block building, can be combined and used according to users' needs, so as to achieve openness, open source, joint development and shared use.
4. Maintain technical upgrades to prevent technological risks.
Financial services are always faced with the threat of cyber attacks, and any security technology has its own validity period. Risk prevention and control is a long-term process. Therefore, smart contracts must not only ensure the security of templates, but also persist with technical upgrades and security reinforcement. The e-CNY ecosystem will apply the latest security technologies, and use the country’s best technical resources and capabilities, to ensure the security of smart contracts.
IV. APPLICATION SCENARIOS OF E-CNY SMART CONTRACTS
E-CNY smart contracts have a wide range of application scenarios, which can reduce the transction cost of economic activities, improve business environment, and promote the development of digital economy. At present, e-CNY smart contracts have been successfully applied in the fields of government subsidy transfer, retail marketing, and prepaid fund management. With the gradual improvement of the underlying platforms and related institutional arrangements, the implementation of the smart contracts will be accelerated on a larger scale.
E-CNY smart contracts could demonstrate diverse functions in different scenarios. For example, in prepaid fund management such as prepaid consumption, smart contracts can effectively prevent misappropriation of funds, achieve transparent management, and protect the interests of all parties under the existing business model. In management of targeted payment such as fiscal subsidies and scientific research funds, smart contracts can monitor and improve the efficiency of use of government funds. In fund settlement such as fund collection and intelligent account splitting, smart contracts can solve the compliance issues with payment transaction processing, increase the accuracy and automation level of fund processing, and reduce manual processing errors and risks. In the marketing and retail fields such as consumer red packets and smart payment, smart contracts can reduce implementation costs, protect users’ rights, and improve customers’ experience. In trade, it can provide a closed-loop solution of " contract signing + contract execution", which can improve the binding force of the contracts, realize the synchronization of fund flow and information flow, and reduce the settlement and compliance costs.
We will work with market entities to speed up the construction of the e-CNY ecosystem and give full play to all parties. Moreover, we will step up efforts to improve relevant business norms and standards, establish a compliance review mechanism, and discuss connection of judicial procedures with relevant departments.
As a folk song goes, the coin goes to thousands of homes without legs. The construction of the e-CNY ecosystem requires the joint efforts of everyone. We welcome the whole society to join this cause that will benefit thousands of households.
This is the transcript of Mu Changchun's speech at the China International Finance Annual Forum 2022 held in Beijing on September 2. The views expressed herewith are the author’s own and do not represent those of CF40 or other organizations. It is translated by CF40 and has not been subject to the review of the author.
