Former President of Zhejiang Commercial Bank Liu Xiaochun: Seven Conjectures of the Bank of China on Digital Currency

Author: Liu Xiaochun (former Governor of the Bank of Zhejiang, Shanghai New Finance Research Institute)

Source: Beijing News

According to Chinese media recently citing foreign media reports, European Central Bank executive board member Benot Curé said that the European Central Bank is studying whether to develop a digital currency to replace cash. He also warned that Europe is falling behind the United States and Asia.

In recent days, Fan Yifei, deputy governor of the People's Bank of China, said about the digital currency of the People's Bank of China. In the next step, the central bank will follow the principles of stability, security and control, rationally select pilot verification regions, scenarios and service scopes, and continuously optimize and enrich The DC / EP function steadily promotes the introduction and application of digital form of fiat currency.

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No doubt, major countries in the world are stepping up their research on digital currencies. Will China be the first country to launch a digital currency? If the People's Bank of China launches the first digital currency, what impact will it have on global currency patterns? In what scenarios will digital currency applications be more suitable in the future? What impact will the introduction of digital currencies have on the payment field, the existing payment landscape, and commercial banks? Can central bank digital currencies become interest-earning assets? Can digital currencies promote the internationalization of RMB? Focusing on the core issues of these digital currencies, Liu Xiaochun, former president of Zhejiang Commercial Bank and deputy dean of Shanghai New Financial Research Institute, put forward seven conjectures about the digital currency of the People's Bank of China.

Conjecture 1: In what scenarios is the future application of the central bank's digital currency more suitable?

The development of currency, especially the development of currency forms, is first and foremost the need for the development of a commodity economy. The second is due to the continuous innovation of financial technology. This financial technology is not a technology of science and technology, but a technology of finance itself, or business innovation and product innovation. For example, borrowing, asset securitization, etc. Third, the development of science and technology has also promoted the development of currency. Without gold and silver refining technology, there would be no gold and silver coins; without paper and printing inventions, there should be no banknotes. The key to the evolution of currency is that the new currency form should be more convenient for transactions, payment and settlement, and at the same time reduce the management costs and operating costs of currency circulation itself. Although paper money and cash are more convenient and cheaper than metal currencies, there are still many inconveniences, and there are also huge social costs-including the management and issue costs of central banks, the operation and management of commercial banks and commercial institutions. And operating costs. If there are better technologies to produce new currency forms, even if the efficiency is flat, but the cost can be greatly reduced, it will also make a huge contribution to society. And digital currency offers this possibility.

Since the advent of bitcoin, on the one hand people have seen the possibility of this technology in terms of currency issuance, and on the other hand they have seen the reality of this technology breaking through existing regulations to provide a carrier for money laundering and illegal transfer of assets. Regardless of the goodness of technology or the prevention of evils of technology, regulatory authorities in various countries have accelerated their research on this technology. In this regard, it should be said that the People's Bank of China is at the forefront of the world.

Judging from the current plan announced by the People's Bank of China, we are not only at the forefront of speed, but also most open to technology applications. Most institutions, including regulators and commercial institutions, research digital currencies based on blockchain technology, and the People's Bank of China has broken such a limit of thinking. If it is only based on blockchain technology, the use of digital currency can only be limited to the blockchain, and the application scenarios of digital currency have great limitations. In February 2019, J.P. Morgan announced the launch of the blockchain-based J.P. Coin. No application has been reported so far. The reason is that JP Morgan Coin can only be circulated on JP Morgan's blockchain, and the specific scenario has not been confirmed. The digital currency designed by China's central bank can be used online or offline, even the network does not need it, let alone the blockchain? Therefore, the imagination space for using the scene is very large.

Because of the small limitations, what kind of scene is more suitable, it is difficult to simply infer. Because the possibility of technology itself is very simple, the key is that the scenes of various types of financial business and commercial transactions are rich and colorful. This depends at least not on technology, but on the characteristics and habits of specific business and transactions, but also on people ’s habits, culture, Interest, privacy awareness, etc.

The application scenarios of currency include shopping and payment, as well as banking services such as deposits, loans, remittances, and trade settlement, as well as futures trading, spot trading, derivatives trading, foreign exchange trading, stock trading, precious metal trading, bill trading and settlement. Are these very different application scenarios suitable for the circulation of digital currencies? Or, in these fields, is digital currency more advantageous than the current electronic settlement? It's hard to gauge now.

