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Central bank digital currency is a digital currency issued by the central bank. Its functional attributes are the same as banknotes and can be regarded as a digital form of banknotes.
During the prevention and control of the new crown pneumonia epidemic, the trend of cashless payment has accelerated, and many countries have accelerated the development and testing of central bank digital currencies. In the future, digital currency will profoundly change the financial infrastructure and people’s daily lives.
The Bank for International Settlements recently released a report that pointed out that 2020 is the year of the rise of central bank digital currencies. As of mid-July this year, at least 36 central banks around the world have released central bank digital currency plans. Among them, Ecuador, Ukraine, and Uruguay have completed the retail central bank digital currency pilot; China, the Bahamas, Cambodia, the Eastern Caribbean Monetary Union, South Korea, and Sweden are conducting pilot trials.
As many countries plan to develop or carry out landing tests, the central bank’s digital currency is gradually approaching. How will it affect economic and social development and what changes will it bring to our lives?
Balancing the risks and benefits in the process of financial innovation
Central bank digital currency is a digital currency issued by the central bank. Its functional attributes are the same as banknotes and can be regarded as a digital form of banknotes. At present, central bank digital currencies are mainly divided into “wholesale type” and “retail type”. The use of wholesale type is limited to the central bank and financial institutions, not to the public. The Jasper project of the Bank of Canada, the Ubin project of the Monetary Authority of Singapore, the Stella project of the Bank of Japan and the European Central Bank are all in this category. The retail type is open to the public and is mostly used for retail market transactions, such as China’s DC/EP (digital currency and electronic payment tools), Sweden’s “electronic krona”, etc., which will widely and profoundly affect people’s daily life. “Currently, most countries are developing retail central bank digital currencies.” Yang Tao, director and researcher of the Payment and Settlement Research Center of the Institute of Finance, Chinese Academy of Social Sciences, told reporters.
As early as 2014, the Central Bank of Ecuador launched a digital currency project to allow individuals to make mobile payments through a system operated by the central bank. In 2017, Uruguay launched a six-month trial of the “electronic peso”. However, these central bank digital currencies did not succeed because they failed to attract a large number of users.
In 2019, Facebook released the white paper on the encrypted digital currency “Libra”, which attracted widespread attention from central banks and financial regulators around the world. “Libra Coin” is a relatively stable cryptocurrency, backed by sovereign currency, and has a huge user base. Public opinion generally believes that the issuance of digital currencies such as “Libra” poses challenges to global central bank monetary sovereignty and brings more financial risks, which is an important reason for central banks to accelerate the development of central bank digital currencies. “Currently, the innovation of electronic money and payment systems is mainly led by private institutions, which will pose challenges to the financial system and monetary sovereignty.” European Central Bank President Lagarde said, “The central bank needs to provide more secure and reliable services to the public. , To balance the risks and benefits in the process of financial innovation.”
The rise of non-cash payments has promoted the development of central bank digital currencies. According to statistics, the cash utilization rate in Sweden in 2018 was only 13%. The high degree of cashlessness is one of the main driving forces for Sweden to accelerate the pilot central bank digital currency. During the prevention and control of the new crown pneumonia epidemic, the trend of cashless payment accelerated. The Bank for International Settlements reported that social distancing policies, public concerns about the possibility of cash spreading the virus, and government subsidies to individuals have further accelerated the transition to digital payments.
China has a good foundation for issuing central bank digital currency
The R&D and testing of central bank digital currencies have been launched in many countries. At the end of 2019, the European Central Bank announced the establishment of a central bank digital currency special committee and launched a new proof-of-concept project called “European Chain” to explore the anonymity and practice of digital currencies. Recently, the European Central Bank released a report stating that the bank plans to make a decision on whether to launch a digital euro project in mid-2021. The report pointed out that the digital euro may provide European citizens with a safe form of currency. In January this year, the United Kingdom, Switzerland, Sweden, Japan, Canada, the European Central Bank and the Bank for International Settlements established a working group to study the potential application scenarios of central bank digital currencies. In February, Sweden began a one-year “electronic krona” test to simulate people’s daily use in an isolated environment, such as making payments and deposits and withdrawals through digital wallets. The Federal Reserve Bank of Boston is working with the Massachusetts Institute of Technology to research more than 30 blockchain technologies and explore technologies that can support the Federal Reserve to issue digital dollars.
