It has been five years since Zhou Xiaochuan proposed to develop the central bank digital currency in 2014 and this year’s Mu Changchun’s “calling out”. After five years of polishing, what is the current central bank digital currency? What kind of development history has you experienced? What impact will the future bring?
First, the model: Two-tier operation delivery system, centralized management mechanism
China's central bank digital currency is abbreviated as "DC/EP", "DC" is the abbreviation of "Digital Currency", "EP" is the abbreviation of "Electronic Payment", the main source of the Chinese central bank's digital currency The function is as a means of electronic payment.
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China's central bank digital currency has its own characteristics in terms of operation, management mode and technology selection.
1. Double-layer operation delivery system: 4 points of consideration and 4 effects
First, the Chinese central bank's digital currency has designed a two-tier operating system rather than a single-tier operating system in which the People's Bank directly issues digital currency to the public. Under the two-tier operating system, the upper level is the central bank, and the central bank issues credit guarantees for the issued legal digital currency. Therefore, the central bank's digital currency has unlimited legal compensation as the renminbi; the lower layer of the operational delivery system consists of different commercial banks. In the case of commercial banks and other institutions responsible for issuing central bank digital currency to the public, it is necessary to pay 100% of the full reserve to the central bank to ensure that the central bank's digital currency is not over-represented.
There are four considerations for the central bank's digital currency to adopt a two-tier operational delivery system:
First, China has a vast territory, a large population, and a complex economic structure. The economic development level, resource endowment, and population quality of different regions are different. Therefore, issuing central bank digital currency in China is an extremely complicated system engineering. The single-tier digital currency operation system will allow the central bank to face all the public alone, which will bring great challenges to the operation of the central bank.
Second, commercial banks and other institutions have developed relatively mature IT technology facilities and service systems, and have accumulated certain experience in the use of financial technology and related talent reserves. The two-tier operation system can give full play to commercial banks. The advantages of the organization in terms of resources, talents and technology, while avoiding the huge waste of another stove.
Third, the digital currency issued by the central bank is aimed at a wide range of public. The system covering more than one billion people is huge. It is very difficult to ensure stable and efficient operation and faces many risks. A two-tiered operating system helps to mitigate risks and avoid excessive concentration of risks.
Fourth, under the single-layer digital currency operation system, it may lead to financial disintermediation. The digital currency directly placed by the central bank for the public is higher in credit rating than the deposit currency of commercial banks, which may have an extrusion effect on commercial bank deposits, which in turn affects the ability of commercial banks to lend.
The impact of the central bank's digital currency using a two-tier operational delivery system is reflected in the following four aspects:
First, the issuance of digital currency by the central bank does not change the creditor-debtor relationship of the currency in circulation. At the beginning, the central bank issued the currency of the state function to issue goods with real value such as gold as convertible reserves. The public accepts the currency issued by the central bank, which means that the real value of gold and other items are borrowed from the central bank, and the public only holds the redemption certificate, that is, the currency is the central bank's liability to the public. This relationship between credit and liability has not changed when the state no longer relies on the gold reserve by virtue of the national credit mandatory statutory currency. From this perspective, all currencies in circulation, including the digital currency issued by the central bank, are central bank liabilities.
Second, the issuance of digital currency by the central bank does not change the existing currency delivery system and dual account structure. Taking the "Bank Account Management Measures" promulgated by the People's Bank of China in October 1994 as the starting point, after more than 20 years of development, China has basically formed a money delivery system supported by a dual account structure. The central bank's digital currency also adopts a two-tier operation system similar to the dual account structure.
Figure 1: Comparison of dual account structure and two-tier operating system
Source: Zero Finance
Third, the central bank's digital currency will not enhance the procyclical effect without prejudice to the existing monetary policy transmission mechanism. Economic growth generally goes through a complete cycle of depression, recovery, prosperity, and crisis. When the economy is booming, the expanding monetary policy is a pro-cyclical policy, and when the economy is depressed, it becomes a counter-cyclical policy; similarly, the tight currency Policies are counter-cyclical policies in times of economic prosperity and pro-cyclical policies in times of economic depression. The monetary policy that expands when the economy prospers will increase the pressure of inflation. The tightening monetary policy during the economic recession will increase the pressure of deflation, which is a pro-cyclical effect. Since the digital currency issued by the central bank does not affect the existing monetary policy transmission mechanism, it is naturally isolated from the procyclical effect.
Fourth, the digital currency issued by the central bank focuses on the substitution of M0 currency instead of the M1 and M2 currencies.
