Review | Digital currency DCEP is about to test why central bank issues digital currency

Source: Sina Finance

Author: drive and Lin (The author is executive president of the Digital Economy Research Institute of Zhongnan University)

According to the news of the People ’s Bank of China ’s website on the 5th, the 2020 People ’s Bank of China ’s working conference was held in Beijing from January 2 to 3. The meeting clarified the seven key tasks of the central bank in 2020, including maintaining a sound and flexible monetary policy, resolutely winning the battle against major financial risks, strengthening financial support and supply-side structural reforms, accelerating the improvement of the macro-prudential management framework, and continuing to deepen Financial reform and opening up, strengthening the development and application of financial technology, and comprehensively improving the level of financial services and financial management.

In terms of strengthening fintech R & D and application, the meeting especially emphasized the need to continue to promote the legal digital currency research and development. The deputy governor of the central bank said a few days ago that the central bank's digital currency DC / EP basically completed the top-level design, standard formulation, function research and development, and joint testing and testing on the premise of adhering to the dual-layer investment, M0 substitution, and controlled anonymity. The next step will be to follow the principles of stability, security, and controllability, reasonably select pilot verification areas, scenarios, and service scopes, continuously optimize DC / EP functions, and steadily promote the introduction and application of digital forms of fiat currencies.

I. Positioning and characteristics of central bank digital currencies

In terms of positioning, according to the central bank ’s statement, the central bank ’s digital currency DCEP is not a simple digitization of paper money, but a replacement for M0, that is, changing the form of the base currency. M0 refers to cash in circulation, that is, the sum of the cash on hand of each unit outside the banking system and the cash held by residents. The digitization of paper currency generally refers to online instead of offline, but both online and offline, you need account support, such as Alipay and WeChat payment need to be tied to a bank card to pay. DCEP does not have this restriction, which means that when using DCEP for payment, you do not need to bind any bank account.

An important feature of DCEP is the use of a two-tier operating system. One is the People's Bank of China for commercial banks, and the other is for commercial banks or commercial institutions. In other words, the way DCEP is issued is that the People ’s Bank of China issues DCEP to the commercial bank ’s business bank, and commercial banks provide DCEP access and circulation services directly to the public, and work with the People ’s Bank of China to maintain the normal operation of digital currencies.

Another important feature is dual offline payments. DCEP is based on a special design and can not rely on the network for point-to-point transactions. In simple terms, even if the mobile phones of both the revenue and expenditure are offline (disconnected), the two parties can still make transfer payments. Of course, the mobile phone must have electricity Row. At present, electronic payment, including Alipay and WeChat payment, needs to be connected.

Dual offline payments make DCEP closer to cash in use. Today, with the increasing popularity of electronic payment, network disconnection has become one of the main causes that bother mobile payments. For example, in the blind spots of network signals such as subways and underground supermarkets, users are likely to be unable to connect to the Internet and cannot conduct transactions. Even though Alipay and WeChat Pay have tried offline payments in recent years, they have only been a single offline mode of the payer so far, and the payee still needs to scan the Internet to complete the payment action.

It is also worth mentioning that DCEP and Alipay and WeChat Pay are not concepts in the same category. The latter two are a means of payment compared to cash payment, that is, electronic payment, but they still pay in RMB. In essence, payment is still made in commercial bank deposit currency. After the introduction of DCEP, the functions of Alipay and WeChat as payment methods have not changed. Instead, they have been replaced by DCEP instead of the original commercial bank deposit currency (or both).

DCEP is a sovereign credit currency

The name of digital currency is easily reminiscent of virtual cryptocurrencies such as Bitcoin and Libra, but there is a fundamental difference between DCEP and them, that is, DCEP is centralized, while Bitcoin and Libra are decentralized of. To be precise, DCEP is a sovereign credit currency, but the latter two are the products of the idea of ​​"currency denationalization".

As we all know, the most essential property and basic function of money is to serve as a medium for commodity exchange. Marx defines money as "the unity of value measures and means of circulation." Among the various functions of money, the value scale function serves the function of circulation means and payment means, and the value storage function is a natural derivative of the function of exchange media.

In the era of physical currency, money itself has intrinsic value, such as gold and silver, so it can perform the above functions. But in the era of credit currency, paper money itself has no value. The reason why it can perform the currency function is because it is supported by national credit, which is legally compensatory and mandatory.

Virtual currencies such as Bitcoin are essentially private currencies and do not have a solid credit foundation. Therefore, any digital currency that has its own mining algorithm, follows a limited amount, and has no central control can be a substitute for Bitcoin. In practice, due to the lack of a central regulatory mechanism, bitcoin not only cannot meet the requirements of monetary policy, but also cannot maintain the stability of the value of the currency. The sharp increase and decline of the value of the currency in recent years have proved this.

In comparison, if there is a substitute for DCEP, it can only be other forms of RMB, such as paper money and coins. In other words, the digital currency DCEP issued by the central bank is still the central bank's debt to the public, and this debt-debt relationship will not change with the change of currency form.

Why do central banks issue digital currencies?

First of all, the existing M0 (paper money and coins) is easy to be forged anonymously, and there are risks such as money laundering and terrorist financing. If DCEP is used to replace paper money and coins, although the above risks still exist, the regulators can use big data to conduct deal with. Although the DCEP transaction is anonymous, certain behavioral characteristics can be used to lock individuals involved in the case. The difficulty of supervision is reduced compared to paper money and coins.

Secondly, as mobile payments become more common, the frequency of use of cash is greatly reduced. Wherever mobile payments are available, people are basically reluctant to carry cash. In addition, the cost of issuing, printing, returning, and storing banknotes and coins is very high, and a large amount of cost is required for anti-counterfeiting treatment. DCEP can economically reduce this cost. At the same time, for some normal anonymous payment needs of the public, existing payment tools cannot be met, such as Alipay, WeChat payment, credit cards, bank cards, etc., which are all tied to the bank account system. DCEP can not only maintain the attributes and main value characteristics of cash, but also meet the needs of portability and anonymity.

Finally, it will help reshape the trade clearing system and promote the internationalization of the RMB. Before the RMB cross-border payment system (CIPS) was launched, RMB cross-border clearing and settlement was highly dependent on the US SWIFT system and CHIPS. However, there is a certain risk of relying heavily on SWIFT and CHIPS systems. As Huang Qifan pointed out, "SWIFT and CHIPS are gradually becoming financial instruments for the United States to exercise global hegemony and exercise long-arm jurisdiction. Historically, the United States has used these SWIFT and CHIPS systems. Several financial wars have been waged. "This is not in the interest of our country, nor is it conducive to the stability of the global financial system. In addition, under the current trend of digitalization, SWIFT and CHIPS system technologies are updated slowly and security is difficult to guarantee. It is now the consensus of many countries to build a new clearing and settlement network using big data platforms and blockchain technology.

There are three important conditions for the internationalization of the renminbi. First, the renminbi must have a certain degree of circulation outside the country. Second, transactions settled by the people in international trade must reach a certain proportion. Third, financial products denominated in renminbi have become major international financial institutions. Institutions include investment vehicles from the central bank. The digital currency based on blockchain technology and finance have a natural fusion. Using digital currency will greatly increase the speed of cross-border settlement, and its security is much higher than traditional cross-border settlement. With China's international influence and the expansion of overseas capital, DCEP will become an important driving force for the internationalization of the RMB.