Is digital currency the ultimate battlefield for competition among countries? A big country seeks stability but not fast


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The progress of the digital RMB pilot program is highly anticipated. It has been six years since the People’s Bank of China established a dedicated research team, and the digital renminbi has first revealed itself. It is currently being tested in Shenzhen, Suzhou, Xiongan, Chengdu and other places. The digital renminbi red envelope tests recently launched in Shenzhen and Suzhou have allowed tens of thousands of people to participate, and the digital renminbi footsteps are getting closer. There is no timetable for the official issuance of the digital renminbi, but before it actually comes, we need to understand or even read it through.

As digital currencies are surging, more and more central banks have begun to join the central bank digital currency track.

On October 9, 2020, the Bank for International Settlements (BIS) and seven central banks including the Federal Reserve issued a report showing that 80% of central banks are studying central bank digital currencies (CBDC), and half of them have developed from the conceptual research stage At the pilot stage.

“In the future, competition between countries may be concentrated in the field of digital finance, and digital currency may be the ultimate battlefield.” Huang Yiping, director of the Digital Finance Research Center of Peking University, said in a public speech in September. It’s the winner-takes-all, the family dominates, it can’t go hand in hand, but one thing for sure is that it cannot be absent.

In foreign countries, the central bank digital currency is generally referred to as CBDC, and China’s central bank digital currency is referred to as DC/EP. The final product of the project is called digital renminbi, or e-CNY.

If you compare horizontally, how about the progress of central banks’ digital currencies? What are the types? What are the characteristics and advantages of China’s digital renminbi?

Small countries are more radical, big countries are more cautious

The legal digital currency represents the country’s credit. It is a big deal. Countries all tend to take R&D first. In terms of the specific pace of advancement, it shows that small countries are more radical and big countries are more cautious.

“Based on the incomplete analysis of the impact on CBDC and the impact mechanism of the central bank’s digital currency operation on the economy and financial system, the hastily launch of CBDC may affect the stability of the existing financial system.” Hao Yi, a postdoctoral fellow at Renmin University of China, told The Paper The reporter said.

Specifically, small countries with “small boats turning around” are more aggressive in the promotion of central bank digital currencies.

At present, the countries that have issued sovereign digital currencies are all smaller countries, including: In 2014, the Central Bank of Ecuador issued the “electronic currency system” (discontinued in 2016); in 2016, the Central Bank of Senegal issued the blockchain-based digital currency eCFA; In February 2018, Venezuela issued a “petrocoin” anchoring the value of oil; on July 23, Lithuania issued the world’s first CBDC, namely LBCoin, and so on.

In addition, Switzerland and Singapore, countries with more developed economies but smaller land areas and smaller populations, have also determined to issue central bank digital currencies.

On October 25th, Benoît Cœuré, head of the BIS Innovation Center, stated at the second Bund Summit that by the end of this year, BIS plans to jointly issue the central bank digital currency in the proof-of-concept stage with the Swiss National Bank.

On November 24, according to media reports, Sopnendu Mohanty, Chief Financial Technology Officer of the Bank of Singapore and the Monetary Authority of Singapore, stated that Singapore is ready to launch its central bank digital currency. On July 13, according to Reuters, the Singaporean authorities stated that they had developed a blockchain-based payment network.

“Ecuador, Senegal, Tunisia, Marshall Islands, Uruguay, Venezuela and other countries issue digital currencies. Some consider de-dollarization, some consider the independence of the financial system, some consider reducing opacity in currency circulation, and some consider dealing with viciousness. The collapse of the inflationary currency.” Sun Yang, a researcher at the Suning Financial Research Institute, said.

He pointed out that small countries must consider the long-term health of the current international financial system on the one hand, and on the other hand their sovereign independence and autonomy, and their own monetary system is full of problems. Issuing central bank digital currency is an opportunity to improve currency circulation, and it can also improve The ability to control the operation of the national economy.

Hao Yi believes that small countries have low construction costs for central bank digital currencies, fewer users, and relatively simple financial systems. Therefore, once a loophole is discovered, the loss is small, and it is easier to stop and repair it in time, and the cost of trial and error is lower. In addition, small countries have relatively small external economic and financial influence. Once the operation of the central bank’s digital currency causes economic fluctuations, it will have limited impact on international economic and financial stability.

Compared with small countries, the layout of central bank digital currencies in other countries is mainly manifested in active research and development or cautious testing. Although some countries have begun research, they have not yet decided whether to issue central bank digital currencies.

