I. Circulating cash to plastic notes
According to statistics, at present, a full set of banknotes in 13 countries have used plastic banknotes . The United Kingdom is one of them. Not only the central bank of the country plans to issue a full set of plastic banknotes, but also several other commercial banks that have the right to issue banknotes, such as the Royal Bank of Scotland and Cleez Bank of Ireland, Bank of Northern Ireland, etc. have also started to issue plastic banknotes in recent years. What they like is that they are resistant to abrasion and dirt, and have a long circulation life. According to estimates, for small denomination banknotes with high turnover rates and relatively low circulation levels, It is said that the circulation life of plastic banknotes is at least 2.5 times (4 times as originally stated). After the release of 10 pounds, the Bank of England has also officially announced that the average circulation life of 5 and 10 pounds should be 5 years (Bank of England, 2017). According to the central bank's calculations, all denominations switched to plastic banknotes can reduce production costs by up to 100 million pounds .
Image source: www.oushidai.com
- The Bank of England declares war on third-party payments and digital tokens - in the form of British gentlemen
- Bank of England: Central banks should consider developing CBDC to counter the tech giant ’s lead in digital payments
However, from 16, 17 to 19, less than 5 years of full play, but more than 50 million plastic banknotes have been withdrawn by the Bank of England because of "folds, tears, holes and holographic features wear out" and other reasons . Although it emphasizes that this is artificial damage rather than natural wear and tear, the percentage of damage (less than 4-5%) is lower than the paper currency indicator (60% for a 5 pound note and 53% for a 10 pound note). The original expected five-year circulation life was for natural wear and tear.
However, there are various currency circulation environments, and natural wear and tear and artificial damage should be considered. When the plastic banknotes were issued, the then Bank of England Governor Mark Carney also promised that the plastic banknotes "can be adapted to being repeatedly folded in a wallet or crumpled in a pocket, and can also be rotated in a washing machine ." The point promise inspired some good people's minds, just like when Canadian dollar plastic notes were first issued, someone used an oven or microwave to test the heat resistance of plastic notes.
The same year that the first British pound plastic note was issued , the RSCoin system was introduced.
Second, the UK's central bank digital currency RSCoin prototype system
In 2015, researchers from the Bank of England and University College London jointly developed RSCoin , the world's first central bank digital currency model , and conducted preliminary tests.
RSCoin participants include the central bank, users, and mintette. "The overall design of the system uses a dual layered architecture of the central bank and a commercial bank, and a distributed ledger managed hierarchically based on blockchain technology." (Yao Qian, 2017)
Centralized currency issuance and ledger management mechanism: the central bank applies cryptographic technology to create RSCoins and centrally manages the distribution; generates a global ledger (higher-level block) to publish final transaction data to the entire system; authorizes authentication to maintain mintettes for the lower-level ledger; and regularly to the whole The system issues a list of authorized mintettes.
Distributed ledger maintenance : Authorized mintettes are responsible for collecting and verifying the transaction information submitted by users, generating verified transaction information into lower-level blocks (lower-level blocks), periodically submitting them to the central bank, and central bank collectively generating global ledger, and Published confirmed transaction data.
Fragmented transaction processing : RSCoin uses a sharding strategy to improve the system's ability to process transactions, that is, to divide mintettes into several groups and distribute the transactions to each group for processing, thereby improving the processing capacity of the entire system. Theoretically, the greater the number of mintettes, the greater the system transaction capacity. In the case of 30 mintettes, it can reach a transaction speed of 2000 transactions per second.
The transaction ledger is auditable . RSCoin uses a cross-logging mechanism to ensure that the ledger has high transparency and auditability. Each mintettte records and maintains information about transaction verification and submission. Through the user's transfer to other mintettes, each mintette will save each other's logs and form a log cross. If any tampering is done, it will be found by other mintettes, which improves the account book. Auditability.
Some scholars believe that the RSCcoin scheme is " introducing the Bitcoin transaction model under the central bank's centralized model, but increasing the system's complexity in processing transactions " (Cai Weide et al., 2016). Its design is based on the first-generation blockchain technology, which lacks scalability and inevitably has some shortcomings. First, under a centralized management mechanism, a single point of failure will cause the system to lack flexibility. The second is that cross logs will become more complex over time, reducing auditability. A large amount of reconciliation work is undertaken by the central bank, and processing capacity may become a bottleneck (Yao Qian, 2017). The third is that the fragmented transaction processing method will cause other packets to fail to operate normally due to the failure of one packet.
