Thinking about Libra | Zhou Xiaochuan: Calling for some kind of global central bank role "online"

Author: China People's Bank former president, president of the China Society for Finance Zhou Xiaochuan

Good morning everyone, first of all, I would like to thank Dean Zhang Chun for his introduction and the speech of Secretary of the Constitution. I am very touched. Dean Wang Jiang has invited me to communicate with you or participate in activities many times, but unfortunately, I have not been able to make it. Today, I am very happy to finally have the opportunity to communicate with the comrades of Gaojin College. I hope that this lecture will play a role in academic research in related fields and the development of Gaojin College.

The topic I am preparing today is FinTech (Finance Technology) , which also includes BigTech (large technology companies) , and the interaction between financial technology and financial policy. The development of information technology has promoted a lot of new technologies. Recently, there are two very hot topics. One is Facebook (social media Facebook) to launch Libra (Libra) , and there are many comments and research from all walks of life. Many of the work and research of the People's Bank of China have been related to this; the other is the recent publication by the IMF (International Monetary Fund) on eMoney (electronic money) , which focuses on the digital currency and financial system. The IMF proposes that the future stable digital currency should be an international currency, supported by eSDR (electronic-SDR) or dSDR (digital-SDR) .

In the past three or four years, when I and the People's Bank of China participated in various international conferences, they have repeatedly expressed their opinions on financial technology. China has always published opinions on this aspect at the international level more and earlier. I would like to share with you this point of view today.


China's current major financial business systems and their characteristics

1. The financial industry is a highly IT industry.

FinTech has an important impact on the financial system, starting with the payment system. Because the payment system has the most characteristics of information technology, it is also highly dependent on information technology. The main objectives of the payment system: First, the pursuit of efficiency, that is, to achieve the function while reducing costs as much as possible. Second, it is stable and reliable because it involves money and is large. The third is subject to macroeconomic regulation and control. The payment system involves money and is subject to macroeconomic regulation and control, rather than affecting macroeconomic regulation and control and the stability of the financial system.

More than 20 years ago, there was a saying that the financial industry is actually a very high IT component of the IT industry or the financial industry, especially the payment industry. For nearly half a century, financial services have basically been driven by information technology. Financial services are related to account information and data. From the perspective of future transactions in financial markets, stock exchanges, bond exchanges, foreign exchange exchanges, etc. basically rely on IT processing; at the same time, the communication between financial service providers and customers is also highly IT. Even traditional businesses such as loans are increasingly dependent on data support. According to big data or structured data and data mining technologies, the feasibility and risk premium of loans are judged. Therefore, the loan business has become more and more a Data processing process. From this perspective, the development of the financial industry and the IT industry is very relevant. Therefore, the role of FinTech's emergence and development in the financial industry is self-evident.

From the perspective of historical dependence, 20 years ago, the financial industry was the largest purchaser of major products in the information industry, including IBM mainframes, open systems, and network equipment. In the past 20 years, with the development of the Internet, social networks, audio and video, etc. have emerged. The volume of these new applications has increased dramatically, and the demand for devices and networks is growing rapidly, although it has gradually replaced the financial industry as the number one purchase. The status of the family, but the financial industry is still at the forefront of buyers, there is a high degree of dependence.

It should be noted that the supply and demand side often have different opinions about FinTech's specific technology. The demand side considers financial services, such as payment, various financial transactions, deposits and loans, financial management and other financial services that need FinTech. The argument that technology or Internet companies are suppliers is not exactly the case. The supply side often needs to promote a certain technology, a certain product, will try to promote the agitation to achieve its value, and will try its best to promote the supply to create demand. With the development of technology, especially after the emergence of blockchain and DLT (distributed ledger technology), suppliers will claim that this is a disruptive innovation, a revolutionary change, and sometimes an advocacy component. From the demand side, we must understand our own needs, not to be fooled. For what is subversive technology, whether it is a revolutionary change or a continuous evolution, we must have our own judgment. The financial industry has always been a big user of IT. Seriously analyzing the experience that many new technologies are updated on the original technology route is a continuous evolution that cannot be easily described as disruptive technology or revolutionary change.

Second, China's current major financial business system

New technologies are having an impact, even change and replacement, on traditional financial business systems, including payment systems. First of all, we should understand what the existing financial business system is. What technical systems are formed by the existing financial infrastructure and how they interact, so that we can figure out which systems will be upgraded, eliminated or Alternative possibilities. Below, we briefly introduce the technical systems running in financial infrastructure such as payment systems, where many different IT technologies are applied.

In China, for example, China has both a real-time full-rate settlement system (RTGS) for large-value payments and a regular-time differential settlement system for small payments. For ordinary users, it is not always possible to understand whether it is real-time or delayed settlement, because the financial institution will enter the central clearing system of the central bank after the payment system handles the rolling gap in its institution. Therefore, there are three systems here. Their characteristics are mainly realized by banks. Banks have transaction provisions to process daily transactions by debit or credit transaction provision. Although the customer feels real-time implementation, if it involves cross-bank transactions, it must be resolved by the clearing system.

Most countries value large-scale real-time trading systems and clearing systems, managed by the central bank or the public sector. Micropayment systems are relatively less important and can be provided either by the private sector or by the central bank or the public sector. This is because, in mature market economies, the payment industry tends to develop from the private sector. When emerging countries begin to develop payment systems, the foundation is weak and often quickly launched by the government or central bank organizations, which is a faster way. Similarly, the credit information system is the same. In developed economies such as the United States, mainly three private credit bureaus play a role. These institutions have formed a high sense of responsibility and will consider the public interest. Other small economies and emerging market economies are often dominated by central banks or regulators to establish credit reporting systems.

