Summary: In recent years, central banks and monetary authorities of all countries and regions in the world have to conduct research and exploration on the central bank's digital currency. The People's Bank of China is also actively exploring in this field. On August 20, the People's Bank of China re-released the revised Vice President Fan Yifei and Mu Changchun, deputy director of the central bank digital currency related articles. This paper explains the conception of the central bank's digital currency and the thinking of the chain technology on the central bank's digital currency from the perspectives of China's central bank's digital currency operation system, management model, alternative targets, technology, and attitude toward smart contracts.
1. The Chinese central bank’s digital currency should adopt a two-tier operating system.
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1.2 Reasons for adoption
1.2.1 State of the country
Due to China's vast territory and large population, there are huge differences in regional economic development, resources, and population education. Single-tier operations cannot meet the diversity and complexity faced by systems and systems design.
1.2.2 helps to decentralize risks and avoid excessive concentration of risks
The central bank is a direct service financial institution for the inter-bank payment clearing system, and the central bank's digital currency directly serves the public. If only the central bank's own strength is used to support such a large system, it must meet the goal of safety, efficiency, stability, and satisfy the user experience. Demand, while the central bank is also subject to objective constraints such as budget, resources, personnel and technology.
1.2.3 Make full use of existing resources and mobilize the enthusiasm of commercial banks
The IT infrastructure application and service system of institutions such as commercial banks has been relatively mature, and the processing capacity of the system is strong. The repeated construction of the stove is a waste of social resources.
1.2.4 Avoid financial disintermediation
Under the single-tier operation, the central bank directly puts digital currency on the public, and the central bank digital currency and commercial bank deposit currency will form a competitive relationship. Obviously, the central bank digital currency endorsed by the central bank has a higher credit rating than the commercial bank deposit currency, which will have a crowding out effect on commercial bank deposits, and may result in “deposit moving”, which in turn affects the ability of commercial banks to lend. In addition, the reduction of the ability of commercial banks to absorb deposits will increase their dependence on the interbank market, raise the price of funds, increase the cost of social financing, damage the real economy, and trigger “financial disintermediation”. In order to maintain its ability to lend and financial stability, the central bank will have to subsidize commercial banks. In extreme cases, it will also subvert the existing financial system, and there will be a “great unity” situation in which the central bank will fight the world.
Interest Chain Note: “Financial Disintermediation” generally refers to skipping all intermediaries while conducting a transaction and directly between the supply and demand sides. “Financial disintermediation” is also called “financial non-intermediation”.
1.3 Credit guarantee
In order to ensure that the currency is not over-received, the operating agency needs to pay the central bank 100% in full. Therefore, the central bank’s digital currency held by the public is still a central bank’s debt, which is guaranteed by the central bank’s credit and has unlimited legal liability.
1.4 Impact on monetary policy
1. Do not change the creditor-debtor relationship of the currency in circulation;
2. Do not change the existing money delivery system and dual account structure;
3. Will not constitute competition for the deposit currency of commercial banks;
4. Will not increase the dependence of commercial banks on the interbank market;
5. Will not affect the ability of commercial banks to lend;
6. Since it does not affect the existing monetary policy transmission mechanism, it will not strengthen the procyclical effect under the pressure environment, and therefore will not have a negative impact on the current mode of operation of the real economy.
Interest Chain Note: To maximize the retention of the existing currency operating mechanism and status quo, in fact, digital currency will still have an impact on monetary policy, "peer-to-peer" payment settlement will change the behavior of different economic sectors, thereby affecting the money supply.
This model is more conducive to the advantages of the central bank's digital currency, saving costs, increasing the speed of money circulation, and improving payment convenience and security. In addition, due to the credit advantage of the central bank endorsement, it is conducive to curbing the public's demand for private encrypted digital currency and consolidating my monetary sovereignty.
Interest Chain Note: The public's appeal for private encrypted digital currency is because its value fluctuations are investment-oriented, while the central bank's digital currency is highly stable, and there may be further development and extension in the future.
Second, the management model
Under the two-tier operating system arrangement, China's central bank digital currency should be released in a loosely coupled manner, and adhere to a centralized management model.
