The concept of blockchain, once confined to discussions within IT and financial circles, has surged into mainstream awareness following a collective study session by China’s central political bureau. Overnight, blockchain-related technologies and applications became hot topics among the general public. Among these, the relationship between blockchain and digital currencies—particularly central bank digital currencies (CBDCs)—has drawn intense scrutiny.
Is there a natural bond between blockchain and digital money akin to the historical connection between precious metals and currency? How are they interrelated? And where is the future of CBDCs headed?
Yao Qian, General Manager of China Securities Depository and Clearing Corporation and former Director of the People's Bank of China Digital Currency Research Institute, sheds light on these questions.
The Cryptographic Origins and Evolution of Blockchain
Modern cryptography took a revolutionary leap with the invention of asymmetric encryption, solving the scalability issues inherent in symmetric key systems. In symmetric encryption, the same key is used for both encryption and decryption—posing major logistical challenges in large-scale communication.
In 1976, Whitfield Diffie and Martin Hellman introduced the idea of splitting a single key into a pair: one public, one private. This breakthrough laid the foundation for secure digital communication. For example, if Alice wants to send Bob an encrypted message, she uses Bob’s public key. Only Bob, holding the corresponding private key, can decrypt it.
The RSA algorithm, proposed in 1978 by Rivest, Shamir, and Adleman, was the first practical implementation of this asymmetric model. Beyond enabling secure transmission, it introduced digital signatures, allowing users to authenticate messages—verifying both origin and integrity.
Another cornerstone is hash functions, such as SHA (developed by the U.S. NSA in 1993) and China’s SM3 standard. Hash algorithms convert inputs into fixed-size outputs rapidly and irreversibly—a property vital for data integrity checks. In fact, even the serial numbers on paper currency can be seen as analogous to hash outputs.
In cryptocurrency systems, hashing powers core mechanisms: mining, block linking, and wallet address generation.
👉 Discover how cryptographic innovations are shaping the future of finance today.
The Emergence of Digital Currency
The vision of digital cash emerged from a simple yet profound question: Can money be sent like an encrypted email? This idea led David Chaum to propose blind signatures in 1982—a cryptographic method enabling anonymous, untraceable electronic payments. His eCash system was pioneering but still relied on a centralized "bank-customer-merchant" model, which struggled with scalability due to growing databases of spent coins.
A paradigm shift came in 2008 with Satoshi Nakamoto’s Bitcoin whitepaper. It introduced a decentralized peer-to-peer electronic cash system, eliminating reliance on central authorities. By using Unspent Transaction Outputs (UTXO) instead of tracking spent coins and chaining blocks via cryptographic hashes, Bitcoin created a distributed ledger secured by consensus.
This innovation allows anyone with internet access to conduct trustless transactions without intermediaries—transforming how value moves across borders.
What Makes Blockchain Revolutionary?
From multiple perspectives, blockchain represents a structural transformation:
- System Architecture: A decentralized network where every node can act as both client and server, empowering end-users.
- Accounting Technology: A distributed ledger that ensures immutability, transparency, auditability, and real-time reconciliation—potentially enabling instant balance sheets.
- Account Model: Users generate private keys locally, derive public keys, and create wallets independently—bypassing traditional banking accounts.
- Value Exchange: Enables decentralized asset trading, reducing or removing intermediaries.
- Organizational Behavior: Facilitates distributed collaboration without hierarchical control—redefining economic coordination.
- Economic Model: Introduces algorithmic economies that blend market efficiency with programmable rules, respecting voluntary exchange while optimizing incentives.
Limitations of Current Blockchain Systems
Despite its promise, blockchain faces several hurdles:
- Performance: Full decentralization slows transaction speeds. Bitcoin confirmations can take minutes or even hours.
- Privacy: Public ledgers expose transaction details. Solutions like zero-knowledge proofs and homomorphic encryption are being explored.
- Security: Smart contracts are vulnerable to exploits; formal verification methods are needed.
- Governance: Decentralized communities lack clear decision-making frameworks during crises.
- Interoperability: No universal protocols exist for cross-chain communication, limiting innovation.
Future Directions in Blockchain Technology
Key advancements will focus on:
- Consensus Protocols: Balancing security, speed, and decentralization through innovations like Proof-of-Stake, DAGs, and sharding.
- Cross-Chain Integration: Enabling interoperability between public, consortium, and private blockchains.
- Regulatory Compliance: Embedding KYC/AML features directly into blockchain systems via supervisory nodes or regulated sidechains.
- Self-Sovereign Identity: Leveraging blockchain as a decentralized public key infrastructure (PKI), giving individuals full control over their digital identities.
- Privacy Preservation: Allowing users to prove authenticity without revealing personal data—enabling selective disclosure.
