Author: Yi princess, Machou Yue, Li Hongliang, Zhangxiao Ru, Xin Zhang
The development of Internet information technology has pushed the world into the era of big data, and the ecological environment of Chinese commercial banks has also undergone a relatively large change. The changes in the competitive situation, the financial needs of customers and the changes in the regulatory system are all important to the survival of commercial banks. Development poses greater challenges. In order to enhance service supply capabilities and effectively enhance their core competitiveness, it is necessary for commercial banks to carry out digital transformation and development to promote their growth and progress. This article mainly studies digital currency and its impact on commercial banks, and elaborates on the relevant overview of digital currency, commercial bank customer boundaries, the stability of demand deposits, and currency creation.
introduction
With the development of the world economy and the advancement of Internet technology, the leapfrog development of the global economic aggregate is also driving the optimization and change of the global economic structure. In this era, most countries are pursuing higher-level upgrades in the payment field. The fully integrated development of the digital economy and the real economy has also accelerated the pace of transformation and upgrading of the traditional currency system. The increasing maturity of technologies such as massive storage, secure transactions, and data analysis has also provided strong support for the issuance of legal digital currencies. Various digital currencies have experienced unprecedented development, and their applications worldwide are accelerating. Although it is not yet mature and perfect in terms of currency technical consensus, rule consensus, and security consensus, it still attracts widespread attention.
The People’s Bank of China took the lead in piloting the central bank’s digital currency. The central bank’s digital currency, DCEP (Digital Currency Electronic Payment) literally means digital currency and electronic payment tools. my country’s central bank digital currency is a digital form of the renminbi, issued by the People’s Bank, operated by designated operating institutions and exchanged to the public. It is based on a broad account system, supports loose coupling of bank accounts, and is equivalent to banknotes and coins. It is a controllable anonymous payment tool with value characteristics and legal compensation.
The development of Internet information technology has pushed the world into the era of big data, and the ecological environment of Chinese commercial banks has also undergone a relatively large change. Changes in the competitive situation, customer financial needs and changes in the regulatory system are all critical to the survival of commercial banks. Development poses greater challenges. In order to enhance service supply capabilities and effectively enhance their core competitiveness, it is necessary for commercial banks to carry out digital transformation and development to promote their growth and progress. The digital renminbi brings opportunities and certain challenges to the digital transformation of commercial banks.
The development and peace of digital currency will have an important impact on economic development and commercial banks. Therefore, we should follow the trend of the times, analyze the characteristics and nature of digital currency, and study its impact on commercial banks. We mainly conduct research on digital currency and its impact on commercial banks, and elaborate on the relevant aspects of digital currency, commercial bank customer boundaries, demand deposit stability and currency creation.
Introduction to Digital Currency
development path
In recent years, with the emergence of virtual currencies such as Bitcoin and Libra and the popularity of electronic payments, in order to ensure the security of payment and the stability of the financial system, some central banks have begun to study the launch of legal digital currencies. Legal digital currency refers to the electronic currency issued by the national legal currency issuing agency with national credit endorsement and unlimited legal solvency. The People’s Bank of China conducted early demonstration research on digital currency and carried out substantive issuance and promotion.
In 2014, the People’s Bank of China established a legal digital currency research team to demonstrate the feasibility of issuing legal digital currency. After six years of analysis and demonstration, technical research, risk regulation, etc., in April 2020, it will be in Shenzhen, Suzhou, and Xiongan New District. , Chengdu and the future Winter Olympics scene to conduct internal closed pilot tests.
In October 2020, the central bank launched a digital RMB red envelope pilot, which means that the digital RMB test has entered a “semi-open” stage.
Table 1 Summary of important events related to the central bank’s digital RMB promotion in the past year
Features
1. Two-tier operating mechanism
The first layer: the People’s Bank of China, which coordinates quotas and standards, full information management, digital wallet management, and infrastructure construction; the second layer: designated commercial banks to provide digital renminbi exchange services; other commercial banks and non-bank payment institutions: Yes Undertaking circulation services can be understood as 2.5 layers.
