2016 International Conference of Multinational Central Banks, Bank of England Preparatory Speech
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At the meeting, there were many central bank scholars, including the European Central Bank, the Italian Central Bank, the Bundesbank, the Bank of England, the Federal Reserve, the Bank of Canada, etc. They were all very excited because it was a major reform. This reform is mainly because the foundation of the entire bank has been affected by technological changes. In the past, banks were hit by robbery, but this time the impact was due to technology.
The Bank of England’s “Great Central Banking”
On June 20 this year, Bank of England Governor Mark Carney made a speech at the time of his abdication, and proposed a new idea – "The new economy needs different central banks", which means that the Bank of England adopts "big central bankism". Without going through commercial banks, the central bank directly deals with companies and even individuals. But the UK has never given up commercial banks or a two-tier structure (central bank-commercial bank) .
Because the Bank of England guarantees that money will not be lost in the central bank, the British people will choose to put the money in the central bank and use the central bank's digital pound to pay. The reason why the Bank of England issued digital legal currency is to fight against third-party payments in the market, because most third-party payments are not regulated by the Bank of England in the UK.
Traditional payment systems in the UK cannot compete with new payment systems
The picture displayed by the Bank of England is very clear. The third-party payment system is very popular in the UK and is not under the management of the Bank of England. The Bank of England has to implement digital legal currency to get the payment supervision.
The use of digital currency is originally regulated
This gives you an important message that when people talk about digital legal currency or stable currency, they will worry about increasing financial risks and increasing money laundering opportunities. In fact, this is not to understand the role of digital legal currency. In fact, the introduction of digital legal currency is to monitor these illegal activities and reduce the possibility of money laundering! Since it is to be regulated, the aim is to reduce financial risks and reduce opportunities for money laundering [2, 3]. If the digital currency will increase the opportunity for money laundering, there will be no plan for digital legal currency.
"No digital currency," financial risks will increase
Because when using digital forex, all transactions are placed on the blockchain, and it is really painful to cheat. If someone wants to launder money on digital currency, it is tantamount to committing crimes in the police station. Those who want to steal the chicken and touch the dog will give up when they encounter the digital currency. This is exactly the opposite of Bitcoin. All transactions are real-name systems. Everything is very clear. Digital currency is the nemesis of money laundering, and it can implement very strong supervision.
This is a misunderstanding of many people's digital currency or stable currency. When it comes to stabilizing coins and digital currency, it is thought to help to launder money. In fact, this is the opposite. They are the nemesis of money laundering. This is why the Bank of England has proposed digital legal currency so early.
The question everyone should be worried about is whether “digital currency regulation is too strict”, and if “no digital currency is used”, financial risks will increase and money laundering plans will increase!
Digital currency is not for the poor, but for supervision
Central banks around the world, as well as Facebook and many institutions (such as Facebook), say that the issue of digital legal currency or stable currency is to help the poor, provide digital legal currency or stabilize the currency to people without banking services. A foreign bank has a swearing word to comment on this statement: junk, rubbish. Because they simply don't want to help those who don't have a bank, but are prepared to supervise those financial businesses and prepare to earn people's money!
Because regulation is very important for financial stability, digital and stable currency are significant.
The Bank of England found that digital currency can have different monetary policies
The Bank of England believes that with the digital currency, the trade will be faster, and the digital currency (number of pounds) can be used in different monetary policies than the current pound. Negative interest should be imposed on digital currency, because people should not put money in the central bank, but hope that the money will operate in the real economy. So if you want to put money in the central bank, you have to pay interest to the central bank (negative interest)! For this reason, they believe that the establishment of the digital legal currency will promote the entire economic activity. The picture below shows that the Bank of England has different characteristics and economic effects from the digital legal currency and the traditional legal currency.
The characteristics of digital legal currency (the impact on bank structure and function) and the impact on macroeconomics
I want to use the digital currency to wash money, wash and sleep.
