Fan Yifei, Deputy Governor of the Central Bank: Policy Perspective Analysis of Digital RMB M0 Positioning


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The digital renminbi is a public product provided by the central bank to the public. No interest is calculated and the central bank does not charge for services such as exchange and circulation.

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Original Title: “Fan Yifei: Analysis of the Policy Implications of the Positioning of Digital RMB M0”
Author: Fan Yifei, Member of the Party Committee and Vice President of the People’s Bank of China Source: China Financial News

The People’s Bank of China is steadily advancing the digital RMB research and development pilot work. The digital renminbi is a digital legal currency issued by the People’s Bank of China. The designated operating agency participates in the operation and exchanges to the public. Based on the broad account system, it supports the loose coupling function of bank accounts, which is equivalent to banknotes and coins, has value characteristics and legal compensation, and supports controllable anonymity. We believe that the digital renminbi is mainly positioned in cash in circulation (M0, the same below), and this positioning contains rich theoretical connotations and policy choices.

Fan Yifei, Member of the Party Committee and Vice President of the People’s Bank of China

The M0 positioning of the digital RMB is determined by the nature of the currency and the law of development

The historical evolution of the legal tender form is driven by technology and demand, gradually transitioning from a physical form to a digital form. Value scale, value storage, and medium of exchange are the basic functions of legal tender. Measurable, confirmable, and transferable are important factors for realizing currency functions. In various historical periods, the development of productivity has spawned new demands, and technological iteration has promoted the evolution of money from physical, metal, paper money, etc. to electronic and digital forms to improve the efficiency of currency circulation and improve consumer welfare.

Currency is derived from the barter exchange in the early development of human society. Some rare and precious items that are easy to preserve and carry, such as shells, have become general equivalents. With technological advances in smelting and other technologies, metal currencies such as copper, iron, gold, and silver began to appear. After the society entered the stage of refined division of labor and large-scale production, the demand for money continued to increase. Metal currency was inconvenient to carry and divide, and it was difficult to meet the needs of commodity economy and production development. Paper bank notes based on commercial credit subsequently appeared. Later, supported by national credit, the legal tender issued by the central bank gradually replaced bank notes, completing the evolution of legal tender from metal currency to banknotes and coins.

In recent years, network technology and mobile payment have developed rapidly, and payment tools based on commercial bank deposit currencies have gradually realized electronic and digitalization. However, the deposit currency of commercial banks cannot replace legal currency to perform the function of a value scale or a unit of account. For this reason, in the course of the evolution of currency morphology, no matter how active the currency issued by the private sector is, it is necessary for the country (or region) to centrally issue legal tender. Historically, while the official currency was in circulation, private currency and foreign currency also existed to varying degrees. The issuance of private currency and the user’s self-determined currency weight and fineness standards increased social transaction costs. After the founding of the People’s Republic of China, the state issued legal tenders that the public trusted by providing banknotes and coins to the public, effectively reducing transaction costs and promoting economic development. In recent years, crypto assets such as Bitcoin and global stablecoins have tried to perform their currency functions, and a new round of private currency, foreign currency and legal tender has begun. In response to this situation, it is necessary for the country to use new technology to digitize M0 and provide a universal base currency for the development of the digital economy.

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, supporting M1 and M2 circulation of inter-bank payment clearing systems (such as large and small payment systems and online payment inter-bank clearing systems, etc.), 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.

With the rapid development of electronic payment, especially mobile payment, it has better met the needs of economic development and has also cultivated the habit of the public to use electronic payment tools. However, this electronic payment tool based on commercial bank deposit currency, based on the tightly coupled account model, still has a lot of room for improvement in application scenario coverage, inclusive finance, payment efficiency, user privacy protection, and anonymous payment. On the other hand, although the cash utilization rate is declining, the absolute amount will also maintain a certain growth, indicating that the digital supply of legal tender in the retail sector has not kept up with changes in demand. Especially in places where financial service coverage is insufficient, the public’s dependence on cash is still high, and there is a realistic demand and expectation for the acquisition and use of digital central bank currency.

