The successful landing of the digital renminbi needs to solve three difficulties

Source: China Securities News Original title: "Digital RMB successfully landing the need to break the three major difficulties" Author: Director of Research Center of Chinese Academy of Social Investment and Financing Huang Guoping; Graduate School of Chinese Academy of Social Sun Huiting

Digital RMB Development Background and Motivation

In 2009, the world's first virtual digital currency, Bitcoin, was born, breaking the situation in which the central bank issued currency to dominate the world. Once bitcoin is produced, relying on blockchain technology, with its characteristics of encryption, decentralization, and anonymity (alias), it is favored and prices are skyrocketing. Immediately, cryptocurrencies based on blockchain and decentralization (such as Litecoin, Ethereum) emerged and applied as payment media to different trading scenarios and approaches.

It is true that the “mining” mechanism such as the workload proof gives the value attribute of the virtual digital currency such as Bitcoin, and the anonymity (alias) and the invisible modification of the hash ensure that they have strong use value. However, the bit There is neither a national credit endorsement nor a corresponding reserve value asset behind the virtual currency such as currency, the market price fluctuates too much, and the speculative performance is super strong. In recent years, various forms of ICO issuance and trading in the “coin circle” market have severely affected the normal order of the financial and money markets on a global scale.

Since 2015, the so-called “stabilized currency” represented by USDT has emerged. By establishing a stable exchange rate with legal currency such as the US dollar (such as USDT and US dollar exchange for 1:1), it tries to build a bridge between the French and the virtual currency and open up the virtual The link between digital currency and the legal currency market. However, there is a moral hazard in the centralized distribution and management model without national credit support, which is highly questioned by the market and the practical effect is indeed unclear.

In June 2019, the Libra project white paper and test network led by Facebook was officially released. Based on Libra's vision and positioning for Libra, Libra focuses on digital payments and inclusive finance, and is committed to making money payments and costs faster and faster for users around the world, especially in countries with poor financial infrastructure. Circulation. Compared with digital currency such as Bitcoin, Libra has a real asset reserve, no fixed amount, and is more inclined to the currency payment function. The price may be more stable and has no obvious appreciation ability.

In order to proactively address the impact of virtual digital currencies on existing monetary and financial systems, China's central bank has begun researching (legal) digital currencies in 2014. In 2015, the central bank's framework for digital renminbi issuance and business operations, key technologies for digital currency, distribution and circulation environment, legal issues faced, impact on the economic and financial system, relationship between legal digital currency and privately issued digital currency, and international digital currency The distribution experience has been thoroughly studied and a series of research reports have been formed. In January 2016, the central bank held a digital currency seminar to discuss issues such as the overall framework for issuing digital currency and legal cryptocurrency, and proposed to introduce digital renminbi as soon as possible. Since August 2019, the People's Bank of China has publicly announced the research and distribution of legal digital currency (digital RMB) through authoritative channels.

In recent years, China's e-commerce has continued to develop, mobile terminal equipment penetration rate has increased, and third-party payment is at the forefront of the world, which has laid a good network environment for China's development of digital currency. In addition, the recently issued "Opinions on Supporting Shenzhen's Pioneering Demonstration Zone with Chinese Characteristics" also clearly pointed out that it supports the development of innovative applications such as digital currency research and mobile payment in Shenzhen, which also provides good results for digital RMB issuance and landing experiments. Experimental sites and development opportunities.

Advancement of rationality and operational structure

At this stage, China's digital renminbi design and distribution focus on M0 replacement instead of M1 and M2 replacement. At the same time, in order to maintain the monetary attributes of the digital renminbi and achieve monetary policy and macro-prudential management objectives, China's legal digital currency adopts a two-tier operating system and adheres to a centralized distribution and management model.

The reason why the digital renminbi pays attention to the replacement of M0,

First, existing banknotes and coins have many shortcomings, such as high cost of printing and inconvenience of carrying, so there is a need for digitization;

Second, M1 and M2 based on commercial bank accounts have been electronically or digitized, and there is no need to digitize again;

Third, it helps to maintain the stability of the existing monetary system, does not change the existing creditor-debt relationship, does not change the dual account structure, and does not cause a run on commercial banks;

Fourth, the central bank's digital currency replaces M0, so that the digital currency has the same value scale, circulation means, payment means and value storage functions as the cash, and the central bank's credit is used as a guarantee to ensure its infinite legality. The reason why the digital renminbi adopts a two-tier operational structure system,

First, the two-tier operation is conducive to making full use of the existing resources, talents, and technologies of commercial organizations. Under the premise of safety and reliability, the central bank does not presuppose technical routes, fully mobilize market forces, and achieve system optimization, joint development and joint operation through competition, which is conducive to integrating resources, exerting synergies, promoting innovation, and helping Enhance the public's acceptance of the central bank's digital currency.

