Compared with the traditional currency system, digital encrypted currency improves payment efficiency, strengthens privacy and security, and optimizes resource allocation. At the same time, the unpredictable risks inherent in the early development of digital currencies will have a huge impact on the current monetary and financial system, requiring governments and international organizations to strengthen regulatory coordination and deepen regulatory cooperation.
Reshaping the banking business model
At present, digital currencies mainly include the following three categories: One is the cryptocurrency that exists on the public chain represented by Bitcoin and Ethereum. This type of cryptocurrency is currently only circulated among small groups of people, within specific scenarios and on some platforms, and is more often known to the public as a speculative tool rather than a means of payment. The second is the encrypted currency that exists on the alliance chain or private chain issued by various platforms or institutions. This type of cryptocurrency is like Facebook’s Libra and Ripple’s Ripple. These currencies are different in various aspects such as issuing institutions, management methods, and development visions, and the scope of application is also different. The third is the “Central Bank Digital Currency” (CBDC) issued by the central bank led by the national credit endorsement. Compared with private digital currencies that exist in public chains, private chains, and alliance chains, it is difficult to fully undertake the three core functions of currency transaction media, value storage and accounting units. CBDC always has national credit behind it, which is one of the central bank policy tools. , Has a major impact on the effectiveness of monetary policy and financial efficiency.
The central bank’s digital currency has a national credit endorsement, which can provide higher security and efficiency than traditional currencies. First of all, account-based digital currency even allows all currency users to directly open and use accounts with the central bank, technically providing the possibility of decoupling deposit business from credit business.
Second, the central bank’s digital currency reduces currency friction and promotes competition. Digital currency will reduce dependence on physical facilities such as bank counters and ATMs, eliminate the physical boundaries of fund transfers, and make cross-institutional fund transfers faster and more convenient. This requires commercial banks to reduce costs, strengthen their differentiated service capabilities, and enhance customer stickiness and competitiveness by providing additional services with high added value.
Third, digital currency will transform the business model of the banking industry. On the one hand, the electronicization of physical cash will lead to major changes in customers’ transaction patterns and behavioral habits, as well as bank fund operations and management patterns, requiring banks to adjust their product structure and service structure in a timely manner. On the other hand, the digitalization of legal currency will transform the monetary and financial environment, integrate with a wider financial infrastructure, and provide a shared financial environment for the innovation of transaction mechanisms. For example, helping banks realize business sinking and create new business forms, such as peer-to-peer microfinance.
Finally, the digitization of the renminbi will require banks to restructure their business element inputs. With the changes in the monetary and financial environment and business models, the existing business support system, production environment, and personnel system need to be remodeled and connected. At the same time, the types of risks in the bank’s business process have also changed, such as information technology risks and digital currencies. The compliance risks under the system require corresponding innovations in the bank’s risk management system and mechanisms, and higher requirements for risk management and control capabilities under the new situation.
Restructure the payment industry pattern
The central bank’s digital currency provides public payment settlement tools to the public, which helps to enhance the stability of the payment system and maintain financial security. The payment system is an important link related to financial stability. The current electronic payment system is mostly dominated by private institutions (as opposed to the government), which leads to instability and uncertainty in price levels, and the payment industry has economies of scale and networks As a result, the monopoly of payment by a few private institutions may lead to systemic risks. At the same time, problems such as user privacy, fraud, and inadequate consumer protection may also arise.
The impact of digital currency on third-party payment institutions will be more direct. Non-interest-paying digital currency is essentially a digital advanced payment settlement tool. Compared with other electronic payment methods, the central bank’s digital currency has significant advantages.
One is to have better performance. The payment efficiency is higher, the cost is lower, the system security is stronger, the operation is more flexible and intelligent, and privacy can be better protected, especially the improvement in cross-border payment will be particularly significant. The central bank’s digital currency can also provide multiple application scenarios that are difficult to complete with other electronic payments, such as offline payments and large-value payments.
The second is higher security. The main operating entities of third-party payment are some non-bank institutions, whose creditworthiness is lower than that of commercial banks. The central bank’s digital currency is based on the credit of national entities, has no default risk, and has stronger market credibility.
The third is extensive coverage. The central bank’s digital currency itself is a public financial infrastructure, which is provided to the broadest public at almost no cost. Different from the scope of use of third-party payment, which is limited by the coverage of hardware and software terminals and the need to have a bank account, the central bank digital currency can be effectively integrated with a wider financial infrastructure. With the expansion of issuance and scope, it will cover The broadest user group that other payment institutions cannot match.
