Zhou Xiaochuan talks about digital currency, electronic payment, cross-border payment supervision and public spirit

Editor's note: On June 18th, Facebook released the Libra white paper on cryptocurrency projects, which once again sparked industry discussions on encrypted digital currencies. Libra's goal is to create a simple, borderless currency and financial infrastructure that serves billions of people. Once successfully issued, its future impact will not be limited to the cryptocurrency field, but may also bring about a new business model change?

In the face of this change, what are the possible development directions for the domestic digital currency industry in the future?

This article selects the speech of Zhou Xiaochuan, president of the China Finance Association and former president of the People's Bank of China, at the 9th Caixin Summit. In its view, the development of digital currency and electronic payments may have multiple options in parallel, moving forward in the competition.

The following is the full text of Zhou Xiaochuan's speech:

Good morning, ladies and gentlemen, I am very happy to accept the invitation of the Caixin Summit to speak here and to communicate with you. I know that there are a lot of hot issues at the moment, but because of the limited time, I can only talk about one topic. In the past three years or so, I have discussed the issue of digital currency and electronic payment in many international occasions, but I have not said it in public in the country, so I will share with you this topic today.

The development of digital currency and electronic payments is very rapid, and everyone expects that electronic payments will largely change the state of the payment industry in the future. According to the situation of today's summit, I think it is not suitable to be too technically discussed. You may also pay more attention to macro and institutional perspectives, so I would like to talk about this phenomenon from multiple angles.


The relationship between the financial industry and the IT industry

Some researchers in the past said that the financial industry, especially the commercial banks and insurance industry, is in principle an IT company, because the main thing they do is data processing, and the vast majority of the currency has been digitized. In our case, for example, cash is only 5% to 6% of the entire currency, and the rest are represented as 0 and 1 stored in the computer. The bank makes a loan to a company based on the historical data of the company in the region and the industry, and processes the historical data to determine whether the company can borrow or what kind of risk premium is needed. This is even more true in the insurance industry.

Furthermore, any IT industry has a user interface, which means that it ultimately deals with users in a certain area. The financial industry is actually the same. This user interface can be seen as a retail network or some counter business. Of course, I think this is a bit too much, but I think that about half of the financial industry actually does something similar to the IT industry. The financial industry can be said to be "half of the IT industry." Therefore, the traditional financial industry has always been the main user of the IT industry and what is now called Fintech.

We can use the time series to look at the evolution of the financial industry in several major IT applications, and we can see that they are almost the largest buyers of IT technology, that is, users . It can be seen from four aspects:

First, computing power. From the early computers to the current cloud computing. Second, storage capacity. The financial industry used to be the largest buyer of storage devices. Now because of audio, video, voice, etc., this information is much larger than structured digital and text storage. The financial industry is no longer the largest user of storage devices, but it is still an important user. The third is the network. The financial industry is highly dependent on the Internet. In the early days, it was communication and telecommunications. Later, everyone actually knew that it was also a network, but it was different. The fourth is the database. The financial industry is also almost the largest database user. Of course, the database users are no longer talking about big data. In short, looking at the relationship between the financial industry and IT from a time series, we can see that there is indeed a very close relationship between the two, and it is also a mutual promotion.

It can be said that the financial industry has benefited from the development of IT technology and has been able to improve the quantity, quality and efficiency of financial services. Therefore, the financial industry should really welcome competition and welcome new technologies. Of course, in the development of specific technologies, individual financial institutions must also protect themselves and compete with each other, so sometimes they will express their opinions or have a resistance to certain technologies. But overall, we must see the whole direction, the financial industry and IT are closely related.

Supply side and demand side of Fintech or IT industry

From the demand side, a key area is the payment field. Payment is an industry that has a supporting role in the national economy. If you stand in the perspective of the payment system , what the payment system really needs is efficiency: first, it must be efficient, the second cost should be low, and the third is to be safe, reliable , and not problematic, including personal privacy, including The reliability of the transaction. If there is a problem in this aspect, the impact on the national economy and on the whole society may be great.

From the supply side, new technologies will continue to emerge. When someone invents a new technology, they will have to sell their new technology. The point of his sales may be based on technical characteristics, and what characteristics it has, this feature may be useful to you. This is sometimes different from the perspective of the demand side. One of the important contents was the emergence of blockchain technology, which later evolved into distributed ledger technology. This technology has its own characteristics and may play a role in certain financial fields, financial markets, and financial transactions. There may be new development prospects in the future.