The other is a cross-border payment system. Everyone knows SWIFT (Society for Worldwide Interbank Financial Telecommunications), which is a message system for cross-border transactions, which explains what transactions and currencies, because the currency determines which country's large payment system is used, and Involving exchange rates, etc. SWIFT should not be used directly as a payment system. SWIFT is used by all financial institutions in China. With the internationalization of the RMB, the international currency has begun to be used. The RMB also has a cross-border payment system, namely CIPS (China International Payment System), which is based in Shanghai.

Closely linked to information technology and payment systems are financial trading institutions or platforms. Whether the future is digital currency or electronic money, eMoney or Libra, it may have a huge connection with the trading system. Bitcoin and others have also established their own trading systems. Trading in the Shanghai and Shenzhen Stock Exchange trading systems, the Shanghai foreign exchange trading system, the interbank lending market, the interbank bond market, the futures market, the financial derivatives market, the gold market, etc. are closely linked to two highly IT-based infrastructures: one It is a trading platform, and the other is the registration of deposits and securities. Securities trading must know how many stocks, where, what varieties, dividends to whom, especially when leveraged financing or securities lending, but also record the borrowing and repayment of securities. These content now rely on account-based IT (mainly supported by IBM mainframe) trading system and two important registration systems, namely the China Securities Registration System and the China National Debt Registration System. Libra is either in the form of a blockchain and exists as a distributed ledger; it also requires a depository system to record who holds the money and securities.

With the advancement of information technology, transactions are becoming more and more computerized. Traders communicate their trading orders through network connections. The speed is very fast. In theory, it is possible to achieve faster and faster transactions, namely high-frequency trading. But whether you want to engage in high frequency or even ultra high frequency trading, this is a matter of choice. Now that technology is getting better and better, it is easier to implement. Some businesses are not technically capable, but have other systematic considerations to make trade-offs between supporting real economic transactions and speculative transactions.

In addition to the above payment system and credit information system, there is also an anti-money laundering anti-terrorism financing system. The payment system must be linked to the anti-money laundering counter-terrorism financing system. All of these systems in China are ostensibly a single system, but there are close links behind them.

Third, the characteristics of traditional financial infrastructure business systems

Which of these systems will continue to exist in the future? What will be changed? Which ones will be replaced? It is first necessary to summarize the characteristics of these systems:

1. Based on the account. Both the payment system and other business systems, such as the exchange system and the securities registration system, are account-based. Alipay, Tenpay, etc. are also account-based systems. The blockchain and distributed ledger technology claims are not based on accounts, which needs to be weighed.

2. It is a combination of full real-time delivery and regular rolling clearance. The payment system provides real-time transactions on the user's perception to meet the needs of economical high-speed operation and various institutional position management. However, for a large number of small retail transactions, the need for full real-time delivery is not so prominent, often using a technical system for netting liquidation at the end of the day. For example, for large banks such as ICBC, many small transactions are settled in the internals. The cross-bank part first enters the liquidation system after the internal rollover, which is usually solved after the end of the external business.

Now someone is considering whether all transactions can be processed through a full real-time trading system in the future. However, this should take into account the current business situation of the financial industry. Now there is no bank that conducts real-time risk control. Every second, it has its own real-time risk judgment and risk judgment on the counterparty, and calculates a new optimized investment portfolio every second. Strategy. In most cases, every morning meeting, based on the previous day's closing situation, the liquidity position after liquidation, and market conditions. Therefore, there is a problem with the decision cycle, which is too high to improve the frequency. The same is true for supervision. In the past, the technical cycle of supervision was relatively long. For example, credit progress monitoring was done once a month, and it was supervised according to the end of the month. The practice of evading supervision was “the mid-month belly” and was recovered at the end of the month. Nowadays, for a large number of institutions, it is already regulated daily. Accounting statements are reported every day. The regulatory authorities use computer technology and other means to supervise them. In the future, artificial intelligence may also be used. In short, it is still not possible to continuously and continuously propose regulatory opinions in real time. The current business situation determines the choice of technology. As for how to develop in the future, everyone can study.

3. Financial transactions emphasize DVP (Delivery Versus Payment) and PVP (Payment Versus Payment). Securities market transactions and foreign exchange market transactions must emphasize the need to pay the first-hand delivery. If there is a slight delay, there will be loopholes and liquidation risks. As you know, the financial system sometimes has institutional bankruptcies. For example, Lehman Brothers, once bankrupt, if the coupons are not synchronized, it is prone to risks. Whether this is eMoney or Libra in the future, this principle should be implemented. If the technology is a distributed computing system, the account data is required to be strongly consistent.

4. Corresponding safety measures. Current account systems often have security isolation measures from the Internet. For example, a large host system has strict communication controllers and authorization and password measures for network access. For retail transactions, there are encryption requirements, encryption can be added in different links, such as payment tools, equipment, payment information transmission and other aspects of encryption. For example, retail transactions should not pass information explicitly, to tokenize, the token transmission process is encrypted. Another is the prevention of computer storage and communication attacks. The dependence of computer systems on communication has always been very high. The early communication of financial systems relied on proprietary communication systems, first on the intranet (intranet), and then used the Internet to engage in virtual intranets, and then relied more on open public Internet on the basis of encryption. . The technology of security measures will be different in different technical routes. Similar to the security settings of the account system, blockchain and cryptocurrency emphasize encryption.

5, can carry out effective macro-control. Currency issuance and its innovation will affect the monetary policy transmission mechanism, which in turn affects the real economy. Later, we will analyze it in detail when we talk about Libra.

6, can carry out effective micro-conservation management. As far as China is concerned, there are two main types of compliance. The first is that cross-border payments comply with current foreign exchange management and balance of payments reporting rules. From the perspective of the forward-looking reform of foreign exchange management, it is necessary to know which management is necessary and which will be released sooner or later. The second is anti-money laundering and counter-terrorism financing management. All large-value transactions must be reported to the anti-money laundering system. After processing, screening for suspicious transactions, AI technology can be used to assist in identification, and money laundering, underground money, tax evasion, and terrorist financing are controlled. From the perspective of micro-conservatism, it is necessary to prevent the chain reaction caused by bankruptcy due to insufficient reserves, excessive leverage, and even capital chain breakage. Therefore, micro-management is also very important, and it is impossible to engage in a new system to try to circumvent micro-management.