In order to maintain the attributes of the central bank's digital currency and achieve monetary policy and macro-prudential management objectives, China's central bank digital currency two-tier operating system should be different from the decentralized distribution model of various tokens. The reasons are as follows:
1. The central bank's digital currency is still the central bank's debt to the public. Its creditor-debtor relationship does not change with the currency pattern, so it must still ensure the central position of the central bank in the process of launching;
2. It is necessary to ensure and strengthen the central bank's macro-prudential and monetary policy control functions;
3. Do not change the dual account system and maintain the original monetary policy transmission mode;
4. In order to avoid operating agencies over-currency, there is a need to arrange for the central bank to track and supervise the digital currency.
2.3 loose coupling delivery method
The centralized operation model mentioned here is also different from the traditional electronic payment tools. The transfer of funds from electronic payment instruments must be done through an account, using a tightly coupled account. The central bank's digital currency should be based on the loosely coupled form of the account, which greatly reduces the dependence of the transaction link on the account.
Interest chain note: Zhou Xiaochuan, the former central bank governor, once mentioned that the central bank's digital currency should conform to the “preemptive front-end, real-name back-end”, just like the circulation of banknotes or coins, it will not be recorded like the current Alipay transaction.
It can be as easy to circulate as cash, and it can achieve controlled anonymity. Central bank digital currency holders can directly apply it to various scenarios, which is conducive to the circulation and internationalization of the RMB.
2.3.2 Controlled Anonymity
If there is no transaction third party anonymity, personal information and privacy will be revealed; but if full third party anonymity is allowed, it will contribute to crimes such as tax evasion, terrorist financing and money laundering. Therefore, in order to achieve a balance, it is necessary to achieve controllable anonymity, and only disclose the transaction data to the third party.
Interest chain note: The central bank is the sole regulator, and the second-tier operators cannot obtain data related to transaction records.
Under the loosely coupled account system, the operator can be required to asynchronously transmit transaction data to the central bank on a daily basis.
Interest chain note: Through unified data, there may be a unified standard KYC, AML in the future.
1. Facilitate the central bank to master the necessary data to ensure prudent management;
2. Three anti-money laundering (anti-money laundering, anti-terrorism financing, anti-tax evasion);
3. Reduce the system burden of commercial organizations.
The loosely coupled delivery method of the account can realize the value transfer from the traditional bank account, and the transaction dependence on the account is greatly reduced. In this way, the central bank's digital currency can be easily circulated like cash, which is conducive to the circulation and internationalization of the renminbi.
Third, the central bank digital currency is M0 replacement
China's central bank digital currency design at this stage should focus on M0 replacement instead of M1 and M2 replacement.
3.1.1M1 and M2 have been electronically implemented
At this stage, M1 and M2 are based on commercial bank accounts and have been electronically or digitized, without the need to digitize again with digital currency. Interbank payment clearing systems that support M1 and M2 flows (such as large-scale payment systems and online payment cross-bank clearing systems), commercial banks' in-bank systems, and various types of online payment methods for non-bank payment institutions operate normally and are constantly improving. Upgrade, increasingly efficient, able to meet the needs of China's economic development. Moreover, replacing M1 and M2 with central bank digital currency does not help to improve payment efficiency, but also creates a huge waste of existing systems and resources.
3.1.2 The digital demand for banknotes is urgent
The cost of issuing, printing, returning and storing of existing banknotes and coins is relatively high. There are many levels of circulation system, and it is inconvenient to carry, easy to be forged, anonymous and uncontrollable, and there is a risk of being used for money laundering and other criminal activities. The need to achieve digitalization is increasing.
3.1.3 Traditional account tight coupling mode cannot meet the demand
Non-cash payment instruments, such as traditional bank cards and Internet payments, are based on tightly coupled accounts and do not fully meet the public's need for easy-to-use and anonymous payment services. It is impossible to completely replace M0, especially in account services and communication networks. In areas with poor coverage, people’s dependence on cash is still high.
3.1.4 The best alternative
The central bank's digital currency maintains the attributes and key features of cash and meets the needs of portability and anonymity, and will be the best tool to replace cash. Libra is also collateralized with so-called 100% reserve assets, but it does not limit itself to M0, as it is likely that Libra will enter the credit market with currency derivation and currency multipliers. This may lead to currency overshoot.