But at the same time, we must also see that some of the characteristics of their marketing are related to the future choice of the payment system, and there are some things that are not necessarily the most concerned by the demand side. For example, decentralization, this is not the core concern of the financial system and the payment system. It can be considered and studied. In addition, for the development of technology, part of it is a step-by-step development. Although the steps may be high or low, the gap may be large; there may be a leap-forward development or subversive development. Therefore, it is necessary to make judgments, which are developments that are step-by-step and which are subversive developments. We need to pay great attention to the patterns that have the potential to fundamentally change the traditional business.

Since the supply side and the demand side sometimes have different opinions, it involves coordination problems, and there will be distortions in the process, and some risks will arise in the middle. This distortion is also seen by everyone. I mainly say three things:

One is to regard new products and new technologies as the main tools for speculating and making money. In particular, it has been pushed to the market for trading very early, and it is believed that trading through the market may be very rewarding in terms of money. This can cause distortion and even some damage.

Second, there is a tendency that some technical applications do not exert their potential financial service capabilities, but instead focus on how to spend more money, especially on the money in the pockets of consumers, and fancy deposit accounts. The money, over-considering whether it can imitate the bank to absorb public savings. About six years ago, we started issuing third-party payment licenses, but later found that some of the more than 200 third-party payment licenses were actually interested in payment technology, and were not too interested in paying for efficiency and reducing costs. It is possible to receive prepayments. Such distortions sometimes have problems. Recently, P2P has a lot of similar problems in the fund pool, which is also a distortion.

Third, the IT industry and the Internet industry will have a “winner-take-all” phenomenon . Caixin is also doing research in this area. “Winners Eat” is different from our original goal, because we hope to develop competitively and achieve excellence, so that the best technology can be highlighted and everyone will eventually use it. So this is also a problem.

To figure out the concept of digital currency and electronic payment

There has been a lot of discussion about this now, but the current discussion is sometimes in a variety of terms, concepts, and terms, and communication is not very good. Therefore, the Bank for International Settlements (BIS) has published a question about the central bank's digital currency. The first discussion is the terminology. The terminology is not a simple technical issue, since the terminology can be seen from which perspectives the development of these technologies is to be seen.

The first point is whether the newly created currency is digital or physical. As I mentioned earlier, the vast majority of the current currency is already in digital form. Of course, it is also said that the digital currency they refer to is only suitable for cryptocurrency based on blockchain technology; if it is not a digital cryptocurrency based on blockchain, it is not called digital currency. This is something that needs to be discussed, and the views are also inconsistent.

The second distinction is whether digital currency and electronic payments are based on Token or Account. From the perspective of China's development, from the past credit card to the current mobile phone-based, two-dimensional code-based applications are based on account-based practices. So this is also an option.

There is another, payment tools and digital currency for retail or wholesale services. If it is wholesale, it may involve the function of the central bank. In addition, there are partial retails, such as the university campus card is a partial retail type. The reason for this difference is that in view of the current division of labor between central banks and commercial banks and third-party payment systems, it also involves consideration of system security, stability, and reliability.

After BIS makes these distinctions, the digital currency can be divided into the digital currency of the central bank or the digital currency of the private sector. Of course, this private sector concept is broader than we said. For example, if it is a commercial bank, regardless of bank ownership, it belongs to the non-central bank and is the digital currency of the private sector. Of course, digital currency can also be made through PPP (public sector and private sector joint ventures).

In short, the central bank will pay attention to this aspect because it has the function of maintaining stable currency and stable financial system. If the private sector does not establish reasonable mechanisms, regulations and incentives, it may only care about market share, efficiency, and cost, and not necessarily care about currency stability. However, after a period of exploration, if the value of the digital currency of the private sector is not stable, some people have created a digital currency pegged to the central bank's currency, which is called “stabilized currency”. This also indicates a need for stable currency values.

However, I think the classification of terms in BIS may not be complete yet, and other features need to be considered. One of them is whether it is debit or credit. The mainstream of third-party payments we have seen in China is still debit-type. However, many P2P companies have also given loans based on the payment characteristics of credits. So this is also a difference.

There is also a difference as to whether the value of the currency is anchored or not. Now it seems that everyone is paying more attention to the value of the digital currency that is anchored.