In addition, the cost of cash management is high, and there is a risk of being used for money laundering and other illegal and criminal activities. Moreover, in the context of increasing social and economic digitization and the gradual decrease in the use of physical currency, the ability of commercial bank deposit currencies to be converted into central bank currencies is the basis for maintaining public confidence in commercial bank deposit currencies. The use of decentralized technology to process payment transactions such as encrypted assets will erode the national currency sovereignty, and the pressure on the digitalization of cash is actually increasing. This historical trend and demand of currency development requires us to make a fuss on the “supply side”. We need to use new technologies to digitize M0 and supplement the existing electronic payment system. It is necessary to maintain the attributes and characteristics of M0 and be based on value. The attribute derives new functions different from electronic payment tools. As a provider of national credit, in order to ensure the stability of the monetary and financial system, the central bank should respond to retail demand and provide digital cash supply.

From the perspective of M0’s management model, currency issuance is the basic responsibility of the central bank, and digital RMB should adhere to central bank management

Currency issuance is the natural responsibility of the central bank, and it is also the basis for performing its duties. Under the modern central bank system, the central bank is a national bank, issuing bank, and bank bank. Currency issuance is the basic function of the central bank. It is the foundation for safeguarding national monetary sovereignty, providing means of payment for the circulation and exchange of commodities, and regulating the base currency and money supply. With the construction and improvement of my country’s socialist market economic system, the People’s Bank of China has returned to its functions as a central bank since 1984. The transition from the central bank’s unified banking system to the “central bank-commercial bank” binary model not only guarantees the central bank’s currency issuance rights, but also gives full play to the resource advantages of commercial banks and the decisive role of the market in resource allocation. A currency circulation system in which central bank currency and commercial bank deposit currency coexist harmoniously has been constructed. Digital renminbi follows the existing currency issuance system. The central bank plays a central role in the digital renminbi system and is responsible for wholesale digital renminbi to designated commercial banks and full life cycle management. Commercial banks and other institutions are responsible for providing digital renminbi exchange and circulation services to the public. .

Adhering to the centralized management of digital RMB issuance is of great significance. The first is to maintain the status of legal tender and the right to issue currency. The centralized management of digital renminbi helps to resist the erosion of encrypted assets and global stable currencies, prevents the right to issue currency in the digital economy era, ensures that currency issuance always serves the overall situation of national development and reform, and ensures the currency value stability and security of the digital renminbi, and legal compensation Sex and other characteristics. The second is to improve the efficiency of the payment system and improve the transmission of monetary policy. The centralized management of digital renminbi can realize payment and settlement, which can improve the capital turnover efficiency of merchants, help solve the liquidity problem of small and medium-sized enterprises, and improve the speed of currency circulation and the efficiency of monetary policy implementation. At the same time, it is conducive to breaking retail payment barriers and market segmentation, avoiding market distortions, protecting the rights and interests of financial consumers, and promoting inclusive finance. The third is to maintain financial stability. The digital renminbi adopts a controllable anonymity mechanism. The People’s Bank of China has full information and can use big data, artificial intelligence and other technologies to analyze transaction data and capital flows, prevent and combat money laundering, terrorist financing, and tax evasion and other illegal and criminal activities, and effectively maintain financial stability.

Centralized management of M0 issuance and circulation is a common practice of global central banks. In order to ensure the ability to control currency issuance and monetary policy, the central banks and monetary authorities of major economies around the world have implemented centralized management of the issuance and circulation of cash. For example, the central banks of the United States, Europe and my country have adopted a centralized cash management model to undertake the functions of printing, allocating, warehousing, placing, returning, sorting, and destroying cash. In the United Kingdom, although the Bank of England has delegated the functions of printing, sorting and warehousing the pound sterling to commercial institutions, the principle of centralized management is also reflected through regulations on operations, finance, corporate governance, risk control, and regular audits. Although my country has begun to explore in recent years to transfer some of the functions such as sorting to social entities, the key functions such as printing, distribution, and withdrawal are still undertaken by the central bank.