(Note: M0, M1, and M2 are all important indicators for reflecting the money supply. M0 is cash flowing outside the banking system. Everyone's deposits and withdrawals in the bank will affect the increase or decrease of M0 in the market; M1 is a narrow currency, "M1=M0+ current deposits of enterprises in the bank"; M2 is broad money, “M2=M1+ quasi-currency”, the quasi-currency here includes time deposits, resident savings deposits, other deposits, securities company customer deposits, housing provident fund center deposits, deposits of non-deposit financial institutions in deposit-type financial institutions. M1 reflects the real purchasing power in the market, while M2 reflects both reality and potential purchasing power. If the M1 growth rate is faster, the consumption and terminal markets are active; if the M2 growth rate is faster, the investment and the middle market are active. )
At present, M1 and M2 currencies have been basically electronicized and digitized in China. The increasing efficiency of various types of online payment systems supporting interbank payment clearing systems for M1 and M2, commercial banks and non-bank payment institutions has been able to meet the needs of China. The need for economic development.
However, there are still three major problems in the M0 currency side: first, the anonymity of the existing M0 makes it exist for the risk of money laundering and terrorist financing; second, the Internet payment is tightly coupled based on the bank card account. The model can not meet the public demand for anonymous payment. Third, there are still areas in China where bank account services and communication networks are not well covered. The local public is still more dependent on M0 currency (currency).
Therefore, the central bank issued a digital currency that focuses on replacing M0, which is in line with national conditions and conforms to the public demand for small-frequency high-frequency payment services (setting transaction limits and balance limits according to different levels of wallets), while also effectively preventing M0 currency from being used. Risks such as money laundering and terrorist financing.
2. Centralized management mode: Essentially different from digital currencies such as Bitcoin
The central bank's digital currency adopts a centralized management model, which is essentially different from the decentralized digital currency represented by Bitcoin.
1) The central bank's digital currency is still the central bank's debt to the public. This creditor-debtor relationship has not changed with the change of currency pattern;
2) In order to ensure and strengthen the macro-prudential and monetary control functions of the central bank, it is necessary to continue to adhere to the centralized management model;
3) The members of the central bank's digital currency dual-layer operation delivery system that carry out the currency by the designated institution, which requires centralized management to avoid the over-issuance of the currency of the designated operating agency;
4) As long as the dual account system and the original monetary policy transmission mechanism have not changed, the central bank's central management model and status will not change.
Finally, for a central bank digital currency system that needs to support widespread public use, the high concurrency performance required at the retail level is not currently achieved if a pure blockchain technology architecture is adopted. Therefore, in the choice of technology roads, China's central bank digital currency does not presuppose technical routes, nor does it rely on a certain technology. In addition, the relevant person in charge said that the central bank's digital currency can support smart contracts, but only support smart contracts that are conducive to monetary functions, and will remain more cautious about smart contracts that exceed the monetary function. In addition, some of the operating agencies designated by the central bank will adopt different technical route methods to determine the research and development of digital currency, and finally realize the system optimization of digital currency through market competition.
Second, the development process:
The research on the digital currency of China's central bank can be traced back to 2014, and it has been five years.
If we say that Zhou Xiaochuan’s proposed legal digital currency research and development in 2014 is the beginning of all this, then the establishment of the Digital Currency Research Institute by the central bank in 2017 is a turning point in this story. In the past five years, the People's Bank of China, with the Digital Monetary Research Institute as the core, has joined several commercial banks to study the feasibility of the central bank's digital currency from multiple dimensions such as digital currency scheme prototypes and digital bills.
On August 2, 2019, the central bank held a central bank to hold a video conference for the second half of 2019, clearly pointing out that the second half of the year should accelerate the pace of research and development of China's legal digital currency (DC/EP), and timely track the development trend of domestic and foreign virtual currency.
Table 1: Progress in China's central bank digital currency research
Source: Organized by Zero Financial according to public data
Third, the voice of all walks of life Nine questions about the central bank's digital currency
1. Why did the central bank open the 996 working model of legal digital currency research last year?
In his speech, Mu Changchun revealed that from 2014 to the present, the research on the central bank's digital currency DC/EP has been going on for five years. Since last year, the relevant personnel of the Digital Money Institute has been 996. Zero Financial has been concerned about the R&D process of the central bank's digital currency. It has been found that it has been tepid. Why did it start crazy development in the 996 mode of operation last year?
