The era of digital currencies is getting closer: starting with cash in circulation and used in small retail scenarios

Economic Daily, China Economic Network reporter Chen Guojing

Source: Economic Daily

According to the design of the current stage, the central bank's digital currency DC / EP is a replacement for M0, and interest is not paid on cash, so it will not cause financial disintermediation and will not have a big impact on the real economy. In addition, the central bank's digital currency DC / EP is used in small retail scenarios and will not have a crowding out effect on deposits.

The digital currency era is getting closer. A few days ago, Fan Yifei, deputy governor of the People's Bank of China, said that in the next step, he will follow the principles of stability, security, and controllability, rationally select pilot verification regions, scenarios, and service scopes, continuously optimize and enrich DC / EP functions, and steadily promote digital form of legal tender Introduce applications.

The DC / EP that Fan Yifei refers to is the legal digital currency that China plans to launch. What will China's legal digital currency look like? How will it affect our lives?

What is the difference between electronic payment

Speaking of digital currencies, everyone's first reaction may be Bitcoin or Libra, which Facebook plans to launch. Unlike these so-called digital currencies, the central bank's digital currency DC / EP to be launched by the central bank is endorsed by the national credit.

China's central bank has started research on digital currencies as early as 2014, and it has been 5 years. Until now, the central bank's digital currency can be said to be ready. So, after the launch of the central bank's legal digital currency DC / EP, does it mean that all RMB will be replaced by digital currencies and cash will disappear?

"I never thought that China would enter a cashless society. I might use the concept of a" light cash society. "Mu Changchun, deputy director of the Payment and Settlement Department of the People's Bank of China, introduced the current design of the central bank's digital currency, focusing on M0. Instead of M1, M2. This is because M1 and M2 have been implemented electronically and digitally, and there is no need to use digital currency for digitalization.

M0 refers to cash in circulation, that is, the central bank's digital currency DC / EP will start with replacing paper currency and coins in circulation. As for other things, such as household deposits, corporate deposits, and other money in bank accounts, they are already in digital form, so there is no need to repeat the construction.

Mu Changchun said that the central bank's digital currency DC / EP is a replacement for M0, and interest is not calculated on cash, so it will not cause financial disintermediation and will not have a large impact on the existing real economy. In addition, the central bank's digital currency DC / EP is used in small retail scenarios and will not have a crowding out effect on deposits.

When using digital currency, how is it different from WeChat and Alipay? Mu Changchun pointed out that for ordinary people, the line between basic payment functions between electronic payment and the central bank's digital currency DC / EP is actually relatively blurred. Of course, the implementation of digital currency by the central bank is very different from electronic payment in some functions.

Many people use cash for the purpose of anonymous transactions. After the introduction of the central bank's legal digital currency DC / EP, is it no longer possible for anonymous transactions?

Mu Changchun said that the design of DC / EP maintains the attributes and main characteristics of cash, and also meets the needs of portability and anonymity, and is a better tool to replace cash. The central bank's digital currency adopts controlled anonymity to meet the legitimate needs of the public for anonymous transactions. At the same time, it must also perform functions of anti-money laundering, anti-terrorist financing, and prevention of online gambling and any cyber criminal activities.

This also means that, unlike Bitcoin and other emphasis on decentralization, central bank digital currencies will still adopt a centralized management approach. At the time of issuance, the central bank first exchanged digital currencies with banks or other operating institutions, and then these institutions exchanged them with the public. In this process, it is necessary to maintain the central position of the central bank and exchange money by designated institutions. Centralization is also to avoid the over-issuance of currency by designated operating agencies, without changing the existing account system, and without changing the way monetary policy is transmitted.

Very different from Libra

The most critical difference between fiat digital currency and Libra is whether there is a national credit endorsement and whether the currency value can be guaranteed to be stable.

Unlike the central bank's legal digital currency that China plans to launch, Libra's sponsors are composed of multiple companies. Libra plans to become an international reserve currency that is decoupled from sovereign countries and can maintain long-term stability of its currency. According to Libra's white paper, the biggest difference from most cryptocurrencies is that using 100% of real assets as reserves and guarantees, users can exchange Libra held by them into fiat currencies such as US dollars and euros at any time. "Pegging" became a stable currency. The stability of the currency is the key to Libra's acceptance.

In addition, in the era of credit money, how Libra can be trusted is a big problem. Libra's sponsors are multiple companies that have not obtained national credit endorsements, and that, apart from supervision, they are more likely to become a hotbed for criminal activities such as money laundering and terrorist financing. After the crisis of trust, many companies, including Visa and MasterCard, have said they will quit Libra.

Murphy, General Counsel of Mastercard, told reporters that the main concern of the withdrawal is compliance. The cooperation between the two parties must meet local regulatory requirements, such as meeting anti-money laundering and understanding your customers (KYC) and other regulatory requirements. But in terms of compliance, Libra obviously has a long way to go.

"Can people accept Libra? Can it be used as a major currency?" Said Meng Wenneng, director of the Singapore Financial Regulatory Authority. Most people prefer to use digital currency in mobile phones for small payment scenarios. But the bigger question is, how many people will invest their lifetime savings?

The battle for strong and weak digital currencies continues

From a global perspective, the competition around digital currencies has only just begun.

The emergence of Libra triggered the catfish effect, and global discussions on fiat digital currencies were even more enthusiastic. Countries took precautions and accelerated research on fiat digital currencies. Even the European Central Bank, which did not seem to be interested before, has recently begun discussing the need to develop a unified digital currency. A report released by the International Monetary Fund (IMF) in July this year pointed out that nearly 70% of central banks around the world are studying fiat digital currencies.

Many people worry that once Libra is in circulation, or it may become a strong currency, it may have exchange relations with currencies of other countries and erode fiat currencies. However, once the weak countries make mistakes in control, they will easily lead to hyperinflation and even "delocalization." In the past, Zimbabwe abolished its own currency and was forced to adopt the US dollar and other currencies as a typical example.

Zhao Ying, a researcher at the Institute of Finance of the Chinese Academy of Social Sciences, pointed out that if cryptocurrencies such as Libra are successful in retail payment applications, there will be a competitive relationship with fiat currencies.

As far as the digital currency of China's central bank is concerned, Zhao Min believes that Libra's design philosophy has many similarities with the People's Bank of China's DC / EP scheme. The 100% reserve issue method adopted is exactly the same as the DC / EP scheme. Both will be used in retail payment scenarios, so Libra forms a direct competitive relationship with DC / EP.

"Libra will also become a" blocker. "Zhao Yan believes that the Libra project targets cross-border financial services, especially cross-border retail payment. This will form a more direct market competition with China's hope for" going out "of mobile payments. Dollarization has a deep historical foundation and realistic impact in the world, making it harder for the central bank's digital DC / EP solutions and products to "go global".

"We should plan ahead and take precautions." Zhao Yan believes that there is a huge investment demand for Libra reserve assets, which is likely to have a huge impact on financial markets and thus bring new instability factors to financial markets. More attention should be paid to the possibility of systemic financial risks as its scale expands.

Zhao Yan said that the implementation of cryptocurrencies will be very fast, which is completely different from the currency replacement of traditional currencies. Once a cryptocurrency is successful, its regulation and restrictions will become difficult. In the process of promoting digital currency in China, we must absorb its advantages and learn from its ideas, and we can also have room to play in the process of RMB internationalization.