These are basically the current status and characteristics of the current financial infrastructure system. Although any system will be outdated and updated, there are some people who have no knowledge of the status quo and have been innovating. It should be said that figuring out the current operating system will help to think more deeply about how the relationship between new and traditional technologies should be handled.

Innovation systems need to face and answer a number of questions

New technologies and new systems definitely have the potential and the opportunity to update the old systems. They should also focus on stability, order, and not too anxious. It is inevitable and beneficial to question the old system, and the innovation system has to face and answer questions such as the following:


What business can be adapted to the current and future TPS (transaction per second)?

Currently, some trading platforms have been able to use decentralized blockchain and DLT technology, and China is currently testing two systems. One is the ticket trading system, the transaction volume is relatively small, the existing blockchain technology is sufficient to deal with, and there is not much need for centralized supervision; the other is the trade finance trading system. At present, Libra claims that its system speed is 1000TPS, so TPS will increase by two orders of magnitude to meet the needs of retail transactions. Compared with the number of transactions in stock trading, bond trading, and retail transactions of ordinary people, the blockchain is not enough in magnitude now. What needs to be improved, and to what extent can its TPS be improved in the future? What is the resource usage after the increase? These are still to be seen. However, there must be forward-thinking thinking about the development of new technologies. If Libra initially targeted cross-border labor remittances, its TPS requirements were lower, perhaps for some reason. Some transactions will also form digital assets and will be used as a tool for property management in the future.


What kind of reserve and custody mechanism is used to stabilize the value of digital currency?

The value of cryptocurrencies such as Bitcoin has fluctuated drastically, and people tend to use 100% reserve-backed stable currency. But you need to clearly answer the depository mechanism of the reserve: Is it your own custody, bank custody, or central bank custody? How is the amount of reserves measured and regulated? Does the issuer pay interest to the issuer (and the interest rate) to the client or the custodian? This is related to the interest motives and interest arrangements of digital currency creation and distribution institutions, whether it is 100% reserve to ensure the value is stable, whether there are checks and balances, supervision and correction mechanisms. It should be noted that people do not easily believe in the reliability of the claimant's claim.


Does the new digital currency support the monetary policy's total regulation of the economy and its transmission mechanism?

Individual BigTech giants may think, why can the central bank issue currency and set the base rate? Can I also? It should be noted that although the history and current status of central banks vary, their objectives and missions can be broadly described as maintaining currency stability and price stability, easing cyclical fluctuations in the economy and employment, preventing administrative interventions in non-professional and short-term motives, and maintaining the financial system. Stable, and stable and profit-seeking, etc., its personnel and organization constitute support for its mission, and there are legislative guarantees, which is also an important product of modern civilization. At least for now, this is far from the goals and mission of commercial organizations. It is hard to believe that a good impact on this civilization can have good results.

Another is the monetary policy transmission mechanism. The existing monetary policy transmission mechanism provides a means of execution between the total amount and the control of inflation, the total amount and the control of the asset bubble. Regardless of the effect, there is always such a control system. A new technology emerges. If the original regulatory transmission channel is completely broken, unable to work and achieve the goal, but there is no new regulation system, this may cause big problems.


What commitments and measures are in place to achieve consumer protection and privacy protection?

Should new digital currency or digital asset providers answer their commitments and measures for consumer protection and investor protection? This also involves the motivation of its own business. In addition, how do they plan to use and process the big data they get? Is the consumer informed? Is there a denial or deletion right? Everyone knows that the gambling of the Chinese people is still relatively strong. Observed, all kinds of illegal fund-raising, fraudulent fund-raising and casino scams are mostly Chinese, what is the reason? The People's Bank of China has also had some analysis, but it is difficult to fully demonstrate it. However, it is necessary to face the problem that if it is easy to form particularly sudden speculation or fraud in China and harm consumers, then it must be prudent. Therefore, for some experimental products, we still hope to test in a relatively mature market, or in a relatively small country. After the success, we will not introduce it later.


How to implement micro-compliance and stability requirements?

First, the motivation should be to implement foreign exchange regulations such as exchange, cross-border transactions and KYC (know your customers), as well as current business compliance requirements for anti-money laundering and counter-terrorism financing, rather than trying to bypass or bypass ( Avoiding this type of compliance requirement, it is not to use its own advantages (including money) to lobby for a green light. Consumers and market players do not like the problems of sudden stability, inability to pay off, running, and outbound. This should give the necessary commitments and answers. It should be noted that payment institutions can be involved in the dark network business such as gambling and drug trading through the network. In the end, they will harm consumers and themselves. There are already many cases, so they must be dealt with positively.


Will BigTech's new system abuse the network effect and the “winner-take-all” strategy?

It is now said that BigTech (large technology companies) can provide payment transaction services at zero cost. BigTech will expand the source of customers as much as possible, and even send bonuses and prizes to subsidize customers, expand traffic, and try to achieve "winners". eat". Of course, zero cost is not accurate, and it costs a little money on equipment, telecommunications, Internet infrastructure, social network management, e-commerce and software development. These costs are distributed to each transaction. The cost per transaction is really small, but there should still be cost accounting to achieve fair competition. There is concern that BigTech has the conditions to use cross-subsidization and capital market financing to subsidize costs. And the financial services industry wants to see real, sustainable competitiveness, not distorted scenes, and does not want to suppress potential new technologies in the future.