However, the advent of the digital currency of the central bank, the advent of RSCoin means that "the research curtain of the legal digital currency issuance and circulation system has slowly opened." (Yao Qian, 2017)
Third, the progress of the Bank of England's digital currency research
Following the RSCoin prototype, the Bank of England's digital currency has not seen any substantial progress and seems to be stagnant. However, the Bank of England's research on officially issued digital currencies has been ongoing.
Since 2016, the Bank of England researchers have conducted in-depth discussions on the policy and technical impact of central bank digital currency issuance through the central bank website columns and central bank blogs. Such as:
In 2016, John Barrdear and Michael Kumhof published "The Macroeconomic Impact of Digital Currency Issued by the Central Bank", which was derived from the DSGE model: When the CBDC issue accounts for 30% of GDP, it reduces the real interest rate, tax distortion, and currency transaction costs, which can permanently increase GDP by 3% .
In 2018, Ben Dyson and Jack Meaning estimated the impact of the central bank's digital currency in the three stages of the monetary policy transmission mechanism in the report "Does the Central Bank's Digital Currency Destroy Monetary Policy?" Efforts to weaken the currency transmission mechanism.
In the same year, Michael Kumhof and Clare Noone tried to create a set of core principles of CBDC issue in the article "Design Principles of Central Bank Digital Currency and Its Impact on Central Watch" to solve the problem of financial disintermediation.
At the technical level, the central bank also started discussions. In 2017, Simon Scorer proposed on the central bank blog whether to adopt distributed technology, which is not a necessary condition for CBDC. CBDC can be DLT or centralized, and it should be selected based on needs assessment. He listed some technical requirements of the CBDC, such as the flexibility should meet the requirements of 24 * 7 * 365, the privacy is not completely anonymous, and can interact with the existing system and other CBDC.
In August 2019, a speech by Mark Carney, Governor of the Bank of England, aimed at Libra, the social giant's plan to issue the concept of "Super Hegemonic Currency" ( SHC ) , which should be a digital currency issued by the central bank. And it is backed by a basket of currencies, the purpose is to replace the dominant position of the US dollar, reduce the US dollar's influence on the global financial environment, and reduce the volatility of capital flows in emerging markets.
4. Britain hovering at the crossroads
From the previous point of view, the UK is in the forefront of global research and development, theoretical research, policy orientation and other aspects of CBDC, but after all, it is not like Sweden. Since 2017, the bank ’s CBDC “electronic crown” has undergone two stages of research and development. It has entered the testing phase; the People's Bank of China has proposed the DCEP prototype concept since 2015, and has basically completed the top-level design, standard formulation, function research and development, and joint debugging and testing (Fan Yifei, 2019).
The reasons why the UK was the first to develop the CBDC but did not become an advantage may be affected by the following factors:
There is a mature small amount quick settlement system . Among European countries with fast payment systems, the UK has been online since 2008, with an average of more than 30 transactions per capita per year, which ranks among the top in 45 such systems worldwide;
Card usage has a long history . According to the BIS Red Book (2016) data, the annual average number of swiped cards in the UK reached more than 240;
The time to switch from paper money to plastic money is short and costs have not been digested . Although the Bank of England claims that using plastic banknotes to replace paper banknotes can save 100 million pounds, major adjustments must be made in all aspects of cash circulation—returning—destruction, because the size of plastic banknotes is 15% smaller than that of banknotes. There have been major changes. Cash and other cash machines, such as teller machines and self-service vending machines, need to be upgraded in software and hardware. The cost is estimated to be 235 million pounds, which is far more than the cost savings of the industry caused by the replacement of new banknotes.
Have a clear preference for cash payments . In the year of RSCoin's advent, a consulting agency (First Capital Cashflow) conducted a survey of payment methods in the British public and found that British people's preference for cash is second only to debit cards. One of three people prefers cash use, and the age group is 18-34. Cash preference is 67%.
There are also considerations such as monetary policy and financial stability. However, the existing payment system in the UK is mature and developed. Although in recent years there have been new situations in which the number of tellers and mobile payments have begun to spread, there is no cash like Sweden. It is imminent that the operation is nearing the threshold and the situation that the central bank will come to break this situation is imminent. Internationally, the pound, as the main reserve currency, ranks fourth in the world, and the global settlement currency ranks third. At present, it is in a good position. In short, inadequate domestic and external demand should be the reason why Britain is lagging behind in the development of digital currencies.