Therefore, with the development of technology, the digital version of RMB will gradually become a public payment and settlement tool that plays a fundamental role in the payment system. Other third-party payments will be used as personalized payment and settlement tools to provide differentiated application scenarios or bundle other value-added Services, forming a payment ecosystem in which each fulfills its duties, settles its place, and operates in a healthy manner.
At the same time, the central bank’s digital currency can enhance the effectiveness of monetary policy. First, the central bank’s digital currency can expand the central bank’s balance sheet and increase its direct influence. Currently, the central bank does not conduct business in non-financial sectors, and monetary policy is mainly transmitted through financial intermediaries such as commercial banks. The introduction of the central bank’s digital currency ensures the necessary existence of legal tender in circulation, provides the basis and guarantee for the effective implementation of monetary policy, and provides the possibility for the public to enter the central bank’s balance sheet. If an account-based digital currency is issued, the central bank can directly interact with the non-financial sector, which will greatly increase the scope of the central bank’s role in the economy and enable the central bank to directly control the economy.
Second, enhance the operability of monetary policy tools. With proper design, the central bank’s digital currency can eliminate the zero lower limit of effective interest rates and ensure that interest rate policies are effective in times of economic downturn or crisis, and avoid liquidity traps. Compared with the current alternative tools that countries use open market operations such as quantitative easing and the issuance of negative interest rate bonds, the role of interest rate tools is more direct, systematic, transparent and effective. Digital currency also makes some unconventional monetary policy methods such as “helicopter money” maneuverable. In addition, in the case of certain changes in policy tools, the central bank’s digital currency will strengthen the currency transmission mechanism.
Third, the digitization of the RMB promotes precise regulation. On the one hand, digital currency provides solid basic data for precise regulation. Based on digital technology, the central bank can quickly track and monitor all digital currencies issued, obtain historical transaction data in the entire life cycle of digital currencies, effectively measure currency circulation and turnover speed, count the total currency and currency structure, and combine big data technology analysis Currency holding and consumption habits; extensive collection of payment data of social and economic entities, analysis of private sector consumption and investment behavior, provide a higher quality data basis for monetary policy formulation and economic regulation, and promote the realization of scientific decision-making. Of course, the actual effect will be related to the scale and scope of digital currency circulation, the degree of substitution of cash, and its status in the payment system. On the other hand, digital currency provides technical possibilities for smart regulation. The central bank digital currency is a kind of smart currency. By combining blockchain technology with smart contract technology to achieve traceability and programmable, the central bank can set the effective conditions (such as time, quantity, investment direction, Interest rates, issuance conditions, etc.), optimize resource allocation, strengthen policy expectation management, shorten policy time lag, and make the implementation of monetary policy more accurate and effective.
Put forward higher requirements for supervision
Judging from the regulatory practice of digital currencies, countries such as Japan, the United Kingdom, Canada, Australia, Singapore, Germany, and Switzerland have a supportive and friendly attitude towards digital currencies, and encourage development in policies. For example, in April 2017, the Japanese government officially recognized the legal payment status of digital currencies by amending the Payment Services Act. The British supervisory authority adopts the “sandbox supervision” method to supervise the digital currency, which provides loose and experimental space for the development of digital currency. On the other hand, the United States, France, Russia, South Korea and other countries have adopted a more cautious attitude towards digital currencies. The U.S. government and regulatory authorities have established a multi-faceted digital currency regulatory mechanism including taxation and anti-money laundering, and innovated regulatory systems to regulate digital currency development based on actual conditions. Starting from protecting the interests of investors, preventing financial violations, and maintaining financial stability, my country’s regulatory authorities adopt stricter supervision on private digital currency transactions such as Bitcoin and related businesses. At the same time, we will accelerate the digitalization of legal tender, actively formulate and modify legal digital currency prototypes, explore and study digital renminbi, and promote the digitalization of legal tender in my country.
The central bank’s digital currency may help improve the level of financial supervision. One is to form a closed loop of capital flow to combat financial crimes. The central bank’s digital currency has controllable anonymity and transaction traceability. After replacing physical cash, it can be combined with bank deposits and electronic payment systems to completely track the circulation chain of transaction funds, thereby effectively monitoring currency transactions. The second is to reduce supervision costs and improve supervision efficiency. The central bank’s digital currency provides a complete and traceable account book, which can simplify the supervisory report submission and statistical work process, improve the quality of supervisory data, and provide powerful technical means for financial supervision. Third, the central bank’s digital currency provides a good foundation for the use of financial technology such as big data, cloud computing, and artificial intelligence, which helps to create a digital regulatory model and promote regulatory innovation. At the same time, it should be noted that currency digitization has accelerated the speed of financial asset conversion and currency circulation, resulting in increased volatility and relevance of financial asset prices, intensified financial procyclicality and financial risk contagion, and put forward higher requirements on the level of financial supervision.