The central bank's digital currency is an alternative to M0. It has the function of money: trading medium, value storage, and accounting unit, and should not pay interest on it. 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.
Since the central bank's digital currency is replaced by M0, it should also comply with all current regulations on cash management, anti-money laundering, counter-terrorism financing, etc. In order to cooperate with anti-money laundering and other related work, relevant institutions may be required to report to the central bank on the central bank's digital currency, large sum and suspicious transactions.
Interest Chain Note: Incorporating M0 into the "three anti-" work will help fight crime, especially economic crimes.
3.4 use scenarios
A business scenario for small retail high frequency.
Interest Chain Note: DC/EP is expected to change the overall retail industry landscape. If you are interested, you can check out the recent article by Fun Chain Technology, "How to Apply Blockchain Technology to Wal-Mart Stores by Wal-Mart"
3.5 related rules of use
3.5.1 Set transaction limits and balance limits according to different levels of wallets
In order to guide the central bank's digital currency to the small-scale retail business scenario and not to squeeze out the deposit, avoid the pro-cyclical effect under the arbitrage and pressure environment, it can set the daily and annual cumulative transaction limit, and stipulate a large amount of reservations for redemption. If necessary, you can also consider the grading charges for the exchange of central bank digital currency, no charge for small, low-frequency exchanges, and higher fees for large-value, high-frequency exchanges and transactions to increase exchange costs and institutional friction.
Interest Chain Note: The issuance of DC/EP can provide the central bank with a means of supervising M0, and can formulate a monetary policy with different amounts and fine transactions to conduct a finer-grained macro-control mechanism.
3.6 Future plans
In the case of a zero interest rate lower limit, this arrangement can also create conditions for the central bank to implement a negative interest rate policy.
Interest chain note: Proactive implementation of negative interest rates can effectively stimulate consumption. Since the banknotes are actually a kind of zero interest rate savings, when the negative interest rate policy is implemented, the people will take the money out of the bank and convert it into banknotes, which will make the negative interest rate policy invalid. The introduction of DC/EP will provide a possibility for the negative interest rate policy.
Fourth, the central bank's digital currency loading smart contracts should remain cautious
The central bank's digital currency is an alternative to M0, with unlimited legal liability, and assumes functions such as value scale, means of circulation, means of payment, and value storage. The original cash does not carry any social and administrative functions. The Regulations on the Administration of Renminbi of the People's Republic of Therefore, adding additional social or administrative functions to cash is actually damaging the renminbi.
In order to maintain the legal status of unlimited legal compensation, the central bank's digital currency should not assume other social and administrative functions besides the four functions that the currency should have. Loading a smart contract other than the function of the legal currency itself will affect its liability function, and even degenerate it into a valuable ticket, reducing the free use of the central bank's digital currency, and will also have an adverse impact on the internationalization of the RMB. It will also reduce the speed of money circulation, affect the transmission of monetary policy and the central bank's performance of macro-prudential functions. At the same time, it may also violate the privacy rights of citizens and is not conducive to the protection of personal rights.
Smart contracts that facilitate monetary functions can be considered, but smart contracts that exceed the monetary function should be cautious.
5.1 performance requirements
1. High concurrency: reach the retail level, at least 300,000 pens / sec;
2. Highly scalable.
5.2 Technical route
The issuance of digital currency in a large country like China, using a pure blockchain architecture, does not achieve the high concurrency performance required by retail. Therefore, we decided that the central bank should maintain technical neutrality and not presuppose technical routes. The central bank and commercial banks can work closely together. It is not necessarily a blockchain. Any technical route can be used. We can call it long-term evolution technology. Long Term Evolution) fully mobilizes market forces to achieve system optimization, joint development and joint operation through competition.
Interest chain note: The central bank maintains technical neutrality, and there is no clear technical requirement for the second-tier operating organization level, but at least it must meet the standard.
5.3 current status
At present, it still belongs to a horse racing state. Several designated operators adopt different technical routes to do DC/EP research and development. Whose route is good, who will eventually be accepted by the people and accepted by the market, who will eventually win the game. Therefore, this is the process of market competition.