The People’s Bank of China has a clear strategic plan for digital renminbi, and the core view can be described as “consistent.”
Original title: “Zou Chuanwei: A Preliminary Study on the Ecological Pattern of Digital RMB”
Author: Zou Chuanwei, Chief Economist of Wanxiang Blockchain
What are the participating institutions in the digital RMB ecosystem? What role will they play? As the digital renminbi began internal closed pilot tests in 4 cities in April, this has become a matter of great concern to the financial community. For example, digital currency concept stocks have appeared in A-shares, and the impact of digital renminbi on related listed companies, commercial banks and non-bank payment institutions has been carried out by securities company researchers. However, because the People’s Bank of China does not disclose much information about the digital renminbi, most of the research reports on the market have a “reasonable speculation” nature.
On September 14, Fan Yifei, Vice President of the People’s Bank of China, published “Analysis on the Policy Implications of the Positioning of Digital RMB M0” in the Financial Times. This is Fan Yifei’s second time to elaborate on the People’s Bank of China’s position on digital renminbi in the financial media after “Some Considerations about the Central Bank’s Digital Currency” published by China Business News on January 25, 2018. From Fan Yifei’s two articles, the People’s Bank of China has a clear strategic plan for the digital renminbi, and the core point of view can be described as “consistent.” In my opinion, Fan Yifei’s latest article has revealed an overview of the digital renminbi ecology, and some unanswered questions need further study.
The Monetary Economics Attributes of Digital RMB
Digital RMB is mainly positioned at M0 (cash in circulation), which is consistent with the positioning of digital RMB as a retail central bank digital currency (CBDC). From the perspective of CBDC projects in major countries, wholesale and retail CBDCs replace central bank currency, which is not at the same level as commercial bank currency (ie deposits). Because M1 and M2 contain commercial bank deposit currencies, the idea of using CBDC to replace M1 and M2 is logically difficult to establish. The M0 positioning and significance of digital renminbi need to be understood in conjunction with my country’s currency and payment system.
In modern society, commercial bank money constitutes the main component of the broad money supply. Commercial bank lending is accompanied by currency creation, which is an important social function undertaken by commercial banks. When commercial banks lend to individuals and institutions, the asset side adds a loan and the debt side adds a deposit. Under the partial deposit reserve system, this process continues to form a mechanism for multiple expansion of deposits. Although some non-bank financial institutions can also lend, only commercial bank lending is accompanied by an increase in liabilities (ie deposits), and among private sector institutions, only commercial bank liabilities can effectively perform monetary functions. When a user uses a commercial bank deposit currency to pay, it involves the commercial bank’s intra-bank system and the inter-bank payment clearing system.
There are two situations when users use non-bank payment institutions to make electronic payments (such as transferring money and sending or grabbing red envelopes). First, the payment is initiated by a non-bank payment institution, but the payment is made through a bound bank card, which is actually done using commercial bank deposit currency. Second, payments are made through payment account balances, such as Alipay balance and WeChat wallet balance. The payment account balance is essentially the prepaid value, which corresponds to the prepaid collection funds (that is, reserve funds) actually received by non-bank payment institutions for the payment business entrusted by the user, and the user needs to recharge in advance with commercial bank deposits. According to the current management system of non-bank payment institutions, 100% of the reserve funds are centrally deposited in the People’s Bank of China.
The above briefly introduced payment systems such as inter-bank payment and clearing systems that support the circulation of M1 and M2, commercial bank intra-bank systems, and non-bank payment institutions. These systems have played an important role in my country’s development of the world’s leading mobile payment services. In view of the electronic and digital level of these systems, replacing M1 and M2 with digital renminbi is just like “superfluous” and it is really unnecessary.
There are multiple relationships between digital renminbi and renminbi cash.
First, digital renminbi can be regarded as an upgraded version of cash, which is the same as cash in terms of its core features of M0 and “payment as settlement”.
Second, the replacement of cash by digital renminbi will not only help reduce the costs related to cash printing, allocation, warehousing, placement, withdrawal, sorting, and destruction, but also play to the characteristics of controllable anonymity and traceability to inhibit cash-based illegal activities , Such as tax evasion, money laundering, and terrorist financing.
Third, although the absolute amount of cash is still growing, with the development of electronic payments, the utilization rate of cash has fallen. Many people have “one machine in hand, traveling all over the country.” In this context, allowing the public to hold the currency of the central bank through the digital renminbi, ensuring that the deposit currency of commercial banks can be converted into the currency of the central bank in equal amounts, is very important for the smooth operation of the economy and finance and increasing public confidence in the renminbi.
