This article explores what exactly is a central bank digital currency
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Part 1: Definition of Central Bank Digital Currency
This section will focus on the following two questions:
1.1 Definition of central bank digital currency;
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1.1 Definition of Central Bank Digital Currency
The digital currency of the People's Bank of China (DC/EP), English is "Digital Currency/Electronic Payment", which is a unique English expression used by the People's Bank of China for internal research and development. The International Monetary Fund (IMF) refers to the central bank's digital currency as CBDC, which is "Central Bank Digital Currency" in English, which actually describes the same concept. The CBDC used in this article refers to the usual central bank digital currency (without national restrictions), and if (DC/EP) is used, it specifically refers to China's upcoming central bank digital currency.
Going back to the concept of central bank digital currency, there is currently no uniform and clear definition in the world. The definition given by the IMF is more refined and accurate:
“CBDC is a new form of money, issued digitally by the central bank and intended to serve as legal tender.”
"The central bank's digital currency is a new form of currency that is digitally issued by the central bank and has legal payment capabilities."
What is clear is that central bank digital currency (CBDC) will not have a physical entity, but it will fully reach every resident and organization in the country, including potentially overseas individuals and businesses, like cash. At the same time, the central bank's digital currency can make it easier to pay any amount in point-to-point payments (such as between individuals, between individuals and enterprises, and between enterprises and enterprises (cash needs to be realized face-to-face).
Generally, central bank digital currency can be divided into two versions: "Account Based" and "Token Based". The account version needs to correspond to the account system of the financial institution when transferring money, while the Token version only needs to have a digital wallet. Mu Changchun, deputy director of the Payment and Settlement Department, mentioned in his speech that the central bank's legal digital currency is an alternative to M0. M0 refers to cash in circulation. Therefore, the digital currency of the People's Bank of China is a Token version, not an account version. (This is also a deliberate decision of the central bank, which we will describe in detail in the next article on the interpretation of the policy environment)
In short, the account version of CBDC is very close to the current commercial bank account system, but in the design system of CBDC, the main difference between the two is that the central bank's digital currency requires accounts to be opened in the central bank instead of commercial banks. The specific process is: the payer needs to log in to the account of the central bank - apply for payment to the account of the payee in the central bank - the central bank's general ledger records settlement and transaction information - complete the transaction.
This is also the single-tier structure that Mu Changchun mentioned was rejected by the central bank. Because the account version of CBDC will increase the financing cost of commercial banks, and the credit of the central bank is better than that of commercial banks, it will also lead to various problems such as financial disintermediation and excessive risk concentration.
The Token version of CBDC actually has a few more steps in the transfer process than cash transactions, but it also brings the convenience of not having to meet with both parties. Compared with physical cash, the central bank's digital currency CBDC is more complicated and difficult to identify the authenticity of both parties. Therefore, it is often necessary to introduce an external authentication mechanism to verify the authenticity of the transaction, which also leads to the fact that the transaction may not be 100% like cash. of anonymity. The degree of anonymity depends on the disclosure of digital wallet registration information. For the upcoming DC/EP in China, we will also interpret anonymity.
The verification and settlement of the Token version of CBDC are divided into centralized and decentralized solutions, depending on the technology used. Decentralized settlement usually uses distributed ledger technology (DLT). Due to the requirements of efficiency, scalability, and transaction completion, the distributed ledger technology will verify and manage the settlement of CBDC on the permissioned chain that the central bank participates in the management of.
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1.2 The difference between the central bank's digital currency and cash, demand deposits, electronic cash (the balance in Alipay/WeChat), and stable coins
The difference between the central bank's digital currency and cash is very clear, but many people still have no specific concept of the difference between it and bank demand deposits, electronic cash (the balance in Alipay/WeChat), and stable coins. For consumers in particular, it can be difficult to perceive the difference between these forms of fiat currency. Coupled with the emergence of a large number of cryptocurrencies and Libra launched by Facebook, what is the difference between these and the central bank's digital currency CBDC?
IFM made a Money Trees, and made a detailed distinction on how to define different types of currencies:
The first level is the different types of "payment forms", which are divided into two categories: "subject correspondence" (Object) and "declaration correspondence" (Claim). "Subject Correspondence" is to use money to buy coffee, and the transaction is completed instantly, without the interaction of information flow. "Claim correspondence" refers to the transfer of a "Value of Claim", such as buying coffee with a credit card, transferring the value claim in the bank to the merchant, and the transaction requires the exchange of information flow. The payment of "declaration correspondence" can also be completed instantly. Although it relies on a complex and developed payment system, it provides users with a lot of convenience. Therefore, the most payments in the world are of the "declaration correspondence" type.