Conjecture 2: How much influence does the central bank's digital currency have on the payment sector?

Regarding the future of digital currency, people have more inferences from the technical perspective, and rarely consider from the application perspective. From the point of view of the application process of paper money, metal money has not been replaced without paper money. The initial paper currency is equivalent to the later bank draft or bank draft. It is a voucher or representative of currency. It is gradually accepted in circulation before it is shaped into a paper currency. When banknotes are issued by the central bank, at the same time, on the basis of bank settlement and clearing, there is an accounting currency or a credit currency. All currency forms are just the specific manifestations of credit currency. The renminbi issued by China's central bank is such a credit currency, and its specific forms include currency figures on bank accounts, that is, bookkeeping currencies, banknotes, and coins. These Renminbi's performance patterns can be arbitrarily changed with each other without any difference. The digital currency issued in the future is also a manifestation of the RMB, which is no different from the current bookkeeping currency, banknotes and coins.

Most modern financial instruments are created on the basis of bookkeeping currency, which is due to the fact that bookkeeping currency breaks through the limitations of physical currency in inter-bank settlement and clearing. Whether digital currencies are superior to bookkeeping currencies in settlement and clearing needs to be tested in practice. In particular, apart from the advantages of peer-to-peer payments, payment and settlement outside the bank account system are as difficult to innovate financial instruments and financial products as cash.

From the perspective of payment applications, the issue of social acceptance still exists. Public payments are generally payments under agreement or contract conditions. From the point of view of payment speed, the electronic payment provided by banks can fully meet the demand. The more critical question is, why should companies abandon interest on deposits and transfer RMB from bank accounts to digital wallets? One more account, or one more wallet, also increases management costs. The same is true for personal payment applications. In addition, as a method of payment, in modern society and future society, what proportion of peer-to-peer payment will account for in the entire payment settlement? If it is a small proportion, then the technical superiority of supporting peer-to-peer payments cannot support the overall superiority of digital currencies.

In fact, whether it is for institutions or individuals, the concern for the obtained currency is whether the currency can be used, whether you can buy things, whether the value of the currency is stable, etc. As to the material and technology of the currency, it is not important of. For example, for a person, if you have a hundred-dollar bill in your hand, you will definitely care whether the bill is genuine or counterfeit. If it is a real bill, you will of course not worry about whether the bill can be used. But do you care what paper this bill is made from? Do you care what printing technology it uses, and do you care about what anti-counterfeiting technology it uses? You don't care about these issues. Of course, if personal curiosity is heavy, it is another matter. Therefore, it is still difficult to say how much influence digital currency will have on the payment field.

Conjecture 3: What impact and change will the central bank digital currency have on the existing payment pattern?

Financial innovation originates from demand, and demand has real needs and hidden needs. Alipay was a real demand for e-commerce development, not a technical issue. At that time, the bank's technology could support this demand, but it was stubbornly institutable and competing with each other, and did not dare to make a bold breakthrough. If banks were willing to open interfaces to each other at that time, the problem of inter-bank payment on the Internet could be solved. If UnionPay was already online at that time, it could also solve the problem of inter-bank settlement. Of course, Alipay still has innovations. It applies the principle of letter of credit settlement to payment settlement to solve the problem of mutual distrust between buyers and sellers. WeChat has discovered the hidden needs in online social networking, and then further expanded to other areas.

The reason why Alipay and WeChat have formed a monopoly is of course very important in terms of its own competitiveness, and more importantly it is in line with people's payment habits. Payment needs universality, and mutual payments can be completed only on the same channel. At the time, the bank could not make instant online interbank payments because the interfaces were not connected, and it could not meet the needs of online transactions. By the same token, many third-party payment agencies are not able to communicate with each other, of course, it is inconvenient to pay. The success of Alipay is not due to the form of online payment, but to open the channels between banks. I don't understand the reason, thinking that if you build a system like Alipay, you can succeed, it is a cat and a tiger. On the other hand, the purpose of payment is transaction, or consumption, not to enjoy the payment itself, as long as it does not affect the transaction much. Under this premise, people tend to follow the crowd, tend to be preconceived, and do not take so much effort to compare and choose. On the other hand, just as there are too many accounts and too many wallets, too many payment accounts and management are troublesome, and it must be concentrated in one or two wallets or accounts. Therefore, the third-party payment monopoly is also a natural consequence.