Xiao Lei analyzed the situation in the same period of last year and found that in June last year, the United States began to impose tariffs on Chinese exports to the United States for the first time. Sino-US trade frictions heat up, the RMB exchange rate is lower, and the demand for digital currency in the domestic market is increasing. The state is on the level of public opinion. At the beginning of the rectification, including the CCTV financial production "focus on the chaotic market chaos" topic, the network office to a number of blockchains from the media, the five ministries and commissions issued risk tips. In June last year, the China Central Bank Digital Currency Research Institute announced four patent applications within one month. Based on these news, Xiao Lei believes that since June last year, China has strengthened regulation from two levels, one is the guidance and control of digital currency by the public opinion level, and the other is to build public confidence in China's official digital currency from the central bank level. The central bank has certainly received instructions to speed up the pace of research and development of legal digital currency, so it is only 996 in Mu Changchun.
2. China has developed mobile payments. Why do you still need central bank digital currency?
Mu Changchun bluntly said that for the common people, the boundary between the basic payment function and the electronic payment and the central bank's digital currency is actually relatively vague. However, the actual implementation of the central bank's digital currency will be very different from electronic payment in some functions. From a macroeconomic point of view, the transfer of funds from electronic payment instruments must be completed through traditional bank accounts, and the “account tight coupling” approach is adopted. The central bank's digital currency is “loosely coupled to the account”, which can realize the value transfer from the traditional bank account, and the transaction dependence on the account is greatly reduced. The central bank's digital currency can be easily circulated as cash, which is conducive to the circulation and internationalization of the renminbi, while at the same time achieving controllable anonymity.
Yang Dong, director of the Center for Financial Technology and Internet Research at the People's University of China, from the perspective of the inevitability of monetary development, believes that money must develop in a low-cost, reliable, and convenient direction. Generally, the equivalents must be more and more separated from the entity, and the form is coming. The more free. Password tokens are the mainstream development direction of the current currency. Although China's mobile payment is relatively leading in the world, this advantage is not absolute. The release of Libra has sounded the alarm for our country and can have a major impact. "In the future, the competition for data resources will inevitably become more and more serious. The payment field in China, especially in the field of small-scale retail payment, will face more challenges. The best way is to launch a legal digital currency to deal with it. At this level, the central bank The introduction of legal digital currency is also conducive to the growth of China's payment industry.
Xiao Lei also said that no matter how many design goals of the central bank's digital currency, it is ultimately the purpose of eliminating cash. The problem is that without digital currency, cash will gradually disappear, which is a historical trend.
3. Does the central bank's digital currency pay interest?
Fan Yifei, deputy governor of the People's Bank of China, said in public in early 2018 that because the central bank's digital currency is an alternative to M0, it should not be charged interest. This will not trigger "financial disintermediation", nor will it lead to inflation expectations. Correspondingly, it will not have a big impact on the existing monetary system, financial system and the operation of the real economy.
Long Baiyi believes that a reasonable central bank digital currency design must pay interest. Paying adjustable interest rates for the central bank's digital currency can maintain price stability and maintain parity between the central bank's digital currency and other currencies. “Adjustable interest rates can increase the demand for central bank digital currencies without the need to adjust the central bank’s balance sheet, without the need to break the parity relationship or adjust the price level.”
4. Central Bank Digital Currency = Central Bank Cash Digitization?
On the same day as Mu Changchun, Shao Fujun, chairman of UnionPay, also expressed his research on legal digital currency at the China Financial Forty Forum on August 10. He believes that the legal digital currency is not only the digitization of money, but also can be greatly simplified by combining with intelligent technology, intelligent contract design, better solving the trust problem of both parties, and the synchronization of information flow and capital flow. A more complex transaction process between traditional financial institutions.
5. Central Bank Digital Currency and Libra
There are always people who compare the central bank's digital currency with Facebook's Libra, but Zhu Chen, the founder of Zhibao.com and a money scholar, believes that the two are very different. Libra is built on the credit of French currency and is bound by the central bank and financial institutions. The digital currency of the central bank is a technological upgrade of the legal currency – the digital upgrade of the original central bank currency (M0) has essentially not changed the bank deposit reserve and The currency attribute of the cash. The specific scene of the central bank's digital currency is still the payment side managed by the central bank, such as the transaction between bank reserves, and the digital upgrade of cash, which is not mysterious. For ordinary people, the central bank's digital currency allows transactions and payments to be in the central bank's network, improving convenience and losing the anonymity and privacy of banknotes.
Sun Tianqi, chief accountant of the foreign exchange bureau, said that Libra should be regarded as a foreign currency and incorporated into the overall framework of China's foreign exchange management. In addition to the very few cases stipulated by the state, the territory must be settled in RMB, including the settlement of domestic transactions in the digital environment. Libraization or dollarization of domestic transactions in the digital environment must not occur.