The commercial bank pays 100% of the reserve fund to the People’s Bank of China, and the People’s Bank gives the commercial bank an equivalent amount of digital renminbi, and then the user exchanges the digital renminbi with the commercial bank through cash or deposits. If the People’s Bank of China directly faces users, the People’s Bank of China needs to face all consumers in China, and it needs to design a system that meets both user experience and high performance requirements. Therefore, the best way is determined by the market economy, that is, It is said that the user-oriented end will be handed over to commercial banks or institutions to give full play to the role of market competition.
Source: “Several Considerations on the Central Bank’s Digital Currency” (Fan Yifei), “Analysis on the Policy Implications of the Positioning of Digital RMB M0”
Figure 1 Digital RMB operating model under the two-tier operating system
2. The central bank maintains technology neutrality
Mu Changchun, director of the Digital Currency Research Institute of the People’s Bank of China, revealed in his speech that when the People’s Bank of China’s Digital Currency Research Group first studied the central bank’s digital currency, they made a prototype that completely adopted the blockchain architecture, but based on existing technology, Unable to meet the high concurrency requirements of the retail level. Therefore, in the end, the central bank level maintains technology neutrality, does not preset a technical route, and does not rely on a certain technology. In other words, as long as commercial institutions can meet the central bank’s technical specifications and user experience requirements for digital renminbi, any blockchain or traditional technology can be adopted. There is no technical route, which means that as long as the central bank’s digital renminbi technology is mature, commercial banks can quickly connect with it. This will greatly shorten the time for the digital renminbi to be launched and seize the lead in the world.
3. Digital RMB mainly replaces M0
(1) Digital RMB is positioned as a partial replacement of M0. Its functions and attributes are exactly the same as those of paper money in circulation. The essence is the central bank’s (not payment institution) liabilities to currency holders (residents or enterprises), with unlimited methods. Compensatory. M0 digitalization is a supply-side structural reform catalyzed by the law of currency development and payment demand. With the development of information technology, wholesale funds are electronically based on payment systems. Interbank payment and clearing systems that support the circulation of M1 and M2 (such as large and small payment systems and online payment inter-bank clearing systems), commercial bank intra-bank systems and non-banks Various payment systems such as payment institutions have been continuously improved and upgraded to better meet the needs of economic development. Replacing M1 and M2 with digital renminbi will neither help improve payment efficiency, but will also cause a huge waste of existing systems and resources. However, electronic payment tools are based on the tightly coupled model of existing bank accounts, and the public’s demand for anonymous payment cannot be fully satisfied. Therefore, electronic payment tools cannot completely replace M0.
(2) Value transfer can be realized without relying on the existing bank account system, which is the characteristic of loose coupling of bank accounts. This means that users do not need to bind a bank account to make transfer payments when using digital renminbi, which is very attractive to overseas people who are in poor and remote areas and lack traditional financial infrastructure (banks).
(3) No interest is calculated.
Security
1. Security
It is required to prevent any party in the business from changing or illegally using digital currency. This is more reflected in the supervision of the use of digital renminbi, and even an illegal transaction can be terminated.
2. Non-repeatability
Means that the digital currency can only be used once, and repeated expenses are easy to be checked.
3. Controllable Anonymity
Even if commercial banks and merchants collude with each other, they cannot track the use of digital renminbi, that is, except for the issuer of digital renminbi (the People’s Bank of China), other institutions cannot track users’ purchase behavior.
4. Unforgeability
Except for the issuer, fake digital currencies cannot be forged, and only those signed by the private key of the central bank are real digital renminbi.
5. Fairness
The payment process is fair, ensuring that the transaction process of both parties to the transaction either succeeds or fails, that is, the atomicity of the transaction is satisfied.
6. Compatibility
The issuance and circulation of digital renminbi should refer to the issuance and circulation of cash as much as possible. The use of digital currency should comply with all current regulations on cash management, anti-money laundering, and anti-terrorist financing, and large and suspicious transactions in the central bank’s digital currency can be reported to the People’s Bank of China.
