Rereading Mu Changchun’s speech: The central bank’s digital currency is coming out, but the people in the currency are over-excited.

On August 10, at the 3rd China Finance 40th Yichun Forum, Mu Changchun, deputy director of the People's Bank of China's payment and settlement department, introduced the practice of the central bank's legal digital currency DC/EP (DC, digital currency, digital currency; EP, electronic payment, and electronic payment have aroused widespread concern in society.

01 opened the flower for 5 years, is it the result?

We must know that the People's Bank of China has started research on the central bank's digital currency since 2014, and it has been five years now. However, the central bank is extremely cautious because the introduction of the central bank's digital currency may have an unprecedented impact on the entire financial system. Mu Changchun said in his speech: "The central bank's digital currency can now be said to be ready." The meaning of this is thought-provoking.

It is important to say what is said, but what is more important is who the speaker is. For some time, Mu Changchun, deputy director of the central bank's payment department, was regarded as the successor of Yao Qian, the director of the central bank's digital currency research institute. For example, Tencent’s “First Line” once reported that after Yao’s former director of the Central Bank’s Digital Money Research Institute retired in October 2018, many close to the regulators said that the post of director of the Central Bank’s Digital Money Institute would not assign a special person. Serve, or will be concurrently appointed by the Deputy Director of the Central Bank Payments Department, Mu Changchun. Although there has been no public appointment information for half a year, from the current speech made by Mu Changchun, he should already be responsible for related matters.

The point in time of speaking is also extremely critical. The central bank’s digital currency has been studied for five years. Every year’s public information gives people unlimited expectations and delusions, but every year they stay in “research” rather than “practice,” not to mention the “landing”. Why do you want to say "call out" at this time? Or, why is it that at this time, saying "calling out" can cause such great concern? This has a lot to do with Libra.

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In June 2019, the Libra white paper, a digital currency project of American technology giant Facebook, was born, which caused a huge wave in the world. Chinese academics and central bank insiders have also expressed great concern. Some experts pointed out that once Libra is proud to implement it, it may become a tool for further aggression and extension of the US dollar hegemony. At this key node, the central bank stressed in its second half of 2019 that it would "accelerate the pace of research and development of China's legal digital currency (DC/EP), track the development of domestic and international virtual currency, and continue to strengthen Internet financial risk remediation."

It can be said that although the central bank's digital currency has been studied for five years, this is the first time that this level of attention has been received within the central bank.

The difference between 02 Mu Changchun's speech and Yao Qian's article

This latest speech by Mu Changchun deserves our careful reading. But the most important thing is to read the difference from Yao's point of view. From these differences, we can see how the central bank's research on digital currency has turned and what changes have taken place in its judgment.

One of the most obvious shifts is the attitude towards blockchain technology. Unlike Yao, who is keen on the technological revolution, Mu Changchun pays more attention to the understanding and elaboration of the monetary and financial systems themselves.

In the speech, Mu Changchun mentioned: "In fact, we do not presuppose the technical route, that is to say, we are technically neutral at the central bank level… whether you are a blockchain or a centralized account system, is it electronic payment or The so-called mobile currency, you can adapt to any kind of technical route." That is to say, the central bank digital currency does not necessarily use blockchain technology.

This attitude is also transmitted to the attitude of smart contracts. Mu Changchun stressed that although the central bank's digital currency can load smart contracts, the monetary function (transaction medium, value storage, accounting unit) has determined that if it loads a smart contract that exceeds its monetary function, it will degrade it. To become a valuable ticket and reduce the degree of usable use will have an adverse impact on the internationalization of the RMB. He pointed out that the central bank can load smart contracts that favor the monetary function, but it will be more cautious about smart contracts that exceed the monetary function.

Another important change is to emphasize the centrality of the central bank in the central bank's digital currency system. Mu Changchun pointed out that although the natural attributes of encrypted assets are decentralized, the DC/EP of the central bank's digital currency must adhere to a centralized management model. The reason for this decision is to ensure and strengthen the central bank's macro-prudential and monetary regulation functions, and to avoid the over-issuance of designated operating institutions.