6. What is the impact of China’s introduction of the central bank’s digital currency?
Shao Fujun believes that the positive impact of the introduction of the central bank's digital currency is reflected in: 1. Improving the efficiency of monitoring the operation of money and enriching the means of monetary policy. The central bank's digital currency issuance will enable real-time data collection such as currency creation, accounting, and movement, providing a useful reference for the formulation and implementation of monetary and monetary policies, and providing useful means for economic regulation and control. At the same time, the central bank's digital currency can also effectively provide some assistance in anti-money laundering and counter-terrorism financing. 2. It is conducive to improving the level of intelligence of the transaction process; 3. Effectively improving the efficiency of payment, especially cross-border payment, and establishing an open payment environment.
In the report, the General Research Institute believes that China's introduction of central bank digital currency is at least in defending digital sovereignty; providing new monetary policy tools, improving the effectiveness of monetary policy and promoting the internationalization of the renminbi are of great significance.
However, Tan Yaling, dean of the China Foreign Exchange Investment Research Institute, believes that using digital currency to promote the internationalization of the renminbi is an idealism. After all, the hegemony of the dollar has great uncertainty in the short, medium and long term. It is difficult to eliminate or replace. "Currently, China's financial department is in the process of adjusting its structure. We want to turn it into "financial supplement, economic entity-based." Our currency scale is also more than the real economy, and we need to adjust. If the concept of digital currency It is still dominated by the financial level, so whether it has a positive effect on the real deficiencies, I am doubtful."
Chen Jibing, from the Glacier Think Tank Institute, also said that in the foreseeable future, traditional currency is still the main medium of circulation in the social economy, and digital currency will be an attempt and supplement for the time being.
7. The difficulties facing the central bank's digital currency
Long Baizhen believes that the biggest challenge for the central bank's digital currency in achieving the core goal of RMB internationalization is the nationalization of the US dollar and a super-sovereign currency similar to Libra. Dealing with this challenge can be solved by accelerating capital account convertibility, but this is not the “most fundamental and thorough” approach. A more effective way is to share the coinage rights with friendly countries through the central bank's digital currency.
In Shao Fujun's view, the current difficulty in launching the central bank's digital currency in China is mainly reflected in: 1. There are problems in technology implementation. At the current state of the art, it is indeed difficult to achieve real-time data collection, monitoring and analysis of massive amounts of money, and it is difficult to carry out efficient and accurate programmable operations; 2. International coordination is difficult. The supervision of countries paying for the market varies greatly from country to country. The starting point and goal of studying digital currency in different countries are also very different. 3. The underlying foundation is insufficient. There is a lack of corresponding underlying operational norms and a lack of corresponding regulatory mechanisms.
8. Is it based on blockchain distribution?
In his speech, Mu Changchun revealed that when the People’s Bank of China’s Digital Money Research Group first studied the central bank’s digital currency, it made a prototype that completely adopted the blockchain architecture, but based on the existing technology, it was unable to meet the high concurrency requirements at the retail level. Therefore, in the end, the central bank maintains technical neutrality, does not presuppose technical routes, and does not rely on a certain technology.
He said that the central bank is currently in a state of "horse racing" in the choice of technical routes and the market competition is preferred. Several designated operating agencies have adopted different technical routes for the research and development of digital currency. Whose route is good, who will eventually be accepted by the people and accepted by the market, who will eventually win the game.
Zhou Xiaochuan, former president of the People's Bank of China, also wrote an article recently saying that one of the most important tasks of the central bank is to help build a competitive environment, so that the best technology can be successfully highlighted and developed, and better technology applications can be achieved through competitive selection. Competition is a dynamic process, because technology advances very quickly, so there will be a technology that has a large market share at a certain stage, but there will be another new technology coming out, forming a wave and a wave. The situation of advancement.
9. How do people get the central bank's digital currency?
Xiao Lei believes that the way people get the central bank's digital currency in the future is roughly divided into three categories. The first type is to open a wallet with a digital currency to the bank, and directly hold the cash in hand, including banknotes and coins, and exchange it for digital currency. The second type is to take the money directly from the existing account and use online banking to purchase it, similar to transferring the money in the bank account to Alipay or WeChat payment (online processing); the third is directly on the off-exchange transaction. I transferred it to you, you transferred it to me, or I have something to sell, clearly only digital currency. In the future, there may be three forms of payment in China, online banking, third-party payment (Alipay, WeChat payment, etc.), official digital currency, and where the user places the money depends on the user.