Comparison with electronic payment
Digital renminbi is digital renminbi cash, which is settled by the central bank and has legal compensation. Digital renminbi payment is the first-tier direct payment method. Alipay and WeChat Pay are third-party payment methods. Commercial banks store currency for settlement. There is a very small probability of bankruptcy and there is no legal indemnity. Therefore, there may be users who do not support Alipay or WeChat Pay. Digital renminbi can also realize offline payment with higher security and limit than Alipay and WeChat payment.
Table 2 Comparison of Digital RMB and Electronic Payment
Commercial Bank Customer Boundary
(1) The implementation of digital currency will help commercial banks increase their market share in the payment field
At present, third-party payment platforms such as Alipay and WeChat account for a large market share in the domestic payment market, although commercial banks have been trying to increase their market share in the payment and settlement field through innovative payment technologies, increased marketing and preferential efforts, and improved payment scenarios. However, due to the problems of customer segmentation, poor experience, and inefficient settlement system operation of commercial banks, the current results have been minimal. Compared with traditional commercial bank payment and settlement, digital renminbi payment and settlement will effectively solve the problems of customer segmentation and poor experience.
On the one hand, in the payment and settlement of traditional commercial banks relying on bank accounts, customers must download and use specific related commercial bank apps. There will be problems such as difficulty for some customers to grasp the operation process, and the coverage of the customer base is limited; while digital RMB uses loose account coupling In this way, users can use digital currency for trading and settlement activities without binding bank accounts and registering personal information, which reduces the threshold for use and effectively solves the limitation of customer segmentation.
On the other hand, in order to fully mobilize the enthusiasm of various operating institutions for technological innovation, it is expected that the central bank will maintain technological neutrality during the issuance of digital renminbi. Commercial banks and market institutions participating in the issuance of digital renminbi will independently choose the technological path, which will help The full free competition among commercial banks in turn encourages commercial banks to continuously improve the technical level of transaction payment and settlement and enhance customer experience.
Compared with third-party payment platforms, digital renminbi has a more efficient and safer transaction settlement system. Third-party payment is essentially based on the electronic transaction settlement of the bank account, and the electronic transaction settlement of the bank account is more complicated, the settlement completion time is longer, and the settlement efficiency is low. In comparison, digital RMB transactions adopt point-to-point real-time settlement, eliminating the need for intermediate reconciliation, review and other links, making transaction settlement more convenient. In addition, digital RMB transaction settlement relies on the strong system support of the central bank and commercial banks, and its security is much higher than that of third-party payment platforms.
(2) The implementation of digital currency will help commercial banks expand their business boundaries
Commercial banks can use payment and settlement as an entry point to provide personalized online comprehensive financial services. At present, commercial banks only control the transaction data of customers’ bank accounts, but not the data of customers’ offline cash transactions. The promotion of digital renminbi transfers current offline cash transactions to online digital wallets, enabling commercial banks to control customer cash transactions Full closed-loop cash flow between account funds. This will help commercial banks to apply emerging technologies such as big data and artificial intelligence to accurately analyze customer risk appetite, capital characteristics, and asset distribution based on the full amount of funds exchanged by customers, and to launch targeted coverage based on customers’ individual characteristics Personalized online comprehensive financial services, including wealth management, funds, stocks, precious metals, insurance, lending, and fund collection, further consolidate financial service capabilities and realize the transformation from “users” to “customers”.
(3) The implementation of digital currency will help commercial banks improve customer service experience and broaden revenue sources
Commercial banks can actively introduce other business ecosystems to obtain low-cost deposits. Commercial banks can use the promotion of digital renminbi as an entry point to continuously improve infrastructure services such as payment and settlement, fund management and collection, actively introduce online and offline consumption ecology, and create online and offline consumption ecosystems that cover food, clothing, housing, transportation, entertainment, education, etc. Convenient consumption scenes within, such as reaching agreements with daily consumption places such as restaurants and movie theaters. By continuously improving user experience and enhancing user stickiness, commercial banks will continue to obtain low-cost deposit accumulation. Although digital renminbi does not constitute a source of commercial bank deposits, digital wallet accounts and bank deposit accounts can be directly exchanged. If commercial banks can create a richer and more convenient consumption ecosystem in the future, a large amount of idle funds will be transferred to bank accounts, thereby forming a deposit of low-cost bank deposits.
