Should a single anchor and a basket of currencies be more imaginative?

Source: Digital Fiat Research Institute

Today, mobile payment tools such as Alipay and WeChat Pay have become so fast today. The People's Bank of China is eager to launch fiat digital currencies. The goal is obviously not to further promote the convenience of domestic payments.

To cope with the dual squeeze of internationally dominant currencies and overseas digital currencies, and reverse the tide of internationalization of the RMB. Relieving cross-border payment contradictions brought about by the long-term capital account regulation should be an important mission of the central bank's digital currency.

DCEP is and is only "digital RMB"

The International Settlement Bank (BIS) defines Central Bank Digital Currency (CBDC) as a digital form of central bank currency, which is different from the balance of traditional reserve accounts or settlement accounts. The digital currency name of China's central bank is DCEP (Digital Currency Electronic Payment), that is, digital currency and electronic payment tools.

As a national project that started in 2014, the research and development of the digital currency of the People's Bank of China has been going on for 5 years.

Judging from the current public information, the digital currency does not have a preset path in technology, and adapts to changes and iterations in digital technology. It adopts a dual-layer operation structure of "central bank-commercial bank" in operation and introduces market forces to participate ; Adopt a partial centralization model in management, and retain control of the central bank.

Openness and marketization, combined with strong government guidance, it is expected that the coin will be quickly applied in China after its launch.

According to reports, the digital currency of the People's Bank is based entirely on RMB. One unit of DCEP is equivalent to one yuan.

Therefore, there is no essential difference between DCEP and paper money. Both are central bank liabilities supported by national credit, but they rely more on digital technology in the design of currency forms and circulation.

As a digital alternative to M0 (paper money and coins), DCEP adopts an "loosely coupled account" model that does not require opening a bank account.

As long as both parties have mobile phones and digital wallets, and do not even need to use the Internet, peer-to-peer payments can be completed.

In addition, DCEP can also load smart contracts within the scope of currency functions. The specific contract design has not been disclosed in more detail.

Single anchor cannot compete internationally with a basket of currencies

"People's Bank of China issues digital currency whose value basis can only be RMB." If this concept is adhered to, DCEP will have no breakthrough in currency theory, no innovation in currency creation mechanism, and RMB internationalization will be difficult to achieve. Across. "

The essence of currency is credit, and which currency the market chooses is the result of the common competition of various factors such as credit, availability and liquidity of various currencies.

Libra is anchoring a basket of currencies, dominated by the US dollar. Judging from the Libra hearing in the U.S. House of Representatives and the House of Representatives in July, it is impossible for Facebook to bypass the Federal Reserve or other institutions to regulate currency issuance.

It is impossible to predict what kind of compromise Facebook will reach with the regulatory authorities, but it is certain that the basic framework of Libra, which is eventually released, will be US dollars and a basket of currencies as anchor.

Facebook has a 2.7 billion user base. It has the advantages of joining members in many fields such as global payment, technology, telecommunications, blockchain, and venture capital, which will greatly enrich Libra's application scenarios.

In contrast, DCEP is 100% anchored in RMB. Even with the participation of Internet giants such as Ali and Tencent in the future issuers, the single RMB value anchor feature is doomed to fail to compete internationally with Libra.

As for China, blockchain and other technologies can completely bypass the inter-bank payment and clearing systems established in various countries. The authorities' attempt to prevent Libra's infiltration and penetration through traditional administrative intervention is bound to be futile.

Anchor settings may be more imaginative

In the era of sovereign credit currencies, it is difficult for the RMB to compete effectively with the currencies of advanced economies; in the digital era, in scenarios with similar technical levels, we may not expect that the purely "digital RMB" can win the competition with "digital major global currencies" .

Focusing on international currency competition in the era of currency denationalization, it is necessary for DCEP to adopt a more open, bold, and imaginative solution in the setting of its anchor.

We must not let DCEP lose on the starting line, and we must not let down the huge advantages of China's mobile payment field due to the defect of the anchor, and we must live up to the technical and regulatory efforts.

On the basis of retaining the framework design of DCEP retail function positioning, non-predetermined technical route, two-tier operation system and partial centralized management mode, the characteristics of Libra anchoring a basket of reserve assets and SDR (Special Drawing Rights) should be modeled The valuation method determines the value anchor of DCEP.

The most concise, intuitive, most operational, and most market-accepted anchor is based on a certain weight of RMB and US dollars, converted at the spot exchange rate to determine the currency basket, such as:

The US dollar in DCEP is supported by official foreign exchange reserves, and the size of US dollar reserves is the upper limit of DCEP issuance.

Generally speaking, the US dollar reserves in China's foreign exchange reserves are slightly over 1.5 trillion US dollars. Even if the entire M0 is converted into DCEP, only about two-thirds of the US dollar's reserves are consumed (the exchange rate is calculated based on 7, 14,537.85 billion DCEPs, and the anchor amount is 7,268.925 billion yuan and 1,038.418 billion US dollars).

In this way, DCEP has 100% redemption guarantee and a sufficient credit base.

With reference to IMF experts' "currency tree" classification of digital currencies, the above types of DCEPs are both accounting units created by the central bank and are object-based payment methods;

At the same time, it has the characteristics of anchoring a basket of reserve assets, and has a claim-based payment attribute. It can be called a composite currency with both rights-based and physical-based attributes.

"RMB + USD" compound currency has multiple advantages

The digital currency issued by the People's Bank of China is "not exactly RMB", but a certain weight of "RMB + USD" compound currency, which has many benefits.

Partial hedging of exchange rate risk. RMB and USD each have a certain weight, which can partially hedge the exchange rate risk of RMB against USD.

When the US dollar appreciates, DCEP users who are accustomed to denominate in USD will tend to reduce holding DCEP, but DCEP users who are accustomed to denominate in RMB will tend to hold more DCEP.

Conversely, when the RMB appreciates, DCEP users who are accustomed to denominate in USD will tend to hold more DCEP, but DCEP users who are accustomed to denominate in RMB will tend to reduce their holding of DCEP.

Hedging relationships exist in both scenarios.

Enhance the international status of RMB. The issuance of the compound DCEP will make the People's Bank of China the second central bank to provide USD payment methods outside the Fed.

The US dollar in the composite DCEP plays a role in increasing the credibility of the RMB, which will be used to sail the sea.

Due to the immediate adjustment of the spot exchange rate, theoretically, 1DCEP is always equivalent to one yuan, which is helpful for DCEP to perform the function of value measurement.

It doesn't matter that "bad coins drive out good coins." Some people may be worried that the composite DCEP after the increase in the US dollar ’s credit has a stronger market attractiveness than the previous RMB, and there will be a significant replacement for the RMB M0.