Another concern is whether the digital currency is encrypted or not. In theory, some people will say that a certain currency is absolutely safe, but now it seems that it is impossible to be absolutely safe. The market is "one foot high and one foot high" and both may be attacked. In fact, careful observation of electronic payments and digital currency is almost always encrypted, but the encryption is not the same: some encryption has who owns the currency, some encryption in the payment link, and some encryption in the pass. In short, it is impossible to not encrypt, otherwise it is vulnerable to attack.

There is also a dimension at which level the data is allowed to persist. Because data retention involves the issue of how to enforce the law if there is a dispute, but more because it involves privacy that is well protected.

Talk about possible development options for digital currency and electronic payment

To clarify the above concepts and distinctions, we can see that the development of digital currency and electronic payment may have multiple programs in parallel, and development in the competition may not be very certain in the future, which will give the central bank and supervision. The departments have presented challenges.

The People's Bank of China established the Digital Money Institute three or four years ago to study Fintech and digital currency. This shows that the central bank can organize research in this area, but it cannot guarantee that the central bank's research plan will be optimal. Technology is constantly evolving and determining technology choices is risky. Therefore, there is another way to design a multi-channel research and development and competition mechanism.

At the same time, there is a certain process for the technology to be put into use, so it is necessary to ensure that the consequences are controllable regardless of whether the technology investment is successful or not. To advance in a controlled manner, you can't let it go. In the event of a certain program being tested, there will be huge loopholes or failures that will cause social economic damage or instability. Therefore, we must design the method of research. One of the well-known methods is the “sandbox” approach advocated by the Bank of England, but the “sandbox” approach may be more effective for some smaller technology choices and trials, and not necessarily enough for too many technical choices.

Although it is said that multi-channel research and development, competition, and competition should be selected, do not make too many settings in advance, and the consequences should be controllable, but at the same time, it must be recognized that some businesses belong to financial infrastructure. The so-called financial infrastructure is public, and the requirements for stability and security are relatively high. If there is a problem with the infrastructure, the impact will be more serious. In the past, printing banknotes, coins and building clearing systems have clearly become financial infrastructure. If there is still a social credit system in the future, it will be an infrastructure if it can be done.

The Financial Stability Forum and BIS, founded by G20, have set up committees on infrastructure, such as the BIS Funding and Market Infrastructure Committee (CPMI). So, for financial infrastructure, we have to consider that it is similar to other infrastructure in the economy.

Since there is publicity, people may want to ask, is it necessary to be undertaken by public institutions? I personally think that it is not necessarily true. The private sector can sometimes do infrastructure as well. Of course, the private sector still has to work under the guidance and supervision of the government to engage in infrastructure. It can also be done in the form of PPP (public sector and private sector cooperation).

However, I emphasize that the private sector must have a public spirit if it participates in the construction of financial infrastructure. The so-called public spirit is that he is prepared to serve the public, rather than preparing to take advantage of the privileges or advantages of infrastructure, and to make more interests for himself or the individual. For example, some companies resell some data in the market. This is the lack of public spirit and the need to cultivate public spirit. Institutions that have truly been tested and have a public spirit can actually participate in financial infrastructure in different ways.

In addition, everyone must realize that as a payment system and digital currency, the impact on the transmission of monetary policy should be considered, which is also a consideration for financial stability. If the public spirit, security, stability, protection of privacy, etc. are all considered, but the relationship with monetary policy is not considered, and the degree of support for monetary policy transmission is not considered, it is also dangerous. Because the monetary policy transmission mechanism is an important channel for macroeconomic regulation and control of any economy, if the monetary policy lacks a transmission mechanism, the macro economy will be out of tune. Therefore, I think that such an institution is not qualified for public infrastructure.

Next, I will briefly introduce the so-called DC/EP R&D plan jointly implemented by the People's Bank of China and the industry when I was the Governor of the People's Bank of China. DC (Digital Currency) is a digital currency, EP (Electronic Payment) is an electronic payment; the middle is a slash, meaning that the two can be either a "and" relationship or an "or" relationship. In other words, digital currency and electronic payments do not need to be opposed. I have already talked about it from the taxonomy of terminology. In fact, it is all optional. The purpose is to realize the efficiency, low cost and security of the payment system, not just from the perspective of a certain supplier. Your own technology is the most important choice, only new technology. Therefore, this is also a research and development method that encourages multi-channel R&D and competition while at the same time designing the consequences in a controlled manner as much as possible.