The second level is the difference in value. In the "declaration corresponding" payment method, whether the value corresponding to the currency redemption statement is fixed (fixed value redemptions) or floating, distinguishes different types of currency forms. The fixed redemption guarantee is priced at the agreed face value in advance. We deposit 10 euros in the bank, and we can definitely withdraw (redeem) 10 euros in cash. We put 100 yuan in Alipay, and we can confirm the redemption of 100 yuan. Fixed value redemption is a form of creditor’s rights. Redemption statement. If the corresponding value of the declaration redemption is a floating Variable value redemptions, the currency declared redemption can be exchanged into other currencies of different values, which is an act of corresponding declaration with the market value of assets. This method is more like an equity tool . In the payment method corresponding to the subject, there is no concept of redemption, and the value corresponds to the face value of the currency in your hand or in the local account.
The third level is the difference in support, that is, what institution supports the fixed value redemption. There are government credit endorsement support, and there are also redemption endorsements relying on the stable operation of the enterprise and legally agreed mortgage assets (such as security deposits).
The fourth level is the type of technology used for settlement, that is, centralized or decentralized.
Through the distinction of these four dimensions, it can help us distinguish 5 different currencies/payment methods:
Central Bank Money, central bank currency, the main categories of which are cash and CBDC;
B-money,bank cash. The most commonly used "statement correspondence" type of currency, our deposits in commercial banks fall into this category;
E-money,electronic cash. A new form of currency that is prominent in the payment field is also used as a tool for creditor's rights. The value redemption needs to be endorsed by corporate credit, and at the same time, stable operations and legally agreed mortgage assets (such as deposits) are used for redemption endorsement. E-money with centralized technology routes includes Alipay, WeChat Pay, and Paytm in India. Most of the compliant stablecoins (Stablecoins) in the decentralized technology route also use the underlying E-money of the blockchain by definition, including TrueUSD, USDC, Gemini, Paxos, etc.
Cryptocurrency, cryptocurrency (digital currency). Issued by non-financial institutions, priced in its own account system, the currency is issued by the blockchain or mined. Cryptocurrencies such as Bitcoin and Ethereum fall into this category.
I-money, a potential new form of currency payment, is very similar to E-money in its basic situation, the only difference is that the value corresponding to the statement redemption is not fixed, similar to equity instruments, corresponding to gold, a basket of currencies, and stock investment Floating assets such as portfolios, such as Digital Swiss Gold (DSG) and I-money backed by Novem gold.
Another example of I-money is Facebook's Libra. Libra corresponds to an asset portfolio composed of bank deposits and short-term government bonds (called the Libar Federal Reserve), and Libar coins can be converted into legal tender at any time according to the value of the corresponding assets. But it does not have any price guarantee, and the value corresponding to the statement redemption is not fixed, so it is classified into the category of I-money.
Many people think that if the central bank’s digital currency replaces M0 cash as the goal, in fact, China is now about to enter a cashless society. E-money electronic cash can already replace cash. Does the central bank’s digital currency need to be icing on the cake? There are also many questions about centralized management and transaction anonymity.
In fact, we can draw conclusions now. We believe that the attempt of the central bank's digital currency is a very necessary innovation!
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Part2: Functional Evaluation and Quantitative Comparison of the Central Bank’s Digital Currency
The main issues we will discuss in this chapter are:
2.1 From the perspective of demand, construct a currency evaluation model;
2.2 Use the currency evaluation model to quantitatively analyze the mainstream currency forms;
2.3 Quantitative comparison of central bank digital currency (CBDC) and bank deposits (M1), cash (M0), and Libra;
2.4 From the perspective of supply, discuss the impact of central bank digital currency.
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2.1 From the perspective of demand, construct a currency evaluation model
From an economic perspective, money has three main functions: a unit of valuation, an instrument of payment, and a store of value.
Valuation unit (a unit of account): Currency is used as the scale function of valuation, and the same unit of currency can theoretically be exchanged for the same amount of goods;
Payment tool (a means of payment): as a payment medium to facilitate transactions;
Store of value (a store of value): A secure form of value storage that prevents multiple risks from occurring.