The above questions to be answered are not comprehensive, but only a few problems that have been experienced and faced. I believe that it is not a hole in the wind or a worry, but for a healthy start and healthy development. Some people also hope that simple start, tolerance, gradual compliance, and money will be pursued to be stable. First, we must make money to build a big system, and then talk about morality and obligations. Perhaps this is a “experience talk” in some industrial fields, but in the financial industry, especially in the currency sector, its socio-economic risks will be much greater.

General considerations of financial policy for FinTech

First, we must maintain tolerance and support for financial technology.

Based on the above understanding, the inference of FinTech's financial policy response is: be sensitive to new technologies, overall support, and tolerance; but at the same time be vigilant to prevent systemic risks. First, don't trust the propaganda of some suppliers. Some people advocate subversive technology and revolutionary technology. If you oppose him, you are a "counterrevolution." This is sometimes done only to sell their own products, and sometimes to exclude and attack competitors; when it is actually strengthened, it may also be a war. The second is to be alert to the oligopoly. Some countries now have a monopoly of government and enterprise oligopoly. Some BigTech started from technology, and of course started from other industries, such as oil and gas manufacturers and chocolate manufacturers. Because BigTech wants to get support from the policy, and politicians need these institutions to provide ballot support, it is easy to form a special relationship. The third is the need to pay attention to whether it will exclude competition . If it is fair competition, everyone will fight for technology, function, cost, compliance, reliability and so on. But if you start with the number of customers, maximize the flow, and also use the risk investment and capital market IPO money to subsidize to occupy the market and strive to achieve the winner, then it may hinder the next One step of fair competition.

Second, the establishment of a limited and recoverable safe space as a test environment

From the perspective of financial policy makers, they want to provide a testable environment with different current rules, emphasizing that this is a limited, regulated, safe and controllable, reversible experimental environment. However, this is also said to be easy to do. The Bank of England proposed a sandbox for regulation. The sandbox is bordered. If the test is unsuccessful, the spillover effect is basically controllable; the sand flow can be restored in general, and everyone should be free from losses, but these two points are actually not easy to do. To. In short, there must be such a system and environment for experimentation. It is a challenge to design a sandbox for currency testing in large economies.

Third, rely on market competition to select

The winning of new technologies in specific fields depends on market competition. Many examples have shown that it is difficult to say that the government has the foresight to pick the most effective technology; it must be acquired in the market. There are many similar examples. For example, electric vehicles, the competent authorities will hope to focus on one direction to concentrate on achieving and promoting and reducing waste. But practice shows that in the face of future uncertainty, the government may not be able to become a prophet, or it must rely on market competition to find out. As we all know, FinTech is now entering the financial services industry, there are BigTech companies, there are third-party payment companies, there are various trading platforms, etc., the policy should establish a fair competition, the survival of the fittest and protect consumption. The environment of the person. I have just mentioned the issue of BigTech's “winners take all the time”, and policies should avoid losing fairness and hindering competition.

Fourth, encourage FinTech to implement inclusive finance

Another entry point is to emphasize inclusive finance. The inclusiveness of traditional financial services is not enough, such as high cost and difficulty in serving the most remote grassroots. Now with FinTech it is possible to better serve the poor, for remote areas, for small transactions. But be careful to ensure that the inclusive financial business is carried out. Because some people are doing this kind of banner to do other things, a large number of P2P platforms have appeared in the past few years, and now there is a large area collapse, there are at least three problems. First, the abuse of inclusive finance has been fooled, and policy makers and regulators have been fooled. In order not to hinder the development of technology, the regulators have shirked their responsibilities. They say that they will not be in charge of the license as long as they have not applied for a license. The regulators only supervise the license-issuing institutions, not the ones that I license, so they will avoid technology. Class companies, conflict with these platforms. But these P2Ps are actually shadow banks, and they have to be responsible for a large-scale accident. Second, it is unrealistic to assume that everyone can review customer information on their own. It is advisable that after the Internet and the trading platform, everyone can lend their own surplus money and review their customer information to decide who to lend. To this end, it can be said that there is no need for the bank. But after actually doing it, I found that not many people have worked hard to see the information of borrowers and small and micro enterprises. Individuals often do not have enough industry knowledge and financial knowledge. Few people do this. As a result, P2P companies almost 100% of the pool of funds, forming a shadow bank. Third, relying entirely on big data and credit reporting systems is also too idealistic. Some people claim that although individuals do not have so much financial knowledge, industry knowledge and detailed understanding of small and micro enterprises, if you can rely on big data and credit information systems, then P2P should be safe and reliable. In fact, this is too idealistic. This is reminiscent of the past centrally planned economy, emphasizing that the central government can obtain all the information, and through precise calculations, it is possible to achieve optimal allocation of resources, which is actually an illusion. Even if there is big data now, it is highly doubtful whether there is sufficient credit information and processing capacity to allocate various loans. In short, we must observe the motives in order to effectively support the innovations that truly engage in inclusive finance.

5. Focus on the true motives of all types of FinTech companies and provide positive incentives

The correct motivation is to achieve efficiency and competitiveness with new technologies, and the motivation for deviations may be to target customers' wallets, want to eat spreads, and even self-inflict. Another type is to get rich quickly through capital market operations. Just mentioned that some BigTech hope that the winners will take all the food. The medium-sized, even the small FinTech, is easy to do the dream of Unicorn. It wants to be listed after the listing, and the rest is ignored. . But I didn't expect to start crashing when I didn't go to the listing, leaving a chicken feather. Therefore, it is important for regulators to pay attention to their motivations . This is not only in the FinTech field, but also in many areas. I have repeatedly mentioned that I can read about Elisabeth Holme. Financial policy has a certain space to set up, using incentives , such as fund custody, whether to pay interest and other rules, to establish a positive incentive mechanism on the basis of observation, encourage behavior under correct motivation, beware of giving incentives to bad motivation.