Song Jiaji, a researcher at Guosheng Securities Research Institute, pointed out that the cash utilization rate of major countries such as the United Kingdom, the United States, Canada, and Japan has not dropped to a “critical point”, and the existing monetary policy system is also relatively effective. They do not consider it necessary to issue CBDC.

On October 2nd, according to Xinhua News Agency, the European Central Bank issued a report stating that it plans to make a decision on whether to launch a digital euro project in mid-2021.

On October 13, the official website of the Central Bank of Russia announced that it is studying the possibility of issuing digital rubles. After the development of the digital ruble platform is completed and trialled by limited users, it will decide whether to issue digital rubles.

On October 13, Reuters reported that many authorities of the Group of Seven are exploring opportunities and risks related to central bank digital currencies (CBDC). The European Central Bank stated that it should be prepared to issue a digital euro to supplement banknotes. The President of the European Central Bank, Christina Lagarde, said that the bank is “very seriously” considering the establishment of a digital euro. The Bank of England has also begun negotiations on the digital pound.

On October 19, Fed Chairman Powell stated at the International Monetary Fund (IMF) annual meeting that the Fed is committed to cautiously, seriously and comprehensively assessing the potential costs and benefits of the central bank’s digital currency to the U.S. economy and payment system. The Fed The decision to issue a digital currency has not yet been made, because further research is needed.

On November 18, according to foreign media reports, former senior official of the Bank of Japan, Hiromi Yamaoka, said that Japan may take several years to issue digital currencies. The Bank of Japan plans to start experiments next year before considering whether to issue digital yen.

Sun Yang believes that countries with more mature and digitalized financial systems will be more cautious in launching digital currencies because of the rapid transmission of risks. On the other hand, the current currency system is already very mature and digitalized, and digital currencies are of little significance.

Although the Federal Reserve, European Central Bank, Bank of Japan and other major central banks have not yet decided whether to launch central bank digital currencies, judging from the statements of the Federal Reserve and the Bank of Japan, their attitudes towards central bank digital currencies have become more positive than before.

As for the digital renminbi, although the pilot is progressing in an orderly manner, the central bank has repeatedly emphasized that the pilot does not mean the official issuance of the digital renminbi.

The difference between wholesale and retail

Central bank digital currencies can be divided into two types: wholesale and retail.

According to the translation of “The Rise of Central Bank Digital Currency: Driving Factors, Methods and Technologies” published by the China Banknote Blockchain Technology Research Institute on BIS, as of mid-July 2020, at least 36 central banks have released work on CBDC. Among them, 3 countries (Ecuador, Ukraine and Uruguay) have completed the CBDC retail pilot; 6 regions (The Bahamas, Cambodia, China, the Eastern Caribbean Monetary Union, South Korea and Sweden) are undergoing retail CBDC pilots. In addition, 18 central banks issued research reports on retail CBDC, and 13 announced the development of wholesale CBDC.

“Wholesale central bank digital currency is mainly used for settlement and clearing scenarios in the financial system; retail central bank digital currency is used for daily payment scenarios.” Hao Yi said.

From the perspective of the users, he said that the users of wholesale CBDC are financial institutions, the number is small, and the scenario is relatively single. Blockchain can be used to increase the efficiency of liquidation, and because the scenario participants are all financial institutions, it is easier to implement supervision controlling the risk. Retail CBDC users are common people, and the usage scenarios are extremely rich. The use of blockchain technology is a challenge in computing power, and it is difficult for supervision to cover all scenarios.

Hao Yi said: “From the perspective of effect, wholesale CBDC will improve the efficiency of the financial system. Currently, Singapore, Canada and other countries are experimenting with CBDC to build an international financial center using the technological advantages of efficient blockchain clearing. Retail CBDC will improve society The overall welfare level allows people to enjoy a more convenient payment experience.”

Sun Yang believes that wholesale CBDCs are used to improve the efficiency of financial transmission between financial backbone networks and enhance the monitorability and efficiency of financial transmissions between financial institutions, such as Jasper in Canada, Ubin in Singapore, and the European Central Bank’s Stella project. Strengthen the control of financial institutions. If the current control is already strong, there is actually no need to be wholesale.”

He pointed out that the retail type can enhance consumers’ experience in retail consumption, enhance the monitoring and traceability of the decentralization of inclusive finance to the general public, enhance the execution of targeted monetary policies, and prevent funds from being misappropriated, etc. More far-reaching, it will control the monitoring of funds for people’s livelihood and key national policy support, enhance the sense of acquisition of the community and the people, and help combat money laundering, telecommunication fraud, terrorism and other crimes.”

