“Currently, the digital renminbi has achieved phased results and is undergoing internal closed tests.” The heavy information disclosed by the deputy governor of the central bank Fan Yifei in public a few days ago has once again aroused heated discussions on the central bank’s digital currency (DC/EP) . Since the establishment of the Central Bank Digital Currency Research Institute in 2016, China’s central bank digital currency research and development has lasted 5 years. Since last year, officials have stated that the digital currency is “ready to come out”, and the official has also explained its design mechanism. The central bank’s digital currency has gradually revealed its mystery; this year, it has piloted in Shenzhen, Suzhou, Xiong’an New District, and Chengdu. At the end of August, the registration channel of its central bank’s digital currency wallet was briefly opened to the public. Various signs indicate that the central bank’s digital currency has gradually approached and will “fly into the homes of ordinary people”.
As technology matures, it is not difficult for the central bank to issue digital currencies. But the central bank’s digital currency brings not only the complexity of currency operations, but also a greater impact on the financial system. Blindly issuing central bank digital currency will not only fail to achieve the expected results, but will also end in failure. The key to the question is: what kind of central bank digital currency do we need? The real central bank digital currency is not just as simple as issuance. In the circulation and transaction process after issuance, how to better serve the social and economic development, serve the central bank’s policy objectives, and serve the financial regulatory requirements is the focus.
M0 attribute avoids financial disintermediation and insists on central bank management
“Take the central bank’s digital currency as an example. The digital renminbi is an important part of the supply-side structural reform of the financial industry. It is the use of new technology to digitize the cash in circulation (M0), and aims to provide a universal technical currency for the development of the digital economy. At present, the digital renminbi has achieved phased results and is undergoing internal closed testing.” Fan Yifei said in public a few days ago.
From the current public information, the central bank’s digital currency has value characteristics and legal compensation, and supports controllable anonymity. Digital RMB is mainly positioned in cash in circulation, and this positioning contains rich theoretical connotations and policy options.
Fan Yifei analyzed that, first of all, in recent years, crypto assets such as Bitcoin and global stablecoins have tried to perform 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 technologies to digitize M0 and provide a universal base currency for the development of the digital economy. Secondly, various payment systems such as commercial banks’ internal systems and non-bank 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.
In the operation of central bank digital currency, DC/EP adopts a two-tier operating system of “central bank-commercial bank/other operating institutions”. Li Lianxuan, chief researcher of Ouke Cloud Chain, told reporters that if a single-tier operating system is adopted, the central bank must directly face all users, which is back to the era of “universal central bank”. Commercial banks and other payment institutions are becoming mature in IT infrastructure applications and service systems, which is conducive to giving full play to the talent and technical advantages of commercial institutions. In addition, DC/EP has a certain competitive advantage over bank deposits. If a single-tier operating system is adopted, it will directly lead to the loss of bank deposits and the phenomenon of “financial disintermediation”.
Li Lianxuan introduced that in the user terminal, DC/EP mainly exhibits three main characteristics: First, the balance between privacy protection and cracking down on crimes. For the privacy needs of the public’s normal economic life, DC/EP must be protected, so controllable anonymity must be realized. The second is the dual offline payment function. Online banking, Alipay and other third-party payment tools need to be connected to the Internet during transactions, otherwise the transaction cannot be performed; and the dual offline payment function of DC/EP, even if the two parties are offline, as long as the two mobile phones are touched, the wallet key is exchanged. The transfer transaction can be completed. The third is mainly for small retail scenes, with amount and time restrictions. It is helpful to solve the “double-spending problem”, and is also out of the consideration of protecting commercial banks and preventing “financial disintermediation”.
From the perspective of M0’s management model, currency issuance is the basic responsibility of the central bank, and digital RMB should adhere to the central bank’s centralized management. From a global perspective, 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.
Fan Yifei said that in order to maintain the central bank’s centralized management status in digital renminbi issuance, the following must be done: First, the overall management of digital renminbi quotas and the formulation of 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.
Improve the efficiency of cross-border payment and promote the internationalization of RMB
Previously, an important feature of digital cryptocurrencies including Libra was their strong convenience in international payment and settlement. Therefore, some people believe that the central bank’s digital currency can help promote the internationalization of the renminbi, but there are also opinions that the degree of renminbi internationalization Mainly depends on its own competitiveness, digitalization is only a form, not a decisive factor. Sky Guo, CEO of Cypherium, a New York blockchain development company, told reporters that some countries, such as the United States, believe that DC/EP is one of the important ways for China’s renminbi to internationalize, and other countries how to interoperate digital renminbi with other countries’ digital currencies , And how to protect user privacy.
