Li Lihui, former president of Bank of China: China should master the dominance of new technologies in the digital currency field

Sina Finance News July 7th news, 2019 International Monetary Forum was held at Renmin University of China from July 6th to 7th, and the former president of Bank of China and the head of the China Internet Finance Association blockchain working group Li Lihui attended and gave a speech.

Li Lihui said that in the process of digitalization of the financial industry, the most complicated experience is the digital currency. Digital currency can be divided into legal digital currency, virtual currency, and trusted institution digital currency.

The basic structure of the legal digital currency has to be decided: if the indirect issuance mechanism is maintained, the current mode of operation of the money market will not change fundamentally; if the direct issuance mechanism is adopted, the central bank will have absolute position in the regulation of the money market, but will limit the business. The initial credit capacity of the bank.

The future of virtual currency is waiting for "ruling": big ups and downs, plunging and soaring; some mining, some speculation; some people make money, some people go bankrupt; very few are allowed to become securities, most of them suspected of illegal fund raising.

The “attempts” of trusted institutions’ digital currencies remain to be seen: digital currencies issued by large financial institutions such as Goldman Sachs, JPMorgan Chase and UBS, with trusted credit endorsements, auditable financial assets, reliable financial transactions and The payment platform has a large customer base; Facebook and Libra, founded by 28 institutions, seem to be a digital financial system that attempts to overstep the central bank's authority and subvert the existing monetary system.

Li Lihui suggested that China must accelerate the construction of the digital financial system and master the dominance of digital technology. The full text of the speech is as follows:

Productivity determines the relationship of production and is the basic principle of Marxism. Deng Xiaoping pointed out that science and technology are the primary productive forces. Stanford University professor Brian Arthur said that the economy will change its structure as technology evolves, changing its institutional arrangements. In the past 20 years, the new technological revolution has been accelerating. In the financial sector, we have seen that financial technology innovation has changed the financial service model and management model, improved the efficiency of economic resource allocation, and is also reshaping the financial market.

Technologies such as big data, cloud computing, artificial intelligence and blockchain are all digital technologies. The widespread use of digital technologies to promote financial industry transformation can be called the digitization of the financial industry.

In the process of digitization in the financial industry, people feel the most direct, digital trust. Using big data technology to discover credit and tap credit can expand the scope of credit and help small and micro enterprises solve the problem of financing difficulties. The use of blockchain technology to establish digital trust can form a trusted bond in an environment with weak trust or weak trust, and strengthen commercial credit, saving the time and cost required for credit formation, and is conducive to the development of inclusive finance.

In the process of digitalization of the financial industry, the most complicated thing people feel is digital currency. Digital currency can be divided into legal digital currency, virtual currency, and trusted institution digital currency. The basic structure of the legal digital currency has to be decided: if the indirect issuance mechanism is maintained, the current mode of operation of the money market will not change fundamentally; if the direct issuance mechanism is adopted, the central bank will have absolute position in the regulation of the money market, but will limit the business. The initial credit capacity of the bank. The future of virtual currency is waiting for "ruling": big ups and downs, plunging and soaring; some mining, some speculation; some people make money, some people go bankrupt; very few are allowed to become securities, most of them suspected of illegal fund raising. The “attempts” of trusted institutions’ digital currencies remain to be seen: digital currencies issued by large financial institutions such as Goldman Sachs, JPMorgan Chase and UBS, with trusted credit endorsements, auditable financial assets, reliable financial transactions and The payment platform has a large customer base; Facebook and Libra, founded by 28 institutions, seem to be a digital financial system that attempts to overstep the central bank's authority and subvert the existing monetary system.

In the process of digitalization of the financial industry, people feel the weakest, and it is a digital asset market. Will the development of the digital asset market deconstruct the existing financial landscape? Do some analysis here.

Financial technology innovation is restructuring financial infrastructure. The Internet realizes the massive aggregation and efficient collection of data. The big data cloud computing realizes the deep mining and value discovery of data. Artificial intelligence has the potential to realize the assetization and market pricing of data property rights, and the blockchain may construct distributed and de-intermediation. A certifiable, trustworthy, low-cost digital asset market.

Digital assets can be divided into 2 categories.

The first is the digitization of physical assets. Including financial assets such as deposits, bonds, stocks, notes, real estate, etc., obtained certification, pricing and transactions in the digital asset market to realize the transfer and transfer of property rights; also includes entities such as hotels, houses, automobiles, equipment, tools, attractions, etc. Assets, which are certified, priced, and used in the digital asset market.

The second is the assetization of data property rights. Including the use of digital products such as games, music, film and television, books, lectures, etc., in the digital asset market to obtain certification, pricing and trading; also includes digital products through securitization arrangements, income rights, and thus investment value, Trading in the digital asset market by share. Owners of such digital assets can retain ownership and transfer full use rights and share-based income rights.

The digital asset market may have characteristics that distinguish it from traditional financial markets.