To maintain the central bank’s centralized management position in the issuance of digital renminbi, the following must be done: First, coordinate the management of the digital renminbi quota and formulate unified business standards, technical specifications, security standards, and application standards. The second is to coordinate the management of digital renminbi information, record, monitor and analyze the exchange and circulation of digital renminbi by mastering full transaction information, and improve the central bank issuance system in the digital age. The third is to coordinate the management of digital renminbi wallets. On the premise of adhering to the unified recognition system and anti-counterfeiting functions of digital renminbi, based on the principle of two-tier operation, the central bank and designated operating agencies jointly develop the wallet ecological platform by means of co-construction and sharing. At the same time realize their respective visual recognition and characteristic functions. The fourth is to coordinate the construction of digital renminbi issuance infrastructure, realize interoperability across operating institutions, and ensure the stable and orderly circulation of digital renminbi.

Judging from the management rules of M0, the issuance and circulation of digital renminbi should be regulated and managed in accordance with cash

The R&D and issuance of digital renminbi basically conforms to the legal framework of my country. The “People’s Bank of China Law” has authorized the People’s Bank to issue RMB and manage the circulation of RMB. The People’s Bank has the right to issue RMB and is the only issuer. At the same time, digital renminbi has digital characteristics and does not fully apply to the regulatory rules for the circulation of physical cash. It is necessary to formulate specific regulatory requirements for digital renminbi and build a digital renminbi circulation environment. At the same time, as the digital renminbi issuance and circulation system gradually matures, timely improvement Laws and regulations.

The digital renminbi is legally compensatory. Digital RMB is mainly positioned at M0 and needs to comply with laws and regulations related to cash management such as the People’s Bank of China Law and RMB Management Regulations. According to the renminbi’s legal indemnity provisions, digital renminbi is used to pay all public and private debts within the territory of our country, and no unit or individual may refuse to accept it if it meets the conditions for acceptance.

The digital renminbi must also comply with laws and regulations such as large cash management, anti-money laundering, and anti-terrorist financing. For example, in accordance with the People’s Bank of China’s “Notice on the Implementation of Large-Value Cash Management Pilots”, in order to cooperate with anti-money laundering related work, large-value deposits and withdrawals should also be registered for digital renminbi in pilot areas. The transaction is reported to the central bank.

From the perspective of M0’s fee system, the digital renminbi is a public product provided by the central bank to the public. No interest is calculated and the central bank does not charge for services such as exchange and circulation.

Digital RMB is mainly positioned at M0, a digital form of legal tender. According to Samuelson’s definition of public goods in The Pure Theory of Public Expenditure, legal tender is a public product. Therefore, the central banks will not charge fees for cash transactions, and the related design, production, dispatch, storage, return and destruction costs are all borne by the government. Digital RMB is also a pure public product. First, the issuance and circulation services of digital renminbi are provided to the whole society, with common benefits and consumption characteristics, and its utility is shared by all members of the society, and it is indivisible; secondly, after the completion of the digital renminbi system, consumers will increase It will not linearly increase the cost of issuance and circulation, nor will it affect the quality of services to others. It has low marginal cost and is non-competitive. Third, no one will exclude others from consuming digital RMB services, which is non-exclusive. Moreover, the digital renminbi does not count interest and is non-profit, and it seeks to maximize social benefits and social welfare.

Therefore, the People’s Bank of China implements a free strategy consistent with cash for digital renminbi. The central bank establishes a free digital renminbi value transfer system and financial infrastructure, and does not charge exchange and circulation service fees from the issuer, and commercial banks do not charge individual customers for digital renminbi exchange and redemption service fees. This can save renminbi production and circulation costs, help implement the decision and deployment of the Party Central Committee and the State Council to reduce taxes and fees, reduce the burden on the real economy, optimize the business environment, and further stimulate market vitality. At the same time, in order to fully mobilize the enthusiasm of all participants and achieve sustainable operations, it is necessary to refer to the current arrangements for banknote issuance, allocate issuance costs, and establish a reasonable and effective incentive mechanism.