What is even more interesting is that Mu Changchun believes that adopting a two-tier system to issue and convert the central bank's legal digital currency is conducive to curbing the public's demand for encrypted assets and consolidating national currency sovereignty.

There are indications that the central bank's thinking on digital currency has risen from the beginning to the exploration of blockchain technology and decentralization, to the mature financial system considerations; its attitude has risen from the amazement and imagination of the technological revolution to technology. Serving finance. Finance is the essence of the central bank's digital currency, and technology is only a tool for serving financial attributes.

Although the currency circle is happy with the central bank's digital currency, it is believed that the introduction of the central bank's digital currency is a big plus, but in fact the central bank's vision is far wider than the minds of the currency. In the end, the central bank's digital currency may not use blockchain technology at all. The "digital currency" of the central bank and the "digital currency" that the currency circle people are currently seeing are not the same thing. This is worthy of our consideration.

From a certain point of view, perhaps the "digital currency" that the currency circle calls is not really a "digital currency". It is more appropriate to call it "encrypted assets." It’s just that at a certain historical stage, we used the wrong name.

03 Attachment: Mu Changchun's speech

Today I want to talk about the practice of the central bank's legal digital currency, DC/EP. Just now, Director Shao said, I remember that in the summer of 2014, President Zhou said one day that we should study the possibility of issuing the central bank’s digital currency. There were a lot of questions to answer at the time. For example, why should I issue my own central bank digital currency when electronic payment is so developed? For another example, what kind of technical route should this technical route take? Is it a blockchain or a centralized account system? For example, interest payment does not pay interest, how the organization structure is arranged, and so on. We have studied these issues and have also achieved some results.

From 2014 to the present, the research on the central bank's digital currency DC/EP has been going on for five years. Since last year, the relevant personnel of the Digital Money Institute has been 996. To do related system development, the central bank's digital currency can now be said to be ready. It is.

Let me first talk about whether to use the blockchain technology. At the very beginning, the PBC Digital Money Research Group made a prototype and completely adopted the blockchain architecture. Later, I found a problem because our legal digital currency is replaced by M0. If we want to reach the retail level, first of all, high concurrency is a problem that cannot be avoided. At the time of the double eleven last year, the online transaction peak reached a total of 92,771 pens / sec. In comparison, bitcoin is 7 per second. Ethereum is 10 to 20 pens per second, and Libra is based on the white paper it just sent, 1,000 pens per second. It is conceivable that the issuance of digital currency in a large country like China cannot achieve the high concurrency performance required by retail using a pure blockchain architecture. So in the end we decided that the central bank should maintain technical neutrality and not presuppose technical routes, which means that it does not necessarily depend on a certain technical route.

DC/EP takes a two-tier operating system. The single-tier operating system is the direct issuance of digital currency by the People's Bank of China. The People's Bank of China first converts digital currency to banks or other operating agencies, and then converts them to the public. This is a two-tier operating system.

There are several considerations for adopting a two-tier operational architecture:

First of all, China is a complex economy with a vast territory and a large population. The economic development, resource endowment, population education and acceptance of intelligent terminals are all different. Therefore, the issuance of legal digital currency in such an economy is a complex systematic project. If a single-tier operating structure is adopted, it means that the central bank has to face all the public alone. In this case, it will bring great challenges to the central bank. From the perspective of improving accessibility and increasing public willingness to use, we believe that a two-tier operational framework should be adopted to deal with this difficulty.