The digital renminbi is aimed at retail payments and has many overlaps with non-bank payment institutions in terms of target users and scenarios, and will provide more redundancy for the current electronic payment system. However, it should be noted that non-bank payment institutions provide payment instruments rather than currency instruments, and only users of the same non-bank payment institution can transfer transactions to each other. Digital RMB is the digital form of my country’s legal tender. Digital RMB is used to pay all public and private debts in my country (such as consumption and shopping, payment of utility bills, and monthly mortgage payment, etc.), and no unit or individual may refuse to accept it if it has the conditions for acceptance. The legal compensation features of the digital renminbi help break retail payment barriers and market segmentation, avoid market distortions, protect the rights and interests of financial consumers, and provide a universal base currency for the development of the digital economy.
Technical attributes of digital RMB
Regarding the technical attributes of digital renminbi, Fan Yifei’s expressions are “based on a broad account system”, “loosely coupled bank accounts” and “derived new functions different from electronic payment tools based on value attributes.” How to understand these expressions? In my opinion, it is best to combine the patent documents of the People’s Bank of China on digital RMB.
In the traditional account system represented by deposit accounts of commercial banks and payment accounts of non-bank payment institutions, the account name shows the real identity of the user, and the account balance records how much deposits the user has and how much funds received in advance are entrusted to non-bank payment mechanism. Payment under the traditional account system is to reduce the corresponding amount from the payer’s account balance, and at the same time increase the corresponding amount to the recipient’s account balance. If the payer’s and beneficiary’s accounts are not in the same account management institution (such as commercial banks and non-bank payment institutions), then the receipt and payment will trigger a transaction between the two account management institutions, and this requires adjusting their accounts The account balance of a higher-level account management institution (such as the central bank) is performed.
The traditional account system follows the principle of real-name system. For example, for personal bank settlement accounts, Type I bank accounts need to be opened at the bank counter and verified on-site; Type II and Type III bank accounts can be opened through electronic channels such as the Internet, but they need to be tied to a Type I bank account or credit card account with the same name. Be sure to verify your identity and use it. Since the birth of payment accounts, non-bank payment institutions have been opening payment accounts for users in a non-face-to-face manner. For personal payment accounts, type I accounts need an external channel to verify user identity, such as online verification of the user’s resident ID information; if type II and type III payment accounts are opened in a non-face-to-face manner, three and five external channels are required respectively Verify user identity.
The digital renminbi is an encrypted digital string representing a specific amount issued by the People’s Bank of China with guarantee and signature. Each digital renminbi has a unique owner at any time. The owner identifier is embodied as the user address, which is generally the hash digest value of the user’s public key. Because it is almost impossible to deduce the original data (that is, the public key) from the hash digest value (that is, the address), the address is naturally anonymous. The controllable anonymity of digital renminbi is embodied in the fact that the address and the user’s real identity can be unrelated, or they can be linked to varying degrees through the “Know Your User” (KYC) process (for example, the digital renminbi wallet is bound to a bank card). Related information is only held by the People’s Bank of China. This user information is centrally managed by the digital currency system of the People’s Bank of China.
The owner information of the digital renminbi is recorded and changed by the digital currency system of the People’s Bank of China. The digital currency system is built around digital renminbi, and records the address of the owner of each digital renminbi. The total amount of digital RMB owned by an address is equal to the sum of all digital RMB denominations owned by the address. Digital RMB payment means changing the owner of the digital RMB owned by the payment address to the receiving address.
Therefore, in the digital renminbi system, the address is controllable and anonymous, and may not necessarily be associated with the user’s real identity; there is no concept similar to the account balance; payment is reflected in the change of the owner of the digital renminbi, not the account balance adjustment; theoretically, any two Direct peer-to-peer transactions are possible between each address.
Digital RMB’s wholesale and retail links
Digital RMB was the first to propose a dual model of “central bank-commercial bank”. This model has been followed by CBDC projects in major countries and is embodied in two links, wholesale and retail. In the wholesale link, commercial banks use the deposit reserves deposited in the central bank to exchange the CBDC with the central bank on demand, which is also the issuance link of CBDC. In the retail sector, users use cash or deposits to exchange CBDC with commercial banks. If there is only a wholesale link but no retail link, it is a wholesale CBDC, such as the Jasper project of the Bank of Canada, the Ubin project of the Singapore Monetary Authority, and the LionRock project of the Hong Kong Monetary Authority. There are both wholesale and retail links, which is a retail CBDC. Digital RMB is in a leading position in global retail CBDC projects.
Vice President Fan Yifei systematically explained the wholesale link of digital renminbi in the article.
First, only commercial banks that are relatively strong in capital and technology can serve as designated operating institutions to participate in the wholesale process and use deposit reserves to exchange digital renminbi with the People’s Bank of China. Other commercial banks and non-bank payment institutions cannot directly trade with the People’s Bank of China to exchange digital renminbi.