Another mistake is that people often confuse the electronic currency with the digital currency. The sub-currency is the currency in the current banking system. It is also the currency on Alipay and WeChat. There is no consensus mechanism for such a system. It is a statement that the family has the final say. If you use Alipay, it is Alipay who has the final say.
Because it is a centralized process, there is a need for reconciliation, especially on cross-border payments. The blockchain is a distributed system with a consensus mechanism. After a consensus, there is no need for reconciliation. And after the consensus, other problems can be solved. I have mentioned in the past that cash is the easiest to launder money, followed by electronic money (the currency of the banking system), and the digital currency is not thought about.
Digital currency has no national boundaries
Digital currency also has a wonderful effect, that is, for cross-border payment, cross-border payment can be done with a mobile phone or PC, and this cross-border payment does not go through the SWIFT system, so this breaks the existing banking structure. This is the characteristic of the stable currency later. So when the United Kingdom proposed digital legal currency, the Bank of Canada was the most excited and did a lot of experiments. Later, the European Central Bank, the Bank of Japan, and the Singapore Central Bank also did a lot of research on digital currency [4, 5].
Later, in 2018, the Bank of England announced the abandonment of the digital currency project. One reason for the abandonment was written in the author's article in 2016, because the Bank of England's RSCoin model uses the same data structure as Bitcoin, and that data structure is easy to escape. Supervision. Originally, the British central bank to do digital legal currency is to regulate money laundering and the like, so how can we allow a mechanism to evade supervision? RSCoin has a fundamental problem!
Digital currency model cannot escape supervision
Because of this, in 2016, the author proposed a panda model to solve this problem. The Bank of England RSCoin model has no new version. The model will continue to go down and must fail, and the expansion technology is not good. This is also an important reason for the failure of the Bank of England’s digital legal currency research. . The blockchain they use is not easy to extend.
To complete a good digital legal currency, you need 1) innovative theory, 2) superb technology. The main contribution of the Bank of England is to propose economic theory rather than a technical framework.
Today, many companies use super-books to do experiments, such as SWIFT. After experimenting, they found that as long as 34 banks are on the system, they can't run. So this is a very practical and serious issue. It is not just an open source blockchain system that says it can do digital currency. There are many banks in a country. There are relatively few banks in China. In some countries, there are hundreds to thousands of banks, and there are hundreds of securities companies and exchanges. Banks are connected and connected to so many securities companies and exchanges. If a blockchain system is used, such a blockchain system is very large. It is also a terrible thing to do it with current technology.
Requires distributed blockchain internet
Therefore, in 2016, the author proposed to use the “blockchain internet” to solve the problem. At that time, there were two blockchain Internet models abroad, but they were all centralized models. This is the opposite of the blockchain spirit. Everyone knows Blockchains are distributed.
Our proposed Panda model and Golden Monkey model are distributed models.
Other central bank experiments have different conclusions
Later, the European Central Bank, the Bank of Japan, and the Bank of Canada did a lot of experiments and proposed many new concepts. For example, the blockchain system transaction model is different from the modern business transaction model. In addition, the demand for scalability is different from the actual payment system. This was mentioned in the author's article . They later solved the problem with the Liquidity Saving Mechanism (LSM), and if the LSM is not used, many financial systems will stop. This is a problem that digital currency must solve. It is not just a blockchain placed in the central bank system to solve the problem.
I once said that it is necessary to develop a ten-generation blockchain to meet the demand for digital currency, which means that this is a very difficult problem. These problems have not been solved. Digital currency can only be said to be a good vision or dream, but there is no way to go forward.
Wake up, China!
However, in July 2018, something happened suddenly. This matter is of great significance. Therefore, the author believes that it is an important day in human history or currency history, that is, July 18, 2018. On that day, IBM announced that it had received support from the US government to issue stable coins. It could do some of the provisions of the Fractional Reserve. For example, if there are 20 yuan in the system, it can issue 100 stable coins.