Preliminary discussion about eMoney and Libra

If you are interested, you can read the eMoney article published by the IMF. In fact, it is very short. It summarizes the discussion of the previous period. The People's Bank of China also participated in the discussion and put forward its own opinions. The eMoney in this report should be the concept of a stable currency. It is accepted that Bitcoin and its similar cryptocurrency are intended to be recycled early, first to trade, to make money, and the value is very unstable, thus also ruining its potential as a payment currency.

In September and October of 2017, China closed its domestic Bitcoin RMB trading platform and wanted to trade to other countries such as Japan. In China, the issue of investor protection and consumer protection on these platforms is not well resolved. After the establishment of these trading platforms, the immediate problem is which department is supervised. Generally speaking, it may be the securities regulatory department. However, the securities regulatory authorities feel that this is very troublesome and they are afraid of suppressing emerging technologies, so they are unwilling to take care of them. No one is in charge. In addition, in these trading platforms in China, the manipulation of knocking prices is very obvious. In 2000, the so-called "funds of funds" in China was to use a counter-tap transaction to manipulate prices through knocking. This is a criminal offence. We have already told the IMF what we observed. Recently, there have been disclosures on the Internet that, after observation, 90% of transactions on a US trading platform are knocking, and real transactions are rare.

eMoney accepted the concept of stable currency. The eMney proposed by the IMF has adopted the practice of stabilizing coins. The People's Bank of China introduced the Hong Kong money-issuing system to the IMF. Hong Kong is not issuing money from the Hong Kong Monetary Authority but has three banknote issuing banks. In the past, there were two, HSBC and Standard Chartered. After Hong Kong returned to Hong Kong, they joined BOC Hong Kong. In the future, whether it is digital currency or electronic money, the banknote issuing bank may not necessarily be the central bank. The CBDC (Central Bank Digital Currency) is a way out, but if the technology is not accurate, the loss of mistakes will be great. If you can't, like Hong Kong, there are three banknote issuing banks. For every 7.8 Hong Kong dollars issued by each banknote issuing bank, you must have a full preparation of US$1 and get a proof of payment. In fact, this is the concept of stable currency.

eMoney supports open technologies. The concept of eMoney payment system emphasizes that it is not limited to DLT technology, but also can use account-based technology. The cost of these current account-based business systems in China, as described above, has been reduced to a very low level, and these systems are still fairly reliable. So, must we decentralize? Is it necessary to opt out of account-based technology and choose a non-account system technology? The IMF article argues that it is not necessary to draw conclusions too early.

Speaking of the cost of payment, I will add a little more. Libra said that the cost of cross-border remittances is high, and there may be around 5%. However, it should be noted that this is not the technical cost of the current bank payment system. The technical cost of the bank payment system is already quite low, and there is a ceiling for large transaction fees. The smaller the amount, the more expensive it is. In fact, the most important problem is that some cross-border remittances have administrative obstacles or discouragement. For example, remittance countries may increase inspection and administrative obstacles to the management of migrant workers; if foreign exchange controls exist in receiving countries, residents may not be allowed to open foreign exchange. The account, which may be a forced settlement but provides disguised compensation (such as China's past remittances), will inevitably increase management measures; then whether the relationship between the two agencies is smooth and whether it can provide services to the grassroots. Defects in this area are reflected in the expense ratio of cross-border remittances. Another obstacle is the exchange rate, the exchange rate of the small country's currency is unstable, then the way to deal with exchange rate risk is to collect more fees. Since there are demand and obstacles, banks have to take advantage of the opportunity to make more money, often based on past technology costs. I heard that Hong Kong has recently opened a quick remittance with the Philippines. It does not use blockchain and DLT technology, and the fees are very low. One explanation is that Hong Kong is very accepting and willing to facilitate a large number of Filipino maids. So, it's not that the current cost of an account-based payment system is high, for other reasons.

Libra has not yet explained in detail the technical details, whether it relies entirely on blockchain or alliance chain technology. Libra's choice of cross-border remittances is sensible and more acceptable. Because the retail payment and financial market payment in developed countries has been more convenient, the urgency is not strong, and the requirements for TPS are very high. It is easy to understand that Libra starts with a low-cost service such as cross-border remittance.

eMoney proposes to consider SDR as a backup. In order to be able to support cross-border transactions, eMoney considers that it should be pegged to SDR, resulting in eSDR or dSDR. This represents the IMF's design philosophy for the necessary management of SDR and member countries' exchange rates.

Libra did not clearly explain the issue of reserve custody. Libra also proposed the concept of a stable currency, which is 100% reserve. However, Libra must make it clear who is hosting the reserve. Many people in China know that the shared bicycle deposit has not been managed, and the last problem will not be available. Several shared bicycle companies have not calculated their financial sustainability, and they have made so many subsidies to grab the market. They flicker first, and some of them can’t end up. It’s hard to say that they don’t want to pay the customer deposit and interest. . So Libra should make it clear who is hosting the reserve. The white paper seems to be hosted by its own association. This lacks checks and balances and is easy to fail. A reliable custody of reserves, one is to find a commercial bank, one is to find a central bank. The Libra white paper seems to have revealed that hosted money, if interest income, will be used to support operations and technology updates, then this can create problems. There has always been a motive – looking at the money in the customer’s pocket, the operation is prone to problems. China started to approve third-party payment companies about seven years ago and issued more than 260 licenses. Everyone is very motivated. Many of the more than 260 companies actually just want to engage in prepaid cards to absorb deposits and operate customers' prepaid funds. The real motivation is not to provide better technology to support payment services, but to act like a bank to absorb deposits. The company absorbs and uses the client's funds, and can obtain interest on the reserve fund, without having to achieve high capital adequacy and other regulatory requirements like deposit-based financial institutions. Bad motivation often hinders the emergence of truly effective technology, which can easily lead to incentive distortion.