From the perspective of M0’s issuance model, commercial banks should assume the function of exchanging digital RMB to the public

The provision of digital RMB exchange services by commercial banks is a requirement of laws and regulations. The “Renminbi Management Regulations” grants “financial institutions that handle RMB deposits and withdrawals” the right to cooperate with the People’s Bank of China to manage the circulation of RMB. The issuance of RMB banknotes is mainly realized through the cash receipt and payment business of banks. Therefore, commercial banks have the legal basis to provide exchange and circulation services for digital renminbi. At the same time, Article 9 of the “Administrative Measures for Online Payment Services by Non-bank Payment Institutions” stipulates that non-bank payment institutions shall not operate or disguisely operate currency exchange, cash deposit and withdrawal services, and do not have the institutional basis for providing exchange services for the digital RMB positioned by M0 . Therefore, in accordance with current laws and regulations, only commercial banks can provide digital RMB exchange services to the public.

Providing M0 exchange services by commercial banks is a global best practice. Cash issuance in various countries generally adopts the binary model of “central bank-commercial bank”. The central bank is the supplier of base currency and the regulator of currency circulation. Commercial banks carry out currency placement, circulation and withdrawal, and provide cash deposit and withdrawal services for the public. Major central banks such as the United States, Britain, Germany, and my country all transfer cash to commercial banks, where they can exchange them with the public. This will not easily lead to “financial disintermediation,” nor will it have a major impact on the existing financial system and the operation of the real economy.

In order to ensure the security and stability of the digital renminbi system, it is necessary to prudently choose a commercial bank with strong capital and technology as the designated operating institution to take the lead in providing digital renminbi exchange services. One is to make full use of existing resources and technological reserves. As a designated operating institution, a commercial bank should have a mature infrastructure, a complete service system and a sufficient talent pool. The exchange services provided by it can fully mobilize market forces and realize the survival of the fittest. The second is to reduce hidden risks. As a designated operating institution, commercial banks have rich experience in retail business governance systems and risk control measures, which can effectively prevent operational risks and enhance the public’s confidence in holding and using digital renminbi. The third is to avoid financial disintermediation. The digital renminbi follows the currency issuance system under the dual model, and no interest is calculated, so as to avoid competition with commercial bank deposit currencies. Fourth, it is conducive to the transmission of monetary policy. Commercial banks provide digital renminbi exchange, which can accelerate the speed and efficiency of the return of funds to commercial banks, promote their role as financial intermediaries, and provide a more direct and efficient channel for monetary policy transmission.

Under the premise of centralized management by the central bank, both stability and innovation will be explored to explore cooperation models between designated operating institutions and other commercial banks and institutions to jointly provide circulation services for digital renminbi. In order to ensure that the digital renminbi is widely available and does not have a major impact on the existing financial market, it is necessary to give full play to the active role of other commercial banks and non-bank payment institutions in the digital renminbi system. In the process of physical cash circulation, all commercial banks can provide RMB services to the public. In the process of digital RMB circulation, taking into account the high technical foundation and system management requirements, commercial banks as designated operating institutions can cooperate with other commercial banks and related institutions, and on the basis of clarifying the relationship between responsibilities and rights, jointly provide the public with digital RMB circulation service.

Specifically, commercial banks, as designated operating institutions, are responsible for opening different types of digital renminbi wallets for them based on the identification strength of customer information under the quota management of the People’s Bank of China to provide digital renminbi exchange services. At the same time, commercial banks as designated operating institutions, together with other commercial banks and related institutions, undertake the circulation services of digital renminbi under the supervision of the People’s Bank of China and are responsible for the management of retail links, so as to realize the safe and efficient operation of digital renminbi, including payment product design innovation and scenario expansion. , Market promotion, system development, business processing and operation and maintenance services. In this process, it is necessary to maintain a level playing field and ensure that the market plays a decisive role in resource allocation to fully mobilize the enthusiasm and creativity of all parties in the market and maintain the stability of the financial system.

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