For the author, this is a huge shock. In August 2018, the author wrote a short article devoted to this matter. The name is "Wake Up, China!" 》. Why do you wake up, China? Because IBM's stable currency is the prototype of digital legal currency. The world has already taken a big step, but China does not know.
The Bank of England spent so much time but did not make digital legal currency, and IBM, with the support of the US government, made digital legal currency. IBM has thus become a digital bank. Later, Facebook's Libra appeared. Many people felt very shocked at first glance, but I didn't feel shocked when I saw Libra, because I have already shocked the author, it was on July 18, 2018.
Before July 20, 2015, people believed that the digital legal currency must be a large, central bank-based, nationwide system, while the IBM stable currency is a corporate, partial, focus-only payment system, and did not use digital legal currency at the beginning. This name is the name of the stable currency.
The system needs to start small and experiment immediately after the small system is completed.
In fact, this is a blinding method. This is the digital legal currency. When IBM gave a speech on August 30, they thought it was the digital law currency (CBDC). Many people say that this is not a stable currency issued by the central bank. How can it be said that it is a digital legal currency? Anyone who deposits RMB (electronic money) in a commercial bank today is recorded in a book. This may be a digital legal currency formed by a loan, not directly issued by the central bank. But is this a legal currency?
In fact, whether it is issued directly by the central bank or the RMB debited by a commercial bank, it is a renminbi. And the stable currency on the IBM system, if it is not a legal currency, what currency is it? Is it a counterfeit coin? Can counterfeit money buy anything? If the system is lost, will the US government guarantee it? So that is the digital dollar, the first generation of digital currency was born.
Suddenly, humans invented a small digital coin model in a short time, which is a very big initiative.
Later, 10 months later, in May 2019, the International Monetary Fund (IMF) also said that the stable currency of these companies is the digital currency! The digital legal currency, as envisioned by the Bank of England, must start from the central bank system, be linked to all banking systems, and all be circulated through digital legal currency, becoming a small payment system, issuing companies, not requiring banking licenses, and doing cross-border Payments, currency circulation on the Internet, US government guarantees, and US central bank supervision, this is the new digital law currency.
Rome was not built in a day
When we discovered that this is a digital legal currency, a new situation has emerged. Now Libra and Wal-Mart have issued stable coins, which are digital legal coins, which will change the entire financial market and the bank structure [7, 8].
After Libra came out, many countries were not only China, including Africa, Europe, Britain, and the Middle East, and they were also greatly shocked. If the stable currency like this is circulating everywhere, what should the country do? Libra will affect the legal currency of these countries. Many countries have begun to learn from Libra's layout and have to issue stable coins. For example, the Philippines announced that commercial banks began issuing stable currencies. After June 18th, there are 100 stable currency projects in the world, and even countries and banks that have always opposed the digital legal currency are now actively encouraging the issuance of stable coins to confront.
So instead of the central bank issuing the currency itself, it is looking for commercial banks and technology companies to do it; not to do the entire financial system, but to start with the payment system, Rome is not built in one day, starting from a small part, starting from the local.
New currency competition begins
These thoughts have been proposed by the author in 2018, and subsequent developments and article predictions are also consistent. At that time, it was predicted that whoever wins first, whoever works first can establish the standard of agreement, who will establish a digital legal currency or an empire that stabilizes the currency, or a financial empire. These views later appeared at the Libra hearing.
Facebook's Libra didn't make the author shocked. The author really felt shocked twice. The first time was in 2016 when he attended the central bank meeting, which was mentioned before. The second time in August 2018, after studying the stable currency, almost at night. I didn't fall asleep all night, this is the longest night I have ever had since I returned to China. At the time, the author found that the incident was serious, but few people around him knew the meaning of the incident.