From the perspective of currency users, people tend to choose a method that can "maximize personal interests", "minimize transaction costs" and "minimize transaction risks". Based on the two dimensions of currency function and user needs, the IMF has constructed the following currency assessment model. According to the two horizontal indicators of "payment function" and "stored value function", and the three vertical indicators of "maximization of benefits", "minimization of transaction costs" and "minimization of risks", some conclusions about the advantages and disadvantages of currency forms are summarized. Quantitative indicators.
Scalability: support any amount of money;
Acceptance: people and people, people and enterprises, enterprises and enterprises, equipment requirements, network requirements;
Eatra Service Additional services: whether other financial services are available, such as loans, advisory services, etc.;
Transaction transaction: whether it is easy to use, and the transaction fee is high or low;
Anonymity: the level of anonymity;
Settlement anti-settlement risk: the delay between agreeing to a transaction and receiving funds;
Returns: the usual interest payments;
Theft&Loss risk of theft and loss: the ability to roll back fraudulent transactions, fraud and network security, and recover losses;
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2.2 Use the currency evaluation model to quantitatively analyze the mainstream currency forms
According to the above currency evaluation model, we quantitatively evaluate the mainstream currency forms in the market, including cash, cryptocurrency, electronic cash, bank deposits, and central bank digital currency (CBDC). Jinqiu Blockchain Research Institute has made a radar map of currency evaluation according to different currency characteristics. The larger the coverage area, the greater the advantage of the currency. On each indicator, 5 is the lowest and 30 is the highest.
cash
Cash is not a popular payment method in a general sense. The main problem is that the transaction cost is high (the two parties need to meet physically, there are many restrictions on cash withdrawal, etc.), it is easy to be stolen (especially for large amounts), and there is no return (lack of interest ). But the advantages of cash are also outstanding, such as timely settlement, no risk of information system, and complete anonymity.
Cryptocurrency (Digital Assets)
The least attractive payment method, which gets a low score for settlement risk due to the speed of settlement. At the same time, there are obvious shortcomings in terms of theft and loss, transaction costs, additional services, and acceptability. The only advantage is in the dimension of anonymity.
e-money
Electronic cash has obvious advantages and is widely accepted because of its extremely low transaction costs (usually the customer experience is good, and there are payment scenarios designed by Internet companies), and there are many additional service scenarios. Due to regulatory and regulatory restrictions, the scalability of electronic cash has the opportunity to cover large-value payments, but compared with online banking payments for bank deposits, its acceptability is somewhat limited in B2B scenarios, and it is as anonymous as bank deposits The degree of sexuality is not high.
commercial bank deposit
A variety of additional services can be superimposed, and the developed online banking support also brings high acceptance (2C and 2B are widely accepted). In addition, the payment is highly scalable (supporting large and small payments), and the transaction dimension The payment fee is very low and there is no settlement risk. The above five dimensions are full marks. The risk of loss and theft and the default risk (covered by account insurance) are relatively manageable, the only shortcoming is that it is not anonymous.
Quantitative Data Prediction of CBDC
CBDC is a brand-new form of currency. Since there is no large-scale use of CBDC in the market, we can only dynamically predict its quantitative indicators.
CBDC has two certain advantages, one of which is anonymity. Compared with bank deposits and electronic cash, CBDC has a higher anonymity score, although it will not be completely anonymous like cash. Another advantage is the risk of default. In the previous article, we mentioned that CBDC is the currency of the central bank in the currency classification. Therefore, compared with electronic cash and bank deposits, its anti-default risk score is full.
Of course, there are some common advantages between CBDC, bank deposits, and electronic cash, such as low settlement risk and transaction costs, and a high degree of acceptance.
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2.3 Quantitative comparison of central bank digital currency (CBDC) and bank deposits (M1), cash (M0) and Libra
In order to understand the Central Bank Digital Currency (CBDC) more intuitively, we focus on comparative analysis with three representative forms of currency: bank deposits (M2), cash (M0) and Libra.
CBDC vs bank deposits
Compared with bank deposits, CBDC has obvious disadvantages. In the quantitative radar chart, bank deposits have obvious advantages in the four core indicators of "scalability", "extra service", "return", and "stolen or lost", but "anonymity" and "anti-default risk "In terms of performance, it is not as good as CBDC. In fact, China's financial system is very developed, and the function of bank deposits as a form of payment has been quite complete. At present, China's M1 and M2 have realized electronic and digitalization.