Second, the two-tier operation helps to diversify the risk. The digital RMB directly serves the public, involving thousands of households. It relies solely on the strength of the central bank for R&D and support. There are risks and difficulties in many aspects such as technology, capital, experience and market. Through the design of double-layer operation, the risk can be avoided. .

Third, double-tier operations can avoid “financial disintermediation”. Once the central bank directly puts the digital currency on the public, the central bank digital currency and the commercial bank deposit currency will form a competitive relationship, which will affect the commercial bank's ability to lend, increase the cost of social financing, damage the real economy, and even trigger the subversion of the existing financial system. The "great unity" situation that has shaped the world has hindered the stable operation of the existing financial and monetary system. The digital RMB M0 alternative design determines that the digital RMB has a “stable currency” attribute, which lays a solid foundation for the future establishment of a close communication between the RMB and various virtual cryptocurrencies. At the same time, the design of the digital RMB double-layer operation structure model and the libra currency have the same effect. Similar to the two-tier operating model of the digital RMB “central bank-commercial organization”, Libracoin uses the “Libra Association-Authorized Reseller” operating model.

Libra coins require legal assets equal to Libra coins, and the digital RMB requires the operator to pay 100% of the reserve in full. As for the management of the reserve fund, the reserve fund paid by the digital renminbi operating agency is managed by the central bank and acts as the central bank's liability as the traditional statutory reserve fund, which guarantees the legal effect of the digital currency and, to a certain extent, prevents the over-currency currency and the run-off. risk. Libra's reserve assets are held by the Libra Association to a global custodian with a good credit rating to ensure asset stability and security, and the interest income earned is used to maintain system operations.

The value of the digital renminbi natural legal currency determines the issuance and management of the digital renminbi by the central bank. The global network currency positioning of the Libra currency has prompted it to adopt a relatively “decentralized” organizational structure and distribution management model. In theory, the centralized model helps to improve operational efficiency, maintain currency stability, and strengthen financial regulation. The “decentralization” model is more conducive to transaction convenience and anonymity (alias), and thus easier to be marketed. Accepted and used by investors.

Future development and conditions of success

As a more convenient new payment method and value storage tool, digital cryptocurrency may pose serious challenges and impacts on the existing monetary and financial systems. The world's major central banks and regulatory authorities are also closely involved in competing for R&D. Future trends and directions.

The Bank of England has initially designed and implemented a central bank digital currency prototype system, but publicly stated that the legal digital currency may have some risks and will not be issued in the short term.

On the one hand, Canadian regulators are actively studying the motives and possible consequences of legal digital currency issuance, while at the same time embarking on the test of the impact of the distributed ledger technology on the financial sector.

The Monetary Authority of Singapore officially launched a digital currency project to prepare for the issuance of legal digital currencies from both business analysis and technical practice.

In addition, the IMF is also trying to launch the SDR version of the digital currency eSDR to meet the challenges of global digital currency development. At present, the design, distribution and placement of digital renminbi has been at the forefront of legal digital currency, which may open a new era of legal digital currency.

The key conditions for the success of digital RMB issuance and landing are:

First, a good distribution exchange incentive mechanism and smooth and flexible payment channel

Whether the digital RMB primary issuance acceptance can be actively supported and responded by commercial banks and other institutions depends on whether the verification and accounting of digital RMB (also known as “mining”) has a fair and reasonable incentive mechanism. It may be a key issue that must be resolved before the official issuance and landing of the digital RMB. The redemption channel is the channel for users to pay with the digital RMB issuing institution (the central bank). If the redemption channel is not smooth, when the demand for digital renminbi suddenly increases or decreases in the market, it can only be carried out through transactions between off-site users. It is easy for the price of the digital renminbi to fluctuate and deviate from the normal level, thus causing unpredictable and huge impact on the existing currency and financial system.

Second, market acceptance and application scenario applicability

Market acceptance and application scenarios are important indicators of digital renminbi. Only when there is sufficient demand for use can the renminbi be liquid. At present, Alipay and WeChat pay a significant share of China's scenario payment and consumption. Domestic users and markets have become dependent on this path. Digital RMB should strengthen cooperation and integration with existing payment and financial institutions, forming a wide range of subtle, Cover online and offline service modes to improve market acceptance and adaptability of application scenarios.

Third, global partners and flexible regulatory adaptability

In the future, China will use digital renminbi as a tool and means to promote the internationalization of the renminbi. It will need to find reliable partners on a global scale, encourage them to actively participate in the issuance and acceptance of digital renminbi, and increase the penetration of digital renminbi and globally. Acceptance level. This also means that China should adopt a more open attitude towards digital renminbi, for example, allowing digital renminbi to truly play the role of “stable currency”, building a bridge between renminbi and virtual digital currency, and allowing digital renminbi to be realized between legal renminbi and the US dollar. Freely convertible, etc. At the same time, in terms of issuance system and regulation, we strive to be more flexible and adaptable to meet the regulatory review of countries in the payment of digital currency and currency transactions.