The former head of the digital currency initiative at the People's Bank of China (PBoC) said central bank digital currencies (CBDCs) are set to become more "smart" and could one day operate on blockchain networks like Ethereum.

Yao Qian, now director of the Science and Technology Supervision Bureau of the China Securities Regulatory Commission, said over the weekend that CBDCs shouldn't attempt to be just a digital form of physical cash, but should incorporate smart contract functionality, Sina Finance reported Monday.

Smart contracts are automatically executing pieces of blockchain code that carry out functions when certain conditions are met, and can also be designed to complement or replace legal contracts.

Yao told the International Finance Forum 2021 Spring Conference in Beijing, however, that the number of security incidents arising from smart contract vulnerabilities shows the technology still needs to mature. Further, there are concerns over the legal status of digital contracts, he said.

As such, central banks should take a cautious approach, starting with simple smart contracts and building complexity as security and legality become more assured.

Yao led the central bank’s digital currency research lab from its inception until he left the PBoC in 2018, moving to the China Securities Regulatory Commission at the end of 2019. He is cited as author or co-author on many of the central bank's patent applications relating to CBDC technology.

The People's Bank has been working on trials of its digital yuan with commercial banks and payment providers. However, a CBDC needn't necessarily be account-based, Yao said.

In theory, via a "two-tier" approach, a digital yuan or digital dollar could sit on Ethereum's network, or that of the Facebook-backed Diem (formerly Libra). That would mean central banks could provide CBDCs directly to users without needing intermediaries.

"Layered operations can enable the central bank's digital currency to better benefit groups without bank accounts and achieve financial inclusion," he said.