When making financial policies, try to use effective incentives to minimize this bad motivation. In this regard, the US PayPal is an example, PayPal's user reserve fund custody is no interest. Another one is Apple Pay, which uses NFC (Near Field Communication Technology) to connect consumers and merchants' bank accounts with a small fee. Its CEO, Tim Cook, is very clear that he never makes a customer wallet idea. Provide payment services and do not contact the user's wallet to obtain interest.

The purpose of discussing this issue is to find out exactly what the motivation for financial services is. If Libra is 100% reserve, there is a hosting issue. If you are ready to fully skillfully, you can do interest-free (or low-interest) hosting through a commercial bank or central bank. But Libra didn't make it clear.

Reserve measurement and financial stability issues. It's not just Libra, it's possible that in the future, after a successful digital currency like Libra, it will become a globally popular paying currency. Since it can be used as a paying currency, it can also be used as a currency for other financial transactions, such as stock trading, bond trading, payment of principal and interest, etc. Bank loans may be Libra denominated (Libra) loans. Macroeconomics of money tells us that it is a loan that creates deposits. Therefore, after M0, there are M1 and M2. Let's see what is the relationship of this order of magnitude? At the end of 2017, China's M0 is about 7 trillion yuan, M1 is about 54 trillion yuan, and M2 is 169 trillion yuan. If the M1 or M2 has a run-through problem, even if the M0 currency has 100% reserve payment, it will not solve the stability problem of the entire financial system. When a depositor asks for redemption, whether it is a digital currency or a survival or derivative interest, it is only concerned about whether it can be redeemed. Therefore, although Hong Kong is a three banknote issuing bank, in fact, if there is a big financial problem in Hong Kong, such as a run on a run, it is definitely not the total face value of the banknotes of the three banknote issuing banks. It is 100% prepared, but M1 and M2 does not. Therefore, it is not that M0 is 100% safe and reliable, and no risk. So, how much reserve should there be? This requires someone to measure. Who can do this live? That is, the central bank does it. Stabilizing coins have been developed on the basis of closely observing the chaos of transactions such as Bitcoin. It is an improvement, but it has not yet been fully explained. Really achieving stability will have more cooperation with the central bank and financial policies.

Exchange rate issues and monetary policy transmission mechanisms. Libra is linked to a basket of multiple currencies, similar to eMoney. The question that follows is the proportion of multiple currencies, the exchange rate, and whether it involves exchange and liquidation issues between each other. Assuming that people's cross-border remittances are sent back to their hometowns, Libra may not be fully used for direct commodity transactions, so they still have to convert to local currency. Local currency is likely to be in Libra's basket and may not be there. If you are not in the basket, there is still a large administrative and exchange rate risk; if you are in the basket, but the actual ratio is not the same as the ratio of the reserve basket, there will still be exchange problems, and the exchange rate will also be involved. This has led to an issue that cannot be avoided by the central bank, and how the international central bank is coordinating. It also raises the question of whether the world needs someone to manage the exchange rate between various currencies and its formation mechanism.

In addition, globally, if Libra succeeds, there must be a problem of the expansion speed of M0, M1, and M2. The existing monetary policy transmission mechanism that controls expansion and its price needs to be transferred to or partially transferred to Libra-based, or Libra. The effectiveness of the monetary policy transmission mechanism must be designed.

Libra may lead to a "winners take all" situation. Facebook has pulled more than 20 large companies to start research and development, and the next step may continue to develop. Therefore, in the beginning, there will be a forerunner or winner to eat, and this kind of sign will cause some people to worry.

Libra's challenge to China. For China, we have to consider Libra and other similar digital currencies. If we use the currency combination as a reserve, we will definitely not choose a non-convertible currency. Otherwise, there are risks in operation, such as obeying the risk of foreign exchange control. If Libra succeeds, it will have a substitute for weak currencies, non-convertible currencies, and developing country currencies. Because the basket is still dominated by the US dollar, people have raised concerns about dollarization. There have been substitutions in the past. The result of the substitution is dollarization, which will slowly squeeze out the currencies of small countries, especially those that have failed in monetary policy. This problem is not caused by Libra. In the past, there was a problem of dollarization. We can observe that countries with poor macroeconomic regulation may be dollarized, such as Zimbabwe. Some countries in Central Asia look good and have problems with dollarization. The comprehensive use of domestic currency is relatively low. Therefore, a strong currency will erode weak currency in the process of globalization, which is an inevitable phenomenon. It's just that if Libra comes out and can be popularized, it can greatly speed up the process. Therefore, this is also a challenge for the renminbi. At present, China still has a certain degree of foreign exchange control. To cope with the challenges of Libra, it is necessary to speed up the convertibility of capital projects, to make the RMB a part of a strong currency, and to avoid erosion and substitution; with the development of the internationalization of the RMB and its expansion The proportion in the SDR basket will involve important policy choices.


There are several main differences in the interaction between information technology and financial policy:

First, we must prevent the motivation from being distorted. There are all kinds of distorted motives in the market, and there are also "sounds to the West". But financial policy incentives should be able to encourage legitimate things.

Second, encouraged businesses must compete properly. The concept of fair competition is that, in general, there should be no improper subsidies. There are two main means for improper subsidies, which are against dumping and restricting subsidies. The competitive order in the financial sector is more problematic and more systematic. Inadequate and unfair subsidies should not be used, and venture capital and other institutions should not support the creation of severely distorted “burning money” competition.

Third, emphasize stability. One of the lessons learned in the Chinese market is to strengthen the management of reserve funds and some micro-stability.

Fourth, emphasize the support or maintenance of the current macro-control.

Fifth, the interrelationship between the global currencies in the future calls for some kind of global central bank role.

Sixth, the pilot's controllability and retreat. I don't have time to talk about it today. I mentioned the regulatory sandbox or the environmental design of other different support technologies.