Latin American countries tested the water of central bank digital currencies earlier. The Central Bank of Uruguay said it is studying the next phase of action and plans to improve the payment system and other related technologies. The Central Bank of Brazil stated that Brazil is expected to adopt central bank digital currency in 2022. The Central Bank of the Eastern Caribbean Monetary Union, which consists of eight economies in the region, is testing a blockchain-based legal digital currency. Its central bank governor Timothy Antoine said: “I hope this will reduce the use of cash by 50%. Improve the stability of the financial sector and promote the development of member states.”
In Asia, the Bank of Korea plans to conduct a pilot program in 2021, and has now completed the first phase of the R&D review. The Bank of Japan recently announced that it will launch a digital currency experiment in fiscal 2021 to test the basic core functions of digital currency.
As one of the countries that initiated the central bank digital currency research earlier, the central bank of China digital currency DC/EP is currently being piloted in Shenzhen, Suzhou and other places. Recently, the Shenzhen Municipal Government has launched a digital RMB red envelope pilot program to distribute a certain amount of funds to personal digital wallets in the form of lottery. Users can use digital RMB to spend at more than 3,000 merchants. The Bank for International Settlements stated that DC/EP is one of the most advanced digital currencies in the world. “The high penetration rate of smart phones and the penetration of mobile payments in all aspects of life have laid a good foundation for China to issue central bank digital currencies.” Huang Yiping, deputy dean of the National Development Research Institute of Peking University and director of the Digital Finance Research Center, told this reporter.
Commercial institutions are also actively engaged in research and development and cooperate with the central bank. Mastercard recently launched the central bank digital currency test platform, enabling the central bank to evaluate and explore the central bank’s digital currency on this platform. It is reported that the platform can be used to simulate the issuance, distribution and exchange of central bank digital currencies among banks, financial service providers and consumers.
Supported by national credit, with features such as traceability
The islands in the Caribbean are small and scattered, making it difficult for people to obtain the services of physical financial institutions. The central bank’s digital currency will improve financial inclusion and the convenience of financial services, reduce the cost of using cash, and improve the efficiency of financial institutions. This is also an important reason for the rapid development of central bank digital currencies in the region. Yang Tao pointed out that as a legal tender, the central bank’s digital currency is supported by national credit. Compared with the mobile payment methods provided by commercial institutions, it is safer and more stable, and its traceability features make it traceable in every link from issuance to circulation. , Is conducive to strengthening financial supervision, combating illegal activities such as tax evasion, money laundering, terrorist financing, and also conducive to earmarked funds and targeted poverty alleviation.
“The central bank can build a more efficient and compatible financial market, and make monetary policy transmission more precise.” said Sarah Allen, project manager of the cryptocurrency and smart contract initiative organization. “The transparency of the central bank’s digital currency Such characteristics will enable policymakers to obtain a more macro global economic perspective.” “Now, it is difficult to know whether or when monetary policy will have the expected impact on the economy. If the central bank digital currency implements economic stimulus policies, they can It is precisely monitored to provide a basis for future monetary policy.” said Mohit Joshi, head of the financial services and insurance department of Infosys, an Indian information company.
In the field of cross-border payment, central bank digital currency is also worth looking forward to. International Monetary Fund research believes that the introduction of central bank digital currency will promote faster and safer cross-border settlement. Simon Scholer, a senior financial technology expert at the Bank of England, pointed out that although people are now paying more attention to the use of central bank digital currencies in China, one of its potential advantages is to lay the foundation for better cross-border payments in the future.
“One of the innovative trends in the financial sector is to increase cashless operations in economic activities.” Yves Mosch, a member of the European Central Bank’s Executive Committee, said that in the future the European Central Bank’s digital currency policy will focus on the development of retail digital currencies. Key issues include the legal status of retail digital currencies and the supervision of intermediaries responsible for the promotion of digital currencies.
After the central bank digital currency is issued, will cash still be useful? Research by the Bank for International Settlements shows that none of the central bank digital currency models currently designed by various countries are designed to completely replace cash, but to become a supplement to cash.
However, the central bank’s digital currency also poses considerable challenges to traditional banks and other financial institutions. Huang Yiping said that in the single-tier operation model, where the central bank directly issues digital currencies to the public, the intermediary function of commercial banks will be significantly weakened and face structural disintermediation risks. Digital RMB adopts a two-tier operation model, which can fully mobilize the enthusiasm and creativity of all parties in the market and maintain the stability of the financial system.
“In the next 5 years, digital currency will profoundly change our financial infrastructure.” Several analysts from the Boston Consulting Group suggested that financial system participants should use this time to analyze potential impacts, prepare for possible situations, and Actively explore the roles they want to play and the partnerships they need to establish to maximize the value of digital currency and influence its development direction.