Stability of demand deposits
(1) DCEP is more attractive, people choose to convert demand deposits into digital currency
1. The pressure of commercial banks to absorb long-term deposits will increase, and the proportion of low-cost demand deposits on the debt side will tend to decline.
Due to the large scale of bank current accounts, which undertake certain payment and settlement functions, they are one of the most important sources of low-cost deposit funds for commercial banks. According to Wind data, as of the end of 2019, my country’s household renminbi demand deposits were 29.5 trillion yuan, and non-financial corporate renminbi demand deposits were 24.3 trillion yuan, accounting for approximately 28% of domestic renminbi deposits in financial institutions.
However, with the promotion and application of digital renminbi payment, some depositors choose to transfer funds from bank demand accounts to digital wallets, resulting in a decline in the scale of demand deposits in commercial banks, increasing pressure to absorb deposits, and posing major challenges to the operations of commercial banks. If the transferred deposits can no longer return to the balance sheet of the commercial bank, the balance sheet of the commercial bank will shrink and affect its steady development.
2. The issuance of digital currency pushes up the overall interest rate of commercial banks on the liability side.
First, as the scale of demand deposits declines, the proportion of low-cost demand deposits on the liability side will tend to decline, which will push up the overall interest cost rate of commercial banks on the liability side.
Second, with the advancement of interest rate market reform, commercial banks may increase the interest rate of demand deposits in order to maintain the scale of demand deposits, increase the attractiveness of demand deposits, and further increase the cost pressure on the liability side of commercial banks.
The third is that at present, the general public retains a certain balance of demand deposit accounts to meet daily payment needs, but the digital renminbi will replace demand deposits to a certain extent because of its payment function. Therefore, the public does not need to retain the balance of current demand deposit accounts. Choose to convert excess demand deposits into time deposits, wealth management and other products with higher yields, resulting in a decline in the balance of demand deposits in commercial banks, while the scale of high-cost time deposits has further increased, thereby boosting the overall debt-side interest payment cost ratio .
3. Increase the difficulty of asset and liability management of commercial banks, and commercial banks are more likely to face depositors runs under extreme circumstances.
The above-mentioned commercial bank demand deposits and off-balance sheet digital renminbi, on-balance-sheet fixed deposits, financial products, etc. dynamic changes have caused the instability of the debt structure of commercial banks, especially when the financial system interest rate level, social inflation level, etc. During major changes, conversions between different accounts will become more frequent.
First, it will increase the difficulty of liquidity management for commercial banks. Commercial banks need to maintain the stability and sustainability of their liabilities as much as possible, ensure the liquidity of assets, and achieve a balance between capital outflow and inflow. If the stability of the liability side structure declines, it will inevitably increase the difficulty of calculation and estimation by commercial banks, thereby increasing the difficulty of liquidity management.
Second, it will increase the difficulty of managing the maturity structure of assets and liabilities of commercial banks. The maturity structure of the assets and liabilities of commercial banks should be basically matched, and appropriate adjustments should be made according to the trend of market interest rates to achieve the unity of liquidity, safety and profitability. If the structure and scale changes between products on the liability side increase, it will inevitably weaken the ability of commercial banks to control and coordinate the maturity structure of assets and liabilities, and increase the difficulty of managing the maturity structure of assets and liabilities.