First, digital asset market transactions have the potential to dilute intermediaries. Using the consensus algorithm of blockchain, intelligent contract mechanism and intelligent pricing and intelligent matching mechanism of artificial intelligence, it is possible to establish a fair equivalence and peer-to-peer direct trading mechanism in digital asset market theory, thereby diluting the intermediary and even canceling the intermediary.

Second, the transaction costs of the digital asset market are likely to be significantly reduced. The establishment of a digital trust mechanism can save trust costs and credit risk costs, thereby reducing the risk pricing of digital financial assets. For asset-based digital products, with the expansion of the scope of use rights, the theoretical boundary transaction costs may tend to zero, and the marginal rate of return may rise.

Third, digital currency is likely to become the value scale, payment instrument and storage means of the digital asset market. Adapted to different trading scenarios, counterparties in the digital asset market may comprehensively evaluate credit endorsements, transaction efficiency, transaction costs and other factors, and choose the appropriate digital currency. The legal digital currency and the trusted institution digital currency are most likely to become digital asset markets. Financial trading tools.

The boundary of the enterprise lies in cost, and the core of finance lies in the intermediary. The cost reduction, de-intermediation effect of digital asset market and the wide application of digital currency may have a subversive impact on the traditional financial architecture.

Based on the present and looking at the future, I have summarized three "ifs":

If the market cost is lower than the internal costs of the financial institution, then the corresponding business of the financial institution may be eliminated.

If the economic function of financial intermediation is diluted, then the space for financial intermediation may be compressed.

If the application of digital currency goes beyond traditional currency, then the deposit resources of commercial banks and the corresponding credit capacity may be weakened.

For financial institutions, the challenges brought by financial technology innovation will be concentrated on cost and competitiveness. The cost of a financial institution includes labor costs, operating costs, and risk costs. The effect of cost savings and competitiveness improvement that can be achieved by large-scale operation can also be achieved by the successful application of new technologies. Financial institutions that have mastered the core technology and application capabilities of digital finance have the potential to significantly reduce labor costs, operating costs and risk costs, thereby achieving excess profits while achieving superior core competitiveness.

To this end, the goal of financial technology innovation is not only new processes, new products, new services, but more importantly new customers, new markets, and new values. The "four-dimensional scale" should be grasped.

First, the efficiency is higher. It provides financial transaction services that are faster and more convenient than existing technology platforms.

Second, the cost is lower. The construction cost and operation and maintenance cost are lower than similar technology platforms, and transaction costs, service costs and supervision costs are lower than similar financial products and services.

The third is the economic scale with commercial value. Only those products and services that are truly distinctive, affordable, attractive, and sticky can be competitive and reach the economic scale of commercial value.

Fourth, it has the reliability and security recognized by the society. The reliability and safety of new technology financial applications should be tested and verified by R&D institutions and application agencies, followed by third-party inspections by socially recognized authorities. New financial products and services must also be confirmed by financial regulatory agencies. .

Promote the integration of technology, capital, data, market and other resources, and reconstruct the business cooperation model with efficiency as the center, which can improve the efficiency and efficiency of financial technology innovation. Small and medium-sized financial institutions should take advantage of the development of the group, learn from each other's strengths, complement each other's advantages, share resources, and build the strength to compete with large financial institutions. Small and medium-sized financial institutions can form a financial technology alliance, jointly invest in financial technology research and development units, concentrate scientific and technological resources, unify research and development, unify maintenance, share results, and share costs. Technology companies and financial institutions can establish long-term cooperative business models in accordance with the principle of complementary advantages and benefit sharing.

The major macro challenge is that if digital currency becomes a large-scale financial transaction tool, it will inevitably reconstruct the operation mechanism of the money market; if digital assets are to be scaled up, it is bound to reconstruct the financial market; if digital technology reaches a large-scale de-intermediation Trading is bound to restructure the financial intermediation system.

The construction of digital financial systems and standardization have become an urgent issue.

First, we must master the dominance of digital technology. Implement the national strategy of digital technology, the national team plus private teams, large and medium plus small, accelerate the development of digital technology, and master independent intellectual property rights in key areas of digital technology. Intensify the development of the next generation computing architecture, the goal is to ensure the fairness and correctness of mathematical algorithms in the digital society of the future, to ensure the privacy and reliability of data, to ensure the full cycle security of data, and to ensure the mathematical algorithm Speed ​​and efficiency.

Second, we must accelerate the construction of the digital financial system. Based on ensuring the sustainable development of digital finance, based on preventing systemic financial risks, we must establish a digital trust mechanism, and promptly formulate digital financial services such as legal digital currency issuance, digital asset market supervision, digital currency supervision of trusted institutions, and virtual currency supervision. Institutions, pay close attention to the development of national standards for digital financial technology, and strive to establish a professional digital financial technology application review and verification system.

Source: Sina Finance