From finance: every company can be a bank
In Shenzhen in July 2017, the author proposed that there will be a new “self-finance” in the blockchain era. Since the financial system is to sell rice after selling rice, or to prepare to accept private money issued by others, this self-finance system is not necessarily a bank, but it is indeed doing banking business. This is the US president’s statement to Facebook that if you want to become a bank, apply for a banking license! In fact, his saying that the White House has studied Facebook, Libra, thinks that this is a bank, and it is a bank without a license. If Facebook is a bank, apply for a banking license!
Of course, Facebook publicly stated that they are not banks and will not engage in banking. If this is true, Facebook's stable currency is designed for the poor, and Facebook's stable currency should start from the world's poorest regions. The United States and Europe are both developed countries. Facebook provides similar banks for the poor in these countries. service? (This is what foreign bankers say, all of which are garbage).
The idea in the United States is very simple. Everyone wants to be a bank. You can use a digital legal currency or a stable currency to make a bank, but a bank can be opened by everyone. Therefore, the United States will certainly formulate new laws and regulations in the future to regulate these self-financing banks so that they can do business in some banks, but there must be restrictions. If there are no restrictions, there may be hundreds of millions of banks around the world.
Will the “pan-banking” financial market appear?
Since the US government has allowed companies like Libra and Wal-Mart to issue stable currency, and their stable currency is regulated, it is actually a digital legal currency. We divide the digital legal currency into a military and a second army: the first army is the digital legal currency produced by the central bank, and the second army is the state-supported regulated digital legal currency, but it is issued in the name of a private company or a commercial bank. Some commercial banks can do banking business because they have a banking license. However, if companies like Libra and Wal-Mart do not have a banking license, in fact they can do banking business, so there may be a “pan-bank” financial market in the future. How to manage these pan-banks is an important layout for the government.
Because technology can do it now, there is only law left. In the future, the work of law and the work of science and technology must change, so why is the biggest impact of Libra this time on commercial banks, and not only commercial banks in China, but commercial banks in every place, including commercial banks in the United States. receive a blow. In fact, some of the most anxious banks are American commercial banks.
Now digital legal currency has no national boundaries, and national borders only appear when there is controversy.
The digital legal currency or the stable currency appears to have national boundaries on the surface, but the national border is only registered in a certain country and is subject to the law of the place of registration. In fact, the stable currency on the Internet, where can the national borders obstruct? So every stable currency will appear in the form of borderlessness, although the place of registration and the law are local. This will be a new normal.
In the case of digital and stable currency, the government may not have all the means to control it. Because people go to the foreign exchange to go to the bank today, it may take an hour to queue up, then fill out the form and answer a lot of questions asked by the bank. After two or three days, the money can be In place. If you use digital legal currency or stable currency today, it may end in a few minutes, and you don't need to go to the bank. You can have a mobile phone.
New four elements of currency competition
Therefore, we believe that these stable or digital legal coins will generate new types of currency competition, which is different from traditional currency competition . Traditional competition relates to currency interest and exchange rates, while the four elements of new currency competition are speed, security, regulation, and monetary policy.
Speed determines customer choice and also affects macroeconomics
What is speed? Suppose that on a new currency, one system transaction takes 3 minutes to complete, and the other takes only 2 seconds. Which system does the customer use? The customer's eyes are of course sharp.
In addition, electronic money such as Alipay transactions can be completed in less than one second, so if the digital legal currency or stable currency is paid for more than one second at home, the customer will not use it. This will challenge the digital currency.
The higher the speed of money flow, the greater the impact on the macro economy . For example, cross-border payment now requires 3 days for the bank, 51 weeks for the year, and the same fund can be transferred 85 times a year, but the digital currency can be turned around every day (in fact, every minute), so you can turn 255 times a year. That is to say, in the economic entity, the digital legal currency is three times the speed of the traditional bank.