Based on these considerations, the People's Bank of China has launched a plan called DC/EP (Digital Currency/Electronic Payment) , which is a step-by-step R&D program. One of the meanings of DC/EP is that whether it is based on accounts or not based on accounts, blockchain or blockchain, you can choose, multi-program development, and competitive selection. Large commercial banks, BigTech, Internet companies, and telecommunications companies can freely combine and compete with different technology routes to open up certain pilot conditions for them. It has been clear from the beginning that it should be the concept of a stable currency. We call it 100% reserve, which is managed by the central bank. Of course, there are some specific technical details, limited to the time relationship, not much to say.

We can research and summarize current lessons, market observations, and technology choices to support technological innovation, replace traditional technologies, and maintain system continuity, preventing large-scale risks and large-scale fraud. The current work is still only exploration, and some places may not have thought of it, and it may also lead to flaws, but also continue to test in practice.

I hope to learn from you and keep track of new technological innovations while promoting their contribution to the continuous updating and upgrading of financial services, technologies and systems. I will talk about it here first, leave some time to ask questions, thank you!


Zhang Chun (Gao Jin Executive Dean)

Zhou Xingchang’s speech was very cutting-edge and very exciting. From the technical aspect, he made a very detailed comparison between the new and old financial infrastructure, especially the payment system, and then made some new eMoney, mainly Libra’s prospects. The analysis concludes with a discussion of how financial regulatory policies should address these new changes. His main point is to support the development of new technologies, but to maintain continuity and control risks.

Below we have a discussion and answering session for a while. We invite Professor Wang Jiang. The audience can use the WeChat public number of the college to ask questions in the menu bar. Professor Wang Jiang will make some choices from it. Let's start the conversation.

Wang Jiang (Chairman of Gaojin Academic Committee)

I am very grateful to President Zhou for giving us a detailed analysis of the current status and trends of financial technology development. I have made a detailed analysis of the overall structure and functions of financial services, especially the infrastructure, which is a very detailed introduction. At the level of practice, it may indeed be insufficiently concerned about the technical level. In fact, due to the emergence of some new technologies, we are now facing new opportunities and challenges, which also forces us not only to have a deeper understanding of the service front, but also to have a deeper understanding of back-end support and technology-driven. Regarding the current situation and the future development prospects and policy considerations of new technologies, Zhou Xingchang also made a detailed and profound analysis.

As Zhou said, in fact, finance is a high-tech industry at the beginning. I think its current opportunities may come mainly from two aspects: First, with the development of the Internet, information gradually goes deep into all aspects of life, whether it is financial institutions or other. Service organizations, all aspects of data collection are experiencing explosive growth; second, the development of technology such as blockchain and AI will inevitably affect the two most important functions of financial services, namely, reducing transaction costs and overcoming information asymmetry. The specific progress is gradual and revolutionary. It is still difficult to say now, and the future is difficult to predict.

From your point of view, based on new information and technology, what new services can be done before? Or what are the different financial service models that can be brought about by technological breakthroughs? Today's discussion may be of particular concern for payment issues. In fact, payment should be the most traditional function in finance, but technological development has brought about a very different situation. In your opinion, whether it is new technology or new service, what are the more revolutionary changes that can be brought about by the development of information technology now?

Zhou Xiaochuan (President of the Chinese Finance Association)

Personal estimates suggest that there are three major changes that may occur. The first is inclusive finance. In the past, financial services in many African countries could not keep up. Many people did not have accounts or deposits. The local traditional financial services industry is difficult to develop, mainly relying on the institutions left by the old colonists in the West to provide financial services. The best-running company was Standard Chartered Bank. Standard Chartered has set up a number of outlets in Africa, but it is difficult to reach the grassroots level. It mainly serves prominent, large enterprises and wealthy people. Because the cost is very high, it is necessary to send employees from the UK. In branch offices, the wages of employees may be 1000 times that of local people. It is difficult to provide local people with small financial services at reasonable cost. Later, the development of Kenya's M-PESA gave developing countries a hope of cheap inclusive finance. As far as China is concerned, the United Nations inclusive financial special envoy, Queen Maxima of the Netherlands, once said that China is already quite good according to the main indicators; however, we also have many dead ends, which should be implemented through universal poverty alleviation and green finance. .

The second is the need for an institution similar to a global central bank. Since the global financial crisis in 2008, the monetary policies of many small countries have become increasingly useless, because of the significant spillover effects of several major central banks such as the Federal Reserve and the European Central Bank, and the independence of regulation is very low. In the future, there may be e-currency without borders. In this development process, the effectiveness of macro-control should be considered to maintain the effectiveness of custody, exchange rate regime or currency exchange. After the establishment of the IMF, there is also a function of exchange rate coordination in the Bretton Woods system, but in general, the IMF may be more concerned with stability and crisis response. In fact, the lack of institutions around the world to perform this function is likely to emerge in the future.

The third is AI smart investment. I personally still have some reservations about this. AI's machine learning ability will become more and more powerful, and it will be useful in the field of investment. But there may be two drawbacks: The first is that the big data collected is basically recent, and the earlier data is not retained or not so rich. The data of learning cannot adequately cover the knowledge and experience of the bubble phenomenon and the economic crisis, that is to say, how the bubble starts, collapses, Minsky time and other phenomena have fewer data samples. AI self-learning based on these data may be more inclined to technology-based transactions, which may contribute to the bubble rise and eventually break down; second, technical analysis is easier to achieve in machine learning, but fundamental analysis and understanding may be more important. A few years ago, when big data began to rise, some people said that in the future, the stock prices of companies like PetroChina and Sinopec should be, what is the situation of each oil well every day, how much oil is produced, big data knows that machines are definitely better than people. Its stock price trend. I said that is not the case. For example, Enron, not exactly how each oil well is, how about every oil trade, can calculate the stock price; it has problems in mergers and acquisitions, finance, leverage, and even the failure of Andersen’s due diligence. Can be found through fundamental analysis. In addition, there is one point, AI smart investment seems to support and provide high-frequency trading services. High-frequency trading can cause system vulnerabilities. There is a lot of discussion in this area. In the first two years, there was a flash crash in the London market, which may be related to high-frequency trading. Therefore, there are advantages and disadvantages in AI smart investment, which needs further study and observation.