As for how the central bank's digital currency will affect the existing payment pattern, it depends on how popular the central bank's digital currency is in reality and in which fields or scenarios are more suitable for use. In my opinion, digital currency is not generated based on demand, which is different from Alipay. Although Satoshi Nakamoto's original purpose was to provide a cash-like payment method for online transactions, Bitcoin has deviated from this original intention from the beginning. After that, all the ideas about digital currency are deduced from the technology itself. Of course, there are needs, but these requirements are prohibited by regulation, such as money laundering, cross-border transfer of assets (the so-called cross-border payment is the real meaning), direct currency issuance (that is, without the effort to make money, directly print money) Wait. The digital currency of China's central bank is only a form of RMB, which is unpopular. It often does not depend on the quality of the technology or whether it is advanced or not. It is related to people's habits and ideas. Third-party payments are very popular in China and Asia, but also in Asia, the developed Japanese just like cash payments that lag behind.

Conjecture 4: What kind of changes and impact will the central bank's digital currency bring to commercial banks?

Once the central bank officially issues digital RMB, commercial banks will provide digital currency services. First, to invest in science and technology, build the bank's own digital wallet (equivalent to cash vaults, which we can also call "digital vaults") and the operation of the digital currency operation system with the central bank's digital currency issuance system and with customers' digital wallet Docking; the second is to ensure the free exchange of digital currencies with bookkeeping currencies, banknotes, and coins. In terms of accounts, digital currency accounts must be added in addition to cash accounts. There is a question here-in the accounting subject, is digital RMB, banknotes and coins all under one cash subject, or is there another digital currency subject in addition to the existing cash subject? If not, at least a separate account is required under inventory cash. Third, the agent central bank does a good job of issuing and managing digital currencies to the society, including the return of digital currencies. Fourth, it creates digital wallets for customers, and this number Wallets are probably the biggest difference between digital currency and cash. If customers use cash, they can bring their own wallets or safes, and individuals can also put the cash directly in their pockets. Digital currency must have a special digital wallet, which can only be produced and distributed by the central bank or commissioned by a central bank for commercial banks to produce and distribute.

If digital currency is really popular in circulation, the phenomenon of disintermediation of currency circulation will be more serious, which will affect the proportion of bank deposits in currency issuance. That is to say, with the development of electronic payment, the amount of cash in the circulation managed by the central bank has been greatly reduced, but because of the issuance of digital currency, there is one more digital currency in circulation. However, because of traceability, although digital currencies are not in the banking system, they may be under the control of the central bank.

After the cash is in circulation, it will be damaged and lost. Regardless of the loss, the damaged one must be destroyed, which is a very large cost of cash flow. Digital currency should not be damaged or lost, but because digital currency can be traced back, the circulation process has a complete record. When the digital currency is withdrawn, should the central bank format it to ensure that the digital yuan issued by the central bank is clean ? This should be a management cost for the central bank.

With the introduction of digital currencies, the competition of commercial banks is still a competition of financial services and innovation. As for digital currency, it is mainly the ability to provide digital currency services. If the digital currency service capability is poor, it may affect the bank's deposit business, and of course, its competitiveness. Just like in cash, the ability of counter staff to identify genuine and counterfeit coins and the speed of counting money are very important. If they do not do well, it will affect the absorption of deposits. In addition, the loan business, the bank's risk control ability, the bank's credit evaluation ability, and the disposal of non-performing assets have nothing to do with digital currency, and these will not be affected by digital currency. As for what currency is used to issue the loan, it still depends on the needs of the customer. Generally, it is first entered into the customer's bank account with the accounting currency. The customer can directly remit money, withdraw cash, or withdraw digital currency according to the payment needs. Another example is payment settlement, of course, first of all, the bank's own process efficiency and digitalization level. Cross-bank and cross-system settlements all use the central bank's public system. Clients use digital currencies to pay peer-to-peer, which is a customer's own operation problem and has nothing to do with the bank. In short, the way to win the bank must be the improvement of financial service capabilities and financial innovation capabilities. Fintech helps banks better enhance their capabilities in this regard, but digital currencies may not.

Conjecture 5: Can central bank digital currencies become interest-earning assets?