If the fund is 10 million, this means that the digital legal currency can bring 10 million x 255 = 25.5 trillion yuan to the market in one year, while the traditional bank will bring 10 million x 85 = 8.5 trillion in circulation. With the same amount of money, digital legal currency brings more than 17 trillion yuan in the market than traditional French currency. Liquidity is an important reason why the Bank of England believes that digital currency will bring about economic recovery.
Payment blockchain system requires new technology
The transaction speed will affect the structure of the blockchain system. In the experiments of the European Central Bank, the Bank of Japan and the Bank of Canada, transactions between banks used LSM (liquidity Saving Mechanism) outside the blockchain to maintain this speed. We put this mechanism in the blockchain.
Many blockchains say scalability, but according to Queuing Theory, if you want to achieve high throughput, the delay must increase. This is science, not by advertising or white paper. Scientific problems can only be solved by scientific methods. .
The payment system delay cannot be high, and a delayed payment system of more than one second cannot be accepted by the customer in the market.
Bitcoin and Ethereum can't do such a speed transaction now, so these systems can't be a universal payment system. But this is not a problem with the blockchain. This is a problem with the public chain. The blockchain payment system with a delay of no more than 1 second has been made in 2017. We also have the LSM mechanism and are in the blockchain system.
Security and privacy
Security is very important. Some systems may have a probability of one in ten thousand. If so, almost no one will use it, because the customer will not want that one of the ten thousandth chance is wrong. Facebook Stabilization Coin will adopt a real name system, so there is almost no privacy. Transaction information can use encryption to maintain privacy, but the regulator can get all the information.
Regulatory and privacy issues
The client will evaluate the regulatory policies for each stable currency. A legally compliant stable currency will use a real-name system with almost no privacy. How will this digital currency be regulated? What is the supervision? The fewer tubes you use, the more people you use, but the less you manage, the more likely you are to make mistakes.
But because it is on the blockchain, it is much less managed, and it is much more manageable than the current banking system. In addition, regulatory technology needs to be improved. Many regulatory technologies are not real-time now, but stable currency payment systems are mostly real-time systems. The RTGS system in the central bank is also a real-time system. These will challenge existing regulatory systems and regulatory technologies.
In the future, the regulatory issues of digital assets will be greater than the current stable currency and digital currency. Now I only need to be responsible for the payment problem, and there will be asset issues in the future.
Digital currency policy issue
Some people say that it is not necessary to pay interest on stable coins. In fact, it is inevitable to pay (positive) interest in stable currency in the future. Today we have seen a lot of stable currency projects ready to pay interest, but the Bank of England has said to be negative interest, in the end, the digital currency should be no interest, positive interest, or negative interest? The following table is our current point of view:
|Stabilizing coins without interest||Facebook stable currency||1) For participating merchants: Facebook customers are large enough to pay for the business in the market, and each participating merchants will receive 10 million US dollars in membership fees; 2) For Facebook users: pay the French currency for face coins, face Book currency is low-priced for local and cross-border payments; 3) Facebook: get the legal currency of the stable currency owner, and millions of dollars for each participating merchant, these funds investment income is not divided between customers and participating businesses, because now No bank was engaged in the settlement of Facebook coins, and Facebook became the “Libra Bank” to settle the Libra currency.|
|Stabilizing currency interest||New stable currency||1) Client: Paying legal currency to the stable currency project party, engaging in local and cross-border payment at a stable price; 2) Project party: obtaining the legal currency of the stable currency owner, which is not divided into customers and participating merchants. To do business with the received legal currency, the business income is shared with the owner of the stable currency. Because no bank is engaged in this stable currency settlement, the project party has become a “stable currency bank” to settle the stable currency settlement. The project party competes with Libra coins with high interest rates.|
|Stable currency negative interest||?||This is a hedging tool. In the economic crisis, many people will exchange stocks or other assets to a stable currency with bank guarantees. Such stable currency should be issued by a major commercial bank.|
|Central bank digital currency does not pay interest||?||This is a hedging tool. In the economic crisis, many people will exchange stocks and other assets to the central bank's digital legal currency. Because the central bank is more stable than commercial banks, this will happen in a huge economic crisis. Because the central bank's digital currency has no interest, many people will be willing to have commercial banks (electronic money) with interest.|
|Central bank digital law currency to pay interest||?||This will cause the central bank to compete directly with commercial banks. The central bank's digital legal currency interest should be lower than the commercial bank's stable currency to maintain market balance.|
|Central bank digital legal currency negative interest||Bank of England||This is a hedging tool. In the economic crisis, many people will sell stocks and other assets to the central bank for digital legal currency. Because the stability of the central bank is greater than that of commercial banks, this will happen in the midst of a huge economic crisis. Negative interest encourages everyone to keep their money in the market.|
If there is no interest, the Stabilizing Coin project party actually makes a lot of money to earn a stable currency purchaser. Facebook stabilizes the currency to make money for the purchaser, earns money from participating merchants, earns money from commercial banks, and then says that the project is serving the poor. I really want to be beautiful.