Digital wallets are evolving beyond storage tools into gateways for managing diverse digital assets—including DeFi services, NFTs, and dApp access. Their future lies in security, ease of use, financial product integration, and bridging digital assets with real-world applications.
Smart contracts will drive programmable economies—but require legal clarity and emergency override mechanisms to handle edge cases.
Furthermore, convergence with AI, big data, cloud computing, and distributed file systems will unlock new use cases—from automated asset securitization to transparent supply chains.
👉 See how next-gen blockchain applications are redefining global finance.
Cryptocurrency vs Third-Party Payments: A Fundamental Divide
While platforms like Alipay use encryption for data transmission, they operate under centralized models—unlike true cryptocurrencies.
Think of Alipay as 4G: fast and efficient within a closed ecosystem. Cryptocurrency payments resemble 5G: open, decentralized, and built on universal infrastructure.
Financial Inclusion
Traditional payment systems rely on layered accounts and proprietary networks—especially costly for cross-border transfers. Cryptocurrencies bypass these barriers entirely, running on existing internet infrastructure. Anyone online can participate equally.
Privacy Protection
Third-party systems store user data centrally—making them prime targets for breaches (e.g., Facebook’s 50 million-user leak). Blockchain offers a new model: users control their data via private keys, anonymize identities through address derivation, and decide exactly who sees what.
This shift marks a move from institutional control to individual sovereignty over personal information.
The Future Path of Central Bank Digital Currencies
Facebook’s Libra (now Diem) didn’t copy Bitcoin or Alipay—it forged a new path. This suggests that future-ready digital currencies must combine cutting-edge tech with lessons from traditional monetary evolution.
Central Bank Cryptocurrencies (CBCC) represent one promising direction—and were indeed the starting point of China’s CBDC research.
Globally, projects like Canada’s Jasper, Singapore’s Ubin, and the Eurosystem-Japan’s Stella explore blockchain-based wholesale CBDCs. However, most remain limited to institutional use due to concerns about retail-scale operational burdens on central banks.
China’s prototype system adopts a hybrid approach:
- Uses blockchain for a tamper-proof ownership verification ledger, acting as a public “online counterfeit detector.”
- Keeps core transaction processing on traditional distributed systems to avoid performance bottlenecks.
- Implements a two-tier ledger structure (central + sub-ledgers), reducing central bank workload while maintaining oversight.
This separation ensures scalability without sacrificing security or control.
Academic focus remains heavily centered on blockchain-based CBCC designs—indicating strong momentum behind this approach.
Libra vs National CBDCs: Key Differences
Though both leverage cryptographic techniques, distinctions abound:
| Feature | CBDC | Libra |
|---|---|---|
| Issuer | Sovereign central bank | Private consortium |
| Platform | Often permissioned | Open-source (Apache 2.0) |
| Anonymity | Tiered privacy | Pseudonymous |
| Bank Integration | Linked to existing accounts | Standalone |
| Asset Issuance | Typically single currency | Multi-asset backed |
More importantly, while CBDCs focus on digitizing M0 (cash), Libra operates at higher monetary layers (akin to M1/M2). With M0/M2 ratios around 4% in China, digital M1+ presents far greater transformative potential.
Moreover, many CBDC initiatives follow closed "Manhattan Project"-style development—contrasting sharply with Libra’s open-source model. Open collaboration fosters faster innovation, broader adoption, and better alignment with market needs.
Ultimately, all digital currencies must survive market competition.
👉 Explore how open innovation is accelerating the global adoption of digital currencies.
FAQ
Q: What is the main difference between cryptocurrency and central bank digital currency?
A: Cryptocurrencies like Bitcoin are decentralized and privately issued, while CBDCs are sovereign-backed digital forms of national money issued by central banks.
Q: Can blockchain handle high-speed retail payments today?
A: Not efficiently at scale. Most public blockchains face throughput limitations—hence hybrid models that separate settlement from verification are being adopted.
Q: Does using cryptocurrency guarantee complete anonymity?
A: Not necessarily. While wallet addresses aren't directly tied to identities, transaction patterns can be analyzed. True anonymity requires additional privacy-enhancing technologies.
Q: Will CBDCs replace cash?
A: They’re designed to complement physical cash initially. Over time, they may reduce reliance on it—but full phase-out depends on policy and public acceptance.
Q: Are smart contracts legally binding?
A: Their enforceability varies by jurisdiction. While technically self-executing, integration with legal frameworks is still evolving.
Q: How does CBDC impact commercial banks?
A: A two-tier system protects banks’ role in distribution and customer service. Direct central bank accounts could disrupt this—but design choices can mitigate risks.
Core keywords: cryptocurrency, central bank digital currency, blockchain technology, digital currency, distributed ledger, CBDC, financial inclusion, decentralized finance