In the balance sheet, monetary cash is listed in assets. The central bank's digital currency, or digital renminbi, should be classified as "cash" together with renminbi notes and coins. Cash is an asset, but it does not generate interest. Money needs to generate interest and it must be put into use. Assets can only produce benefits if they are put into operation. At this time, they are called "interest-earning assets". If assets are not put into operation, they are "idle assets". The "digital currency" that sleeps in a digital wallet is an "idle asset", of course, not an interest-generating asset.

Digital Renminbi cannot be independent of "RMB" and itself becomes an interest-earning asset, and of course it cannot become an invested asset. It is ridiculous to speculate on the digital currency of the renminbi with renminbi notes, that is, to speculate on the renminbi with renminbi. Foreign currency investment and exchange of RMB in the foreign exchange market is the currency of RMB, not a certain form of RMB.

Investing in RMB interest-earning assets must be RMB-denominated assets such as RMB deposits, RMB bonds, and RMB stocks, not a manifestation of RMB.

Conjecture 6: Digital currency promotes RMB internationalization?

The central bank's digital currency is only a form of RMB, like other existing RMB forms. The internationalization of the renminbi is a matter of the renminbi, and the manifestation of the renminbi are two concepts. The key to the advancement of RMB internationalization lies in three aspects: first, valuation and settlement in international trade; second, whether it can become a reserve currency; and second, the main currency for financial transactions. At present, the first two aspects are making good progress, but the lack of renminbi products in financial transactions and inactive transactions have restricted the further development of the first two aspects. Trade valuation and settlement, reserves, and financial transactions are interrelated. Whether a country ’s currency is accepted internationally and widely and actively used in these three areas is mainly determined by the country ’s economy and politics Power, and these have nothing to do with whether to use digital currency. The reason why the Special Drawing Rights (SDR) of the United Nations International Monetary Fund cannot become an international currency is because the International Monetary Fund and the United Nations do not have their own economic and political strength.

If digital RMB is to be circulated internationally, it must first comply with RMB cross-border settlement management regulations. Under this premise, two issues need to be considered: one is to establish a digital cross-border payment system similar to the current RMB cross-border payment system (CIPS), and all banks handling RMB business, including central banks and commercial banks All must have the ability to issue and withdraw digital RMB, and also prepare digital wallets for all institutions and individuals using digital RMB. And this process is more troublesome than the current system. The second is the entry and exit of offline digital currencies. Countries have quotas on the entry and exit of cash, and customs will check. How to check the entry and exit of digital wallets, and how to manage cross-border payments? These issues need to be studied.

Conjecture 7: If the People's Bank of China launches the first digital currency, what impact will it have on global currency patterns?

Some national central banks are studying digital currencies, but the information is not sufficient, and progress is difficult to estimate. There are also some banks and private institutions doing research, but the information is also more cluttered. Therefore, the Chinese central bank may become the first central bank to issue digital currencies. If the People's Bank of China first introduced digital currencies, it would undoubtedly be of great demonstration significance.

The first is technology demonstration. At present, central banks and private institutions in various countries are making great efforts to study which technologies are used to issue digital currencies. Most of them are based on blockchain technology, but there are various options for what underlying technology and encryption algorithm to use. The People's Bank of China is an open platform this time, not limited to blockchain technology, which is even more significant because it provides more technical possibilities.

The second is the release framework demonstration. This is related to the construction of the digital currency issuance system and operation management system. The central bank of our country adopts a two-tier structure.

The third is a demonstration of social acceptance. This determines whether digital currency has the ability to fully replace the existing currency form, or is only a supplement to the existing currency form, so it is more critical. Of course, digital currencies may not be accepted.

The fourth is a demonstration of social costs. The circulation of each currency form has social operating costs. For example, the social operating cost of metal money is higher than paper money, and paper money is higher than the bookkeeping currency. What is the operating cost of digital currency? The current inference is that its cost will be lower, but this needs to be tested in practice.

The fifth is the extended display model. That is, through the research and development and application of digital currency, the application of related technologies in other aspects of the financial field can be explored. The initial application direction of a technology may fail, but it will often be used successfully in other areas. For example, based on the application of digital currency technology in the field of bills, is it possible to create new financial instruments? Can the settlement method of digital currency be applied to the settlement of other financial instruments? These are all worth looking forward to.

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