Qin Lan (Chinese famous media person, Gao Jin alumni)

Thank you, President Zhou. The amount of your speech is very large and very profound. I have two questions. The first problem is that our goal is to become a world-class business school, and our students have this ideal. In recent years, there have been many criticisms in the financial industry. For example, the added value of the financial industry accounts for too much GDP. Too many outstanding college students are doing financial, investment banking, and talent allocation distortions; financial contribution to the real economy is not enough, and more is self-entertainment; Speaking of the motivation issues of many people in the P2P process. Our Gaojin students also exchanged together. What is good finance, or is it reasonable and appropriate finance? As a financial industry, what should our initial heart be? This issue will also have some guiding effects for our Gaojin College.

The second question is that President Zhou has talked about many cases today, showing how to make the market better play a decisive role in resource allocation and better play the role of government. The Third Plenary Session of the 18th CPC Central Committee has proposed comprehensive and deepening reforms for six years. There have been many things in the past few years. In the financial industry, the market plays a decisive role and plays a better role in the government. What kind of thinking you can share with us. Thank you!

Zhou Xiaochuan (President of the Chinese Finance Association)

Let me talk about the first question, which can be analyzed from three angles. The first is that there are deviations in statistical methods. The added value of China's financial industry is only 8 percent of GDP, which is not much. I don't think so much. Some people say that more than 10% in a certain quarter, in fact, this is misunderstood. Because the statistics of the added value of the financial industry need to use the GDP income method. As we all know, GDP statistics include production methods, expenditure laws, and income laws. Why does the financial industry have to use the income method? I won't talk much about this. With the income method, it is necessary to understand the income of the company and employees. Do not look at the stock market's daily transaction amount of several hundred billion, but the added value of the brokerage and exchange services provided by the exchange needs to be calculated by the income method. China’s quarterly financial statistics do not use the income method, but use several similar multipliers. If the stock market rises by 10% to 20% in a quarter, multiplying it by the multiplier is particularly large. Not so high. In the first quarter of 2018, there was a saying that the financial industry accounted for more than 10% of GDP, and some people were nervous, saying that there must be problems. I would like to say that there are statistical problems here. Currently only reliable annual data, the annual figure may still be around 8%.

The second is to fully understand the relationship between finance and the real economy. If we emphasize that finance serves the real economy, then there is no zero-sum game between them. In the past, rural finance was used. Some people said that there are so many people in the village, and several people are working in credit unions. If they earn more, they must be taken from the farmers. This is zero-sum game thinking. The financial support of the real economy is particularly advocated by China, and it was first proposed by the People's Bank of China after the global financial crisis in 2008. At that time, everyone analyzed the reasons at the IMF and BIS (BIS) meeting. The People's Bank of China mentioned for the first time that some financial activities in the United States were separated from the real economy, and some derivatives were separated from the real economy. This was one of the causes of the crisis. To this end, China should emphasize that finance must serve the real economy. In 2010, the Central Economic Work Conference officially wrote that finance should support the real economy.

It is certainly not easy for finance to serve the real economy well. After the rise of risk control, risk control requires more complex financial products, especially derivatives, many of which are useful, but some financial derivatives sometimes do deviate from the real economy and become self-entertainment. So there are some blurry areas that need to be carefully distinguished. From most other financial services, such as stock financing, bond financing, deposits and loans, and payment services, these are obviously closely related to the real economy. I have always said that this part cannot be simply called the virtual economy.

The third is that the added value of financial services to GDP is related to many factors. In addition to the amount of financial services, such as the increase in GDP and the amount of imports and exports, it is also related to factors such as the national savings rate. The savings rate is high. Whether it is deposits, wealth management, or funds, some people need to provide more services. When China's savings rate is high, it reaches 50% of GDP. Now 45%, which is basically the highest in the world, it definitely needs more financial services. In countries with low savings and no savings, the proportion of financial services will be much weaker. Another is related to trade, trade links, trade settlement, trade finance, exchange cross-border settlement, letters of credit, etc., in addition to trade-related investment and intellectual property transactions, which require financial services. China is the world's largest trading country. Compared with GDP, trade accounts for such a large proportion. This is also a reason for the relatively large amount of financial services. Finally, the region must be distinguished. Shanghai is an international financial center, and the United States is the same. New York City is very high. Therefore, to do a specific analysis, individual cases cannot be used to draw conclusions.

As for the resource allocation problem, I think the first priority is the price. Resource optimization configuration is to rationalize the price and reduce unnecessary distortion; the more distorted, the more the resource allocation efficiency will be lost. The price is rationalized. From the mathematical optimization model, the price is close to the shadow price, which is the price represented by the Lagrangian multiplier in the optimization model. If we want to improve the efficiency of market allocation of resources, we must try to avoid distortion and try to make the price formation more rational, including exchange rate and interest rate. For example, we care about small and micro enterprises, but we don't have to directly intervene in their financing prices, because there are many things behind the price, the most complicated of which is the risk premium. In general, competition is still used to form fair prices.

Original title: "Zhou Xiaochuan: Information Technology Development and Financial Policy Response"

Zhou Xiaochuan, president of the China Finance Association and former president of the People's Bank of China, was the "SAIF-CAFR Famous Lecture Hall" on the 10th anniversary of the Shanghai University of Finance's 10th Anniversary of the Shanghai Jiaotong University. On FinTech (Finance Technology), BigTech ( The interaction between financial technology and financial policy, as well as hot topics such as eMoney and Libra, have been deeply interpreted and analyzed, and interacted with Professor Gao Jin, classmates and alumni.

(The author of this article: former president of the People's Bank of China)

Editor in charge: Zhang Wen

Source: Sina column opinion leader