Third, commercial banks are more likely to face a run on depositors in extreme situations. When extreme situations such as inflation, financial crisis, and war occur, depositors tend to withdraw bank deposits. When banknotes are cash in circulation, there are certain costs and risks for depositors to withdraw cash, such as time cost, banknote storage cost, risk of cash loss, and risk of damage. The issuance of digital currency makes the conversion of deposits to digital renminbi almost no cost, and the holding risk is much lower than that of paper currency cash, which greatly improves the convenience of depositors withdrawing cash. When extreme circumstances occur, and under the premise of unlimited digital renminbi exchange, depositors intensively convert large amounts of bank deposits into digital renminbi. In this process, a large number of bank deposits will be off-balance sheet, and the bank’s balance sheet will shrink severely, resulting in a banking crisis and a serious contraction of social credit.
(2) DCEP is not attractive enough, people choose to keep interest-bearing demand deposits
So for the public, the biggest question may be “Why choose digital currency?” “What is the difference with Alipay and WeChat payment?”.
Compared with third-party payment and demand deposits, the prominent advantage of central bank digital currency is that it has legal compensation, zero cost, and dual offline payment functions.
In the eyes of most people, deposits in the bank means absolute safety. Due to the particularity of the bank in our country, the bankruptcy of the bank needs to go through a special procedure, that is, a “takeover” procedure. Counting the latest bankruptcy of Baoshang Bank, after the Hainan Development Bank and Hebei Suning Shangcun Rural Credit Cooperative, there have been only three bankrupt banks since the founding of New China.
First of all, the change people deposit in digital wallets and mobile payment tool accounts is usually to meet the needs of daily life, the amount is small, the handling fees for daily transfers are not many, and large transfers are less through online channels; second, WeChat and Alipay Products such as Yu’e Bao designed by third-party payment platforms usually provide a certain amount of interest, which can make up for the handling fee to a certain extent, while digital currency does not accrue interest.
At present, WeChat and Alipay have already implemented offline payment functions. But compared to digital currency, mobile payment requires that the payer can be offline, but the receiver must be online. However, with the gradual expansion of mobile Internet coverage, the dual offline payment function is a little bit tasteless. Areas without network coverage are usually poor and remote areas where digital currency is difficult to be widely used.
In addition, WeChat and Alipay regularly have a large number of preferential activities, such as full discounts when cooperating with stores, random draws, charity events, convenient services, etc., which are more attractive to our people than digital currency wallets It’s still a little bigger. So for now, we who are accustomed to WeChat and Alipay will not have much impact from the issuance of digital currency. Whether it will have an impact in the future depends on the central bank’s policies and promotion efforts.
Money creation
(1) Third-party payment slows down the growth of cash in social circulation
At present, social payment tools are mainly composed of third-party payment platforms, bank current accounts, cash and bills. Among them, the balances of third-party payment platforms and bank current accounts are reflected in the form of bank deposits. In recent years, with the rapid development of third-party payment, the proportion of cash payment has gradually declined after the generation of third-party payment. According to the “Overall Operation of the Payment System in 2019” issued by the Central Bank and the “46th Statistical Report on China’s Internet Development Status” issued by the China Internet Information Center, the scale of non-cash payments in my country in 2019 exceeded RMB 4000 trillion, and in the first half of 2020 The amount of mobile payment in my country reached 196.98 trillion yuan, and the utilization rate accounted for 85.7% of mobile Internet users.
The following figure shows the trend chart obtained after the year-on-year growth rate of M0 minus the year-on-year growth rate of CPI. If the abnormal situation caused by the epidemic in 2020 is excluded, after removing the factor of inflation, it can be seen from the figure that since the regulatory agency began to issue third-party payment licenses in 2011, the growth rate of M0 has shown a downward trend, and that of M0 The growth rate dropped from a year-on-year growth of about 10% in 2011 to an average level of about 5%. It can be said that third-party payment has slowed the growth of social cash in circulation.
Note: The data source of currency in circulation (M0) is the Survey and Statistics Department of the People’s Bank of China, and the year-on-year growth rate is obtained through calculation. The source of CPI year-on-year growth rate data is Oriental Fortune. The M0-CPI data excludes abnormal data values in January and February each year.