Further, one of the arrangements to support monetary stability and monetary policy transmission is that any payment institution should have a 100% provision, which is also a reference to the practice of Hong Kong's return. Before the return of Hong Kong in 1997, there were two note-issuing banks, namely HSBC and Standard Chartered Bank. The Hong Kong monetary authority, the Hong Kong Monetary Authority, did not issue banknotes directly; later, because Hong Kong returned to the motherland, the Bank of China joined the banknotes. In fact, this is where commercial banks are issuing notes, but the central bank is managed. Among them, an important management method is that each 7.8 Hong Kong dollars must be paid 1 US dollar as a proof of payment. Of course, there are similar other considerations for doing so. That is to say, the issuer cannot be as constrained as the "wild cat bank" of the 1920s and 1930s.

The next step is to take into account the so-called "anti-money laundering" and "anti-terrorism financing" issues that are commonly required and coordinated in the world today. Money laundering and terrorist financing are obviously harmful to society. Therefore, there is a certain public awareness in technology development. Technology may be used for good or for bad aspects; for example, the development of a biotechnology may be good for the treatment of the disease, but it may also be used by some people for biological weapons. Therefore, it is necessary to have some control. After the emergence of a group of electronic payment and digital currency technologies, they have not been widely used, and they have been widely used by people in Darknet, such as tax evasion, money laundering, arms sales, human trafficking, and fake voucher sales. These transactions are expected to be traded anonymously and are expected to be subject to unregulated tracking, so special care must be taken in this regard: the new payment system and digital currency must be able to effectively comply with current “anti-money laundering” and “anti-terrorist financing” requirements.

Finally, cross-border payments are also an important issue. Since emerging electronic payments and digital currencies have had a major impact on the payments industry, it is bound to have a significant impact on cross-border payments. First of all, from a technical point of view, it will bring more possibilities. From the demand side, we acknowledge that there are indeed many inconveniences in the current global cross-border payment, and the efficiency is not high. However, the requirements for cross-border payments and domestic payments vary. Cross-border payments involve monetary policy sovereignty. A country's macroeconomic policy mainly regulates the domestic economy, but it needs to pay attention to the extent to which cross-border payment will affect the regulation of macroeconomic regulation and control and monetary policy sovereignty.

There is another one, whether cross-border payments will affect financial stability. This year's financial stability problem has occurred to a certain extent in emerging markets. We have seen the depreciation of exchange rates and capital outflows in emerging markets. Among them, the first is starting from Argentina this spring, followed by Turkey, South Africa, India, Indonesia, Russia, not Less countries are affected, and the degree is not the same. Therefore, if there is cross-border payment, there is one more factor in considering financial stability.

In addition, just said that if the digital currency is a "stable currency" in China, it must be pegged to the sovereign currency of the country. Then, after international cross-border payment, is there a benchmark to be pegged? I think it may also be necessary to have a benchmark to peg. This benchmark, regardless of the ratio, is somewhat like the International Monetary Fund's Special Drawing Rights (SDR), a mixed currency. Because it is flawed to peg a single currency or peg to gold alone, there is no such stable currency basket that has the ability to accurately pay at the international level. This is also a consideration.

Finally, cross-border payments may also require a global coordinating agency, but there is currently no global central bank. Central banks, especially those in some countries, particularly emphasize that the central bank is serving the domestic economy from a legislative perspective and has no obligation to consider policy spillovers and impact on other countries. But in fact, since the global financial crisis, everyone knows that there is a spillover effect on monetary policy (macroeconomic regulation, including fiscal policy, may have spillover effects), so the world needs coordination.

Therefore, if cross-border payment is realized, electronic payment and digital currency can be greatly improved in efficiency, but there are still many things to be studied, and ultimately it involves the coordination of global authorities or global central banks. To support cross-border payments. In addition, in addition to coordination, some other aspects of the practice must be prevented. For example, some countries now prefer to use financial sanctions, which will have an impact on the structure of money, on electronic payments, and on the characteristics of digital currencies.

Therefore, technically speaking, based on the progress of electronic payment and digital currency, everyone will definitely consider making a difference in cross-border payment. However, this still needs to solve more problems in order to truly make cross-border payments better.

The above is that I have introduced you from various angles to all aspects of electronic payment and digital currency. I have not done any detailed technical discussions, but I hope that the content I will talk about will be instructive, that is, it may be necessary Look at this matter from multiple angles and comprehensively, so as to seize this important development opportunity, develop better and healthier, and then serve the economy more effectively and globally.

thank you all!


This article reprinted from Caixin.com