Second, the People's Bank of China decided to adopt a two-tier structure, in order to give full play to the resources, talents and technological advantages of commercial organizations, promote innovation, and compete for excellence. The IT infrastructure and service system of commercial organizations are relatively mature, and the processing capacity of the system is relatively strong. They have accumulated certain experience in the application of financial technology, and the talent reserve is relatively sufficient . Therefore, if the existing infrastructure, human resources and service systems of commercial banks are in place, it is a huge waste of resources to start another stove. The central bank and commercial banks can cooperate closely, do not presuppose technical routes, fully mobilize market forces, achieve system optimization through competition, and jointly develop common operations. Later, we found that the organizational structure of Libra and the organizational structure adopted by our DC/EP were actually the same. Third, the two-tier operating system helps to resolve risks and avoid excessive concentration of risks. The People's Bank of China has developed and operated a number of payment clearing systems and payment systems, including the size of the network, including the silver networking, but the clearing system we have done is facing financial institutions. However, the issuance of central bank digital currency should directly face the public. This involves thousands of households. It is not easy to develop and support such a large system by the central bank alone, and to meet the needs of efficient, stable and secure, and to enhance the customer experience. So from this perspective, whether from the choice of technical route, or from operational risk, business risk, we can avoid excessive risk concentration to a single institution through two-tier operation design. Fourth, if we use a single-tier operational architecture, it will lead to financial disintermediation. Under the single-tiered delivery framework, the central bank directly faces the public to put digital currency. Compared with the commercial bank deposit currency, the central bank’s digital currency is better than the commercial bank’s deposit currency in the case of central bank credit endorsement, which will squeeze commercial bank deposits. The effect will affect the ability of commercial banks to lend and increase the dependence of commercial banks on the interbank market. In this case, the capital price will be raised, the social financing cost will be increased, and the real economy will be damaged. At that time, the central bank will have to subsidize commercial banks. In extreme cases, it may even subvert the existing financial system and return to the central bank’s “great unity” before 1984. The pattern.

To sum up, the central bank is the upper level and the commercial bank is the second level. This dual delivery system is suitable for our national conditions. It can not only use existing resources to mobilize the enthusiasm of commercial banks, but also smoothly improve the acceptance of digital currency. Here we will also talk about the impact of the two-tier operating system on monetary policy. The two-tier operating system will not change the currency debt and debt relationship in circulation. In order to ensure that the central bank's digital currency is not over-received, the commercial institution will pay the central bank 100% in full, and the central bank's digital currency will remain the central bank's debt. Guarantee, with unlimited liability. In addition, the two-tier operating system will not change the existing money delivery system and the dual account structure, and will not compete with the commercial bank deposit currency. Since it does not affect the existing monetary policy transmission mechanism, it will not strengthen the procyclical effect under the pressure environment, so that it will not have a negative impact on the real economy.

In addition, the adoption of a two-tier system for distribution to the central bank's legal digital currency is also conducive to curbing public demand for cryptographic assets and consolidating our national currency sovereignty. (Carbon chain value Note: Please note that what is said here is "to curb the public's demand for crypto assets and consolidate China's currency sovereignty")

Let me talk about the technical route. Just now Director Shao said that it is possible to use blockchain. Here I will talk about it. In the original design, I used to have the idea of ​​using blockchain. I also envisioned the architecture of “one currency, two banks, three centers”. But in fact, we don't presuppose the technical route. That is to say, we are technology neutral at the central bank . This digital currency has both the characteristics of digital currency and the value system, as well as the loose coupling of accounts. The characteristics of unlimited compensation.

From the perspective of the central bank, whether you are a blockchain or a centralized account system, whether it is electronic payment or so-called mobile currency, you can adapt to any kind of technical route. Of course, your technical route should meet our threshold, for example, because it is for retail, at least to meet the high concurrency needs, at least 300,000 pens / sec. If you can only meet Libra's standards, you can only exchange internationally. It takes 40 minutes to make a transaction like Bitcoin, and the entire supermarket must be lined up at the door. From the perspective of the central bank, we have never presupposed a technical route, not necessarily a blockchain. Any technical route is possible. We can call it Long Term Evolution. In addition, for the common people, the basic payment function between the electronic payment and the central bank digital currency is actually relatively vague. Of course, the central bank digital currency that we will launch in the future will be very different from electronic payment in some functions. In addition, we also talked about at the beginning. The two-tier operating system is conducive to fully mobilizing market forces and achieving system optimization through competition.

In addition, it should be emphasized that under the two-tier operating system arrangement, we still have to adhere to a centralized management model. Everyone knows about cryptographic assets, and its natural attributes are decentralization. And DC/EP must adhere to a centralized management model, why?