Figure 2 M0-CPI
(2) The competition between digital currency and third parties affects the currency creation ability of commercial banks
1. From the perspective of book processing
The emergence of digital renminbi will compete with third-party payment, and digital wallets will partially replace the third-party payment function. One difference between a digital wallet and a third-party payment is that the balance in the digital wallet is embodied in the currency in circulation, namely M0. The balance on the third-party payment account is most reflected in the form of bank deposits. When originally using third-party payment or bank account payment, the funds are transferred from one account to another during the transaction, or directly transferred to the central bank’s payment institution reserve account, and the funds do not flow out of the bank system. However, after the creation of digital currency, if the public wants to use digital currency, there are only two exchange methods: cash exchange or deposit exchange.
When cash is used to exchange digital renminbi, it is equivalent to the mutual conversion of two different forms of M0, which will not cause a new increase in the cash in circulation. However, when the public uses their own deposits to exchange digital renminbi, demand deposits on the liability side of commercial banks’ balance sheets have declined, and their deposit reserves at the central bank have also decreased, especially the reduction in excess reserves, so the currency of commercial banks The ability to create will be affected.
2. From the perspective of currency multipliers
From the perspective of currency multiplier, commercial banks create money by issuing loans, and the ratio of the deposits they create to the base currency is the currency multiplier, reflecting the size of the money creation ability, expressed by the formula:
Among them, m represents the currency multiplier; C represents cash; D represents deposits; R represents the deposit reserve of commercial banks deposited in the central bank; c represents the cash leakage rate, which is obtained by C/D; r represents the deposit reserve ratio, which is R/D is obtained.
In order to measure the impact of the cash leakage rate, the partial derivative of the currency multiplier to the cash leakage rate c is obtained:
Since the deposit reserve ratio r is always not greater than 1, the functional relationship between the currency multiplier and the cash leakage rate is a decreasing function. That is, under the condition of constant r, the larger the cash leakage rate c and the smaller the currency multiplier m, the smaller the ability of commercial banks to create money.
As mentioned above, the public exchanges deposits for digital renminbi and enters another user’s digital wallet after the digital renminbi realizes its payment method. This user can consider leaving the digital currency in the digital wallet for daily use, which will lead to a permanent decline in commercial bank deposits and an increase in currency in circulation. This user can also consider converting the received digital renminbi into a deposit again, as shown in the figure below. However, this process has gone through the three stages of 2, 3, and 4, and the time for money to flow out of the banking system has increased. Therefore, on average from the overall social level, the currency in circulation will always increase appropriately after the use of digital currency, and cash leakage The loss rate increased, and the currency creation ability of commercial banks weakened.
Figure 3 The currency cycle process of using deposits to exchange digital people’s table
to sum up
As a loosely coupled, two-tiered, and centralized currency, the digital renminbi has good security guarantees, and at the same time it has the feature of non-interest bearing. The characteristics of its digital currency can reduce the operating costs of commercial banks that originally manage cash on hand, and can also help commercial banks continue to expand new business scenarios. However, although the central bank has tried its best to minimize the negative impact of the digital renminbi on the financial system when designing the digital renminbi, the digital renminbi inevitably caused the fluctuation of demand deposits on the liability side of commercial banks and the ability to derive currency. decline. Moreover, as a non-interest-bearing currency, the digital renminbi will not bring additional costs to commercial banks on the one hand, but on the other hand, the digital renminbi will also lose its advantages with Alipay’s Yu’ebao and WeChat Pay’s change wallet Competitiveness of third-party payment methods for interest. In the eastern coastal areas and big cities where offline electronic payments are well established, how the digital renminbi will gain the favor of the people, and how the digital renminbi will promote the internationalization of the renminbi in overseas markets where credit card and check payments occupy a high share. The design of the renminbi has yet to be considered.
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This article is a class work for the “Commercial Banking Business and Management” course of Renmin University of China. The authors are Yi Gege (Class 3 of Finance of 2018), Ma Shuyue (Class 3 of Finance of 2018), Li Hongliang (Class 3 of Finance of 2018), Zhang Xiaoru ( Class 3 of 2018 Finance), Zhang Xinyu (Class 4 of 2018 News).