Second, the People’s Bank of China provides digital RMB as a public product to the public. Digital RMB does not count interest. The People’s Bank of China does not charge digital RMB exchange and circulation service fees during the wholesale process. The wholesale link of digital renminbi has largely borrowed from the cash issuance system. The main difference is that only commercial banks as designated operating institutions can participate in the issuance of digital renminbi.
Fan Yifei clarified three points about the retail link of digital RMB.
First, digital renminbi must comply with the “People’s Bank of China Law”, “Renminbi Management Regulations” and other laws and regulations related to cash management, as well as large cash management, anti-money laundering, and anti-terrorist financing laws and regulations.
Second, commercial banks, as designated operating institutions, under the quota management of the People’s Bank of China, open different types of digital renminbi wallets for them according to the identification strength of user identity information, and perform digital renminbi redemption services.
Third, commercial banks do not charge individual customers for redemption service fees for digital RMB.
Issues for further study
(1) How does the settlement arrangement of digital renminbi realize “payment as settlement” and interoperability across operating institutions?
One idea is that digital renminbi transactions of individuals and institutions (including commercial banks) are immediately reflected in the update of the digital currency registration center of the People’s Bank of China. This is equivalent to the People’s Bank of China providing real-time full settlement to the public, and it places high requirements on the security and performance of the digital RMB system.
(2) How can other commercial banks (referring to commercial banks that are not designated operating institutions) and non-bank payment institutions participate in digital RMB circulation services? How to play their active role in the digital RMB system?
First, can other commercial banks not participate in the wholesale link of digital renminbi and only participate in the retail link? In other words, can other commercial banks operate digital renminbi wallet services, but not exchange digital renminbi with the People’s Bank but with designated operating institutions? If the digital renminbi wallet management mechanism and technology are mature, this arrangement will not affect the centralized management of digital renminbi and the dual model of “central bank-commercial bank”, will not create additional risks, and can effectively promote the public to hold and use digital RMB.
Second, how are the ATM machines of commercial banks compatible with digital RMB? RMB cash and digital RMB will coexist for a long time, and users will have continuous demand for two-way exchange between the two. This is an important part of the digital renminbi retail link, and it puts forward upgrade requirements for ATM machines.
Third, can the list of designated operating institutions be expanded? With the development of my country’s banking industry and the deepening of understanding of the digital RMB, more commercial banks will meet the requirements of the People’s Bank of China for designated operating institutions, namely mature infrastructure, complete service system, adequate talent pool, and retail business governance system Rich experience in risk measures, etc. In the long run, the list of designated operating institutions can be expanded and should be expanded.
Fourth, what is the status of non-bank payment institutions in the digital RMB ecosystem? The “aorta” of electronic payment in my country is commercial banks, and the “capillaries” are non-bank payment institutions. In the past 10 years, driven by innovation and market competition, non-bank payment institutions have deeply penetrated common people’s daily necessities, living payments, credit card repayments, and social entertainment, despite the concentration of the payment market, market segmentation, and protection of financial consumer rights Ineffectiveness and other issues, but it has brought great convenience to the people. As Vice President Fan Yifei pointed out, according to Article 9 of the “Administrative Measures for Online Payment Services of Non-bank Payment Institutions”, non-bank payment institutions shall not operate or operate currency exchange in a disguised form, and do not have a system for providing exchange services for the digital RMB positioned by M0. basis. Specifically, whether non-bank payment institutions exchange digital renminbi to the People’s Bank of China at the wholesale stage or exchange digital renminbi with a designated operating institution at the retail stage, they have no legal basis. In addition, if a non-bank payment institution provides digital renminbi exchange services, it will inevitably involve two-way exchange between the reserve fund and the digital renminbi. Although both the reserve fund and the digital renminbi belong to the category of base currencies, this has an impact on monetary economics. very complicated.
In my opinion, in addition to payment product design innovation, scenario expansion, market promotion, system development, business processing, operation and maintenance and other service links, users should be allowed to use digital RMB to recharge accounts of non-bank payment institutions. In terms of implementation, non-bank payment institutions open digital renminbi wallets at designated operating institutions, and users transfer digital renminbi from their own wallets to the wallets of non-bank payment institutions as prepayment collection funds for entrusting non-bank payment institutions to handle payment services , But it is restricted that users can only get back digital RMB instead of commercial bank deposits when withdrawing cash. The value basis of this part of the payment account balance is changed from the reserve fund to the digital renminbi, because both the reserve fund and the digital renminbi belong to the base currency and are basically equivalent in terms of risk connotation.
Fifth, how does the corporate user terminal adapt to the digital RMB? On the one hand, POS machines need to be upgraded. On the other hand, digital RMB should be compatible with the QR code acquiring system established by non-bank payment institutions. According to the legal compensation characteristics of digital renminbi, enterprise users cannot refuse consumers to use digital renminbi to pay after they meet the acceptance conditions. This facilitates the application and promotion of digital RMB.
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