China’s central bank digital currency is retail.

Guosheng Securities researcher Song Jiaji said that China’s choice of retail CBDC mainly believes that currency digitalization is the general trend, while M1 and M2 have been digitalized, and only M0 has not been digitalized, so they have to replace it, and M0 is available to the public and conforms to “retail” By definition, the corresponding CBDC is also a retail type. In addition, it is hoped that CBDC will break the monopoly of the retail payment market and play a role of “interconnection”.

BIS found that in areas with larger informal economies, retail CBDCs are more likely, while in economies with higher levels of financial development, wholesale CBDCs are more advanced.

Features of Digital RMB

According to the translation of the BIS report by the China Banknote Blockchain Technology Research Institute, there are four types of CBDC design architectures. The pilot architecture of the digital RMB is the “hybrid CBDC” model.

The so-called hybrid model means that intermediaries are responsible for retail payments, but CBDC is a direct liability of the central bank. The central bank also keeps a central ledger for all transactions. That is, the digital renminbi is a claim on the People’s Bank of China, but user guidance and real-time payment services are intermediary. Organizations (called “authorized operators”) operate. The central bank regularly receives and stores copies of retail assets and transactions.

The other three types of CBDC design architecture are: direct CBDC, a payment system operated by the central bank, which provides retail services. CBDC is a direct claim on the central bank. The central bank maintains all transaction books and performs retail payments; intermediate CBDC, similar to Hybrid CBDC, but the central bank only maintains the wholesale ledger, not the central ledger for all retail transactions; indirect or synthetic CBDC, a payment system operated by an intermediary agency similar to a narrow payment bank, the intermediary agency is responsible for all retail business, and all The debts are all returned to retail customers who have central bank claims.

Zhou Xiaochuan, the former governor of the central bank, gave a more detailed explanation of the characteristics of the digital renminbi at a public seminar on November 27.

Zhou Xiaochuan said that the development idea of ​​DC/EP is not completely consistent with the CBDC that has been mentioned internationally. DC/EP is not an idea in the CBDC system. The main differences between the two are as follows:

First, the second-tier organization in DC/EP actually owns the ownership of e-CNY and guarantees that it can pay, as well as the corresponding systems, technology and equipment.

Zhou Xiaochuan revealed that to a certain extent, this approach has been studied and used for reference by the three Hong Kong note-issuing banks (HSBC, Standard Chartered and Bank of China Hong Kong). For every 7.8 Hong Kong dollar issued by the note-issuing bank, it must give 1 USD to the Hong Kong Monetary Authority, and the Monetary Authority will issue a 100% reserve certificate. From the perspective of the balance sheet, the banknotes issued by the banks are their liabilities, the assets are reserves, and the central bank’s liabilities are the certificates issued by them. Therefore, from the perspective of the balance sheet, this issuance model and the currency ownership and liability responsibilities envisaged by CBDC are different from the central bank.

Second, the relationship between the two-tier entities in DC/EP is not what some people think is that “the central bank engages in wholesale and the second-tier institutions engage in retail”. The second-tier institutions need to perform a series of compliance responsibilities, including KYC, anti-money laundering, and data privacy protection, and CBDC in the general sense usually believes that these responsibilities belong to the central bank.

Zhou Xiaochuan also pointed out that in order to better maintain the stability of the system and understand the operating status of the system, the central bank should master the transaction data it needs, but this is only a backup, and the central bank itself does not involve direct commercial interests.

“The People’s Bank of China has accumulated experience and technology in the development and supervision of the payment industry, leading the world, and my country’s mobile payment is very developed. How to develop the payment market through policies, how to manage it after development, how to design related technologies, the people Banks have accumulated a lot in these areas, which should be the advantage of my country’s development of DC/EP.” Zou Chuanwei, chief economist of Wanxiang Blockchain, believes.

Zou Chuanwei also said that from the user’s point of view, the acceptance of electronic payment is very high. In the early stage, third-party payment institutions have done a lot of user education and promotion work offline, allowing electronic payment to enter many application scenarios. “DC/EP will make full use of these preliminary work. In many scenarios, third-party payment apps have become central bank digital currency wallets, with sound supporting facilities, which will help DC/EP promotion.”

“China has a large land area, a large population, and a large market, which is also an important support for the development of DC/EP applications.” He said.

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