First, the central bank's digital currency remains the central bank's liability to the public. This creditor-debtor relationship has not changed with changes in currency patterns. Therefore, it is still necessary to ensure the central position of the central bank in the delivery process. Second, in order to ensure and strengthen the macro-prudential and monetary regulation functions of the central bank, it is necessary to continue to adhere to a centralized management model. Third, the second layer specifies the operating agency to exchange currency, and centralizes the management to avoid over-issuing the currency of the designated operating agency. Finally, because the dual account system has not changed during the entire redemption process, the original monetary policy transmission method should be maintained, which also needs to maintain the central bank's central management status. Centralized management is different from electronic payment tools. From a macroeconomic point of view, the transfer of funds from electronic payment instruments must be completed through traditional bank accounts, and the account is tightly coupled. For the central bank digital currency, we are loosely coupled with the account, that is, the value transfer from the traditional bank account, so that the transaction link is greatly reduced. In this way, the central bank's digital currency can be circulated as easily as cash, which is conducive to the circulation and internationalization of the renminbi. At the same time, it can achieve controllable anonymity. We must guarantee the anti-money laundering and anti-terrorism financing while ensuring that both parties are anonymous. And anti-tax evasion), there is a balance between the two. Third, the current central bank digital currency design focuses on M0 replacement, not M1 and M2 replacement. This is because M1 and M2 have now been electronically and digitally implemented. Because it is based on the existing commercial bank account system, there is no need to digitize it with digital currency.

In addition, the interbank payment clearing system that supports M1 and M2 circulation, the online banking system of commercial banks, and various types of online payment methods of non-bank payment institutions are increasingly efficient and can meet the needs of China's economic development. Therefore, using the central bank's digital currency to do an alternative to M1 and M2 will not help improve payment efficiency and will cause huge waste of existing systems and resources. In contrast, existing M0 (banknotes and coins) are easy to be forged anonymously, and there is a risk for money laundering, terrorist financing, and the like. In addition, electronic payment tools, such as bank cards and Internet payments, are based on the tight coupling of existing bank accounts, and the public's demand for anonymous payments cannot be fully met. Therefore, the electronic payment tool cannot completely replace M0. Especially in areas where account services and communication networks are poorly covered, people are still more dependent on cash. Therefore, our DC/EP design maintains the properties and main features of cash, and also meets the needs of portable and anonymous. It is a better tool to replace cash.

In addition, everyone has also seen that Libra is also collateralized by the so-called 100% reserve assets, but it does not limit itself to M0, as it is likely that Libra will enter the credit market with currency derivation and currency multipliers. This may lead to currency overshoot.

In addition, because the central bank's digital currency is an alternative to M0, it does not pay interest on cash, it will not trigger financial disintermediation, and will not have a big impact on the existing real economy. Since the central bank's digital currency is an alternative to M0, it should comply with all current regulations on cash management, anti-money laundering, and counter-terrorism financing, and report to the People's Bank of China on the large amount of digital currency and suspicious transactions.

In addition, we have repeatedly stressed that the central bank digital currency must have high scalability, high concurrency performance, it is used for small retail high-frequency business scenarios. In order to guide the central bank's digital currency for small-scale retail scenarios, not to squeeze out deposits and avoid the pro-cyclical effects of arbitrage and stress, we can set transaction limits and balance limits according to different levels of wallets. In addition, some exchange costs and frictions can be added to avoid procyclical conditions in a stressful environment.

In addition, the central bank's digital currency can also provide conditions for the central bank to implement negative interest rates if needed.

The last question I want to emphasize is the attitude towards smart contracts. The central bank's digital currency can load smart contracts. The point to emphasize here is that, as mentioned earlier, the central bank's digital currency is still a currency with infinite legal characteristics, which is an alternative to M0. Its monetary function (transaction medium, value storage, accounting unit) determines that if it is loaded with a smart contract that exceeds its monetary function, it will degenerate it into a valuable ticket, reduce the degree of usability, and internationalize the RMB. It has an adverse effect, so we will load smart contracts that are good for the monetary function, but we will remain more cautious about smart contracts that exceed the monetary function.

Author: Whitefish

Editor: Tang Wei

Produced: Carbon Chain Value (ID: cc-value)

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