Huang Yiping, deputy dean of the National Development Institute of Peking University, recently stated at a public event of the National Development Institute that at present, the direct relationship between the digital currency to be issued by the central bank and the internationalization of the RMB is not obvious. Whether a currency can be accepted internationally has nothing to do with whether the currency is digitized, but depends on whether the currency’s exchange rate is flexible, whether the market is open, and whether foreign investors are confident and willing to use the currency. “So the internationalization of RMB is a matter of going forward on its own, and then our digitized RMB may help the process of RMB internationalization more convenient, such as cross-border payment, cross-border trade, cross-border investment settlement, these costs can be reduced,” Huang Yiping Said.
Li Lianxuan told reporters that DC/EP has advantages in cross-border payments, which can not only increase the speed of cross-border transfers, but also reduce the cost of remittances; in addition, the current central bank digital currency adopts a loosely coupled account design, which means that users are using the central bank Digital currency does not need to bind a bank account to make transfer payments, which is very attractive to overseas people who are in poor and remote areas and lack traditional financial infrastructure (banks). In the future, with the gradual liberalization of DC/EP restrictions on payment time and amount, it will promote the internationalization of the RMB in trade and financial transaction settlement and pricing.
Ju Jiandong, a professor at the Wudaokou School of Finance of Tsinghua University, recently wrote an article that in order to meet the challenges facing my country’s financial security, it is necessary to accelerate the construction and upgrading of digital financial infrastructure and promote the establishment of a new digital RMB cross-border payment and settlement system. Use blockchain and other new technologies to fully realize the cross-border payment function of the RMB, solve the pricing problem through the digital currency issued by the People’s Bank of China, temporarily put aside the reserve function of the RMB, and improve the direct exchange rate inquiry between the RMB and other currencies under the DC/EP framework mechanism. On this basis, establish a “digital RMB cross-border payment and settlement new system.”
Digital currency may be the ultimate place for future financial competition
At present, most countries have realized the importance of central bank digital currency, but they are more cautious about issuing central bank digital currency. According to Christian’s questionnaire survey of 63 central banks around the world, all central banks have begun to conduct theoretical and conceptual research on digital currencies. 49% of central banks have entered the test/proof of concept stage, and only 10% have entered the development/pilot stage. In the short term (within 3 years), more than 85% of central banks are unlikely or very unlikely to issue any central bank digital currency, and only 3% of central banks will issue retail central bank digital currencies in the short term.
Judging from current practice, the Central Bank of China has a clear and comprehensive understanding of the necessity and urgency of legal digital currency, and its practice is undoubtedly walking in the forefront of the world.
“Crypto assets and other payment transactions processed through decentralized technology will erode national currency sovereignty, and the pressure on digitization of cash is actually increasing. This historical trend and demand for currency development requires us to make a fuss on the’supply side’. New technologies need to be used to digitize M0. 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 needs and provide digital cash supply,” Fan Yifei pointed out.
When answering a reporter’s question, Huang Yiping said, “In the future financial competition, I think it may be in the field of digital finance. The most important thing is digital currency. Why have all countries suddenly become interested in central bank digital currencies? I think a central bank issued Digital currency, it is likely to be the only one, the winner takes all. Of course, it is not ruled out that there will be many central bank digital currencies in the market at the same time. But in short, if you lag behind others, if you can’t compete with others, maybe you The opportunity for the future is gone, so I guess it is very likely that the central bank’s digital currency will be the ultimate place for our future financial competition.”
“In the end, it may be a winner-takes-all. The reason is that in the future, once a platform with a long-tail effect is established, the marginal cost of this digital technology is very low. In the process of currency evolution, there may be more Digital currencies are competing together, but in short, we cannot be absent. Is it to form a new international currency that will dominate the international financial system in the future? Or among these currencies, the sovereign currency is the euro, the US dollar, the Japanese yen, including the RMB It is really unpredictable that other currencies will tilt, or a new currency will be triggered in the middle. I just say that from a technical point of view, it is unlikely that so many currencies will coexist for a long time.” Huang Yiping said.
Sky Guo said that the current digital currency research and development routes of central banks in various countries are very different. For example, China’s digital currency is directly led and developed by the People’s Bank of China, while the central bank’s digital currency experiment in France invited several private companies to submit technical proposals. Digital currency will replace cash. This is a historical necessity. The convenience brought by digital currency will also greatly affect the liquidity and development of financial markets. In particular, new technologies represented by smart contracts are generating new financial service model innovations at an unprecedented speed. For central bank digital currencies, how to adapt to new changes and challenges such as supervision and network security will inevitably become the top priority of central banks. The central bank’s digital currency contains competitions in various aspects such as technology, monetary policy, and supervision, and it is a must for major countries in the future.