New currency competition
In our view, the first army and the second army are not the same. The second army should pay interest (positive interest), and the interest is to attract customers, but the army can be negative interest (owners pay central bank interest to keep Assets), with security as the killer of competition. Below we list several very obvious currency competitions:
1. Stabilizing currency and stable currency competition:
a. The competition between the first army (the central bank's digital legal currency) and the second army (the technology company or the bank's digital legal currency); mainly in the security competition, the second army that does not pay interest during the crisis has an advantage, but in the financial crisis, one The military has an advantage.
b. Competition between the Second Army and the Second Army: competition by interest, security, supervision, and market size factors. For example, the stable currency of Facebook has an advantage over the stable currency of a small company. The stability of a small company must have high interest or other Factors to compete.
c. Competition between the First Army and the First Army: For example, the US Central Bank's digital legal currency and the Bank of England's digital legal currency competition, this will be a comprehensive competition.
2. Competition between legal currency and stable currency (two armies): For example, Facebook Libra and French currency competition, this will be speed, security, supervision, and policy competition. Small country currency cannot compete with large stable currency (Libra).
3. The competition between the French currency and the central bank's digital legal currency: the small country has no way to fight against the stable currency of the big country (the second army), and it is even more impossible to counter the digital legal currency (one army) of the big country central bank.
4. Real stable currency and fake stable currency competition: True stable currency has government, central bank, or bank guarantee, which has advantages in security and stability, while fake stable currency has advantages in escaping supervision, and fake stable currency may come from the market. disappear.
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. Cai Weide, "Taishan Sandbox tells you: Facebook stable currency technology may become the mainstream of blockchain in the future",2019.07.08,https://mp.weixin.qq.com/s/NS6f0yuTwfRDl4pcSQ75fA
. Cai Weide, "Authentic and stable currency! Blockchain needs to be supervised | DeepHash column", 2010.05.30, https://mp.weixin.qq.com/s/gCZqo4kjZ0Npk0FV82kjPQ
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. Yuan Shang, "Cai Weide: Wal-Mart issued a stable currency destructive power, Libra will make the US dollar pervasive", 2011.08, https://mp.weixin.qq.com/s/Uw4Y4zIn_nORgOsDcB94-w
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Director of Digital Society and Blockchain Laboratory of Beihang University, Chief Scientist of Tiande Technology, Major Project Leader of National Ministry of Science and Technology, Director of Blockchain Internet Lab of National Big Data (Guizhou) Comprehensive Experimental Zone, Tianmin (Qingdao) International Sandbox Research Dean of the Academy, Honorary Dean of the CCID Research Institute of CCID (Qingdao), President of the Blockchain Industry Professional Committee of China Asia Economic Development Association, Director of the North Mujin District Block Chain Committee
Ph.D. student of Beihang University of Computer Science, Chartered Financial Analyst (CFA), member of Beijing Financial Analyst Association