CBDC vs cash
Compared with cash (M0), CBDC has potential advantages in the dimensions of "acceptability", "extra service", "transaction", and "return". Cash is easy to forge anonymously, and there are risks such as money laundering and terrorist financing. And in areas where account services and communication network coverage are poor, the reliance on cash is still high. With the development of the digital economy, banknotes are becoming more and more inappropriate in many scenarios, and replacing cash with CBDC is a very worthy pilot option.
CBDC vs Libra
As Libra is a kind of i-money, we also predicted the parameters based on the public information provided by Facebook, and made a quantitative comparison with the central bank's digital currency (prediction parameters).
Libra will be limited in large transfers, so the "scalability" score is medium; Libra's acceptance in the B2B scene will be limited, so the "acceptability" index score is lower than e-money; Considering the protection of any anonymity and user information, considering Facebook’s criminal record, the “anonymity” score is lower than CBDC but higher than e-money; Libra’s “anti-settlement risk” and “anti-default risk” scores are lower than the central bank Currency and B-money are also lower than e-money such as Alipay that accepts financial supervision; in terms of "extra services" and "transactions", Libra and e-money can get full marks.
Of course, with the clarification of supervision and the development of Libra itself, Libra, like e-money, will gradually improve its scores in various dimensions, but this is beyond the scope of our research report.
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2.4 Discuss the impact of central bank digital currency from the perspective of supply
Looking at the impact of central bank digital currency (CBDC) from a supply perspective, that is, from the central bank’s regulatory perspective, is a very complicated topic. Due to the length of this research report and the main research direction, we only briefly discuss the framework.
The soundness of the financial system Financial Integrity
Depending on the design, CBDC can enhance or weaken the soundness of the country's financial system (Financial Integrity).
In terms of currency design, regulators often face a game between the soundness of the financial system and the privacy of legal users. For example, cash transactions can be completely anonymous, without the need for an account system and without transaction records, allowing cash transactions to protect the privacy of users. But it also brings a series of problems such as money laundering, tax evasion, and terrorist financing.
Replacing cash (M0) with CBDC also involves this game. We can assume that if the CBDC limits the amount of each transfer, and sets transaction identity authentication and transaction records at the same time, but the transaction identity and information are encrypted and kept secret from any third party including the government, unless there is a criminal suspect, A court order is required to decrypt transaction details.
This model will fully avoid the risk of financial integrity, but how to establish an effective privacy protection mechanism that users can trust needs to be explored in practice. Another possibility is a completely anonymous form that does not limit the upper limit of transfers and does not record transaction identities and information. The problem with this method is that it will undermine existing financial integrity. It should be emphasized that in the design of CBDC rules, there will be some flexible rules in the field of KYC (customer identity verification), but strict and effective control will be carried out in AML (anti-money laundering) and CFT (anti-terrorist financing).
Financial stability Banking intermediation
If CBDC and bank deposits form a competitive relationship, CBDC will affect financial stability and financial disintermediation. This is also the deep consideration why China's central bank digital currency (DC/EP) adopts a two-tier structure and is only used to replace M0.
Director Mu also explained this part in detail in his speech: "If we use a single-tier operating structure, it will lead to 'financial disintermediation'. Under the single-tier delivery framework, the central bank directly faces the public to launch digital currency. The central bank digital currency Compared with commercial bank deposit currencies, the former is more competitive than commercial bank deposit currencies under the credit endorsement of the central bank, which will have a crowding out effect on commercial bank deposits, affect the ability of commercial banks to issue loans, and increase commercial banks' dependence on the interbank market In this case, the price of funds will be raised, social financing costs will be increased, and the real economy will be damaged...The central bank's digital currency is a substitute for M0, so no interest is paid on cash, and it will not trigger financial disintermediation , and will not have a major impact on the existing real economy."
Effective Monetary Policy Effective Monetary Policy
The introduction of CBDC will not significantly change the effectiveness of central bank monetary policy. There are four main channels for monetary policy transmission, including base interest rate, bank lending channel, credit channel and currency exchange rate channel. IMF research shows that CBDC has relatively weak influence on monetary policy in the above four main transmission channels.
This paper uses the IMF model to quantitatively analyze the mainstream currency forms in the market from the dimensions of demand and supply. In the world, Jinqiu Blockchain Research Institute is also the first institution to give a clear quantitative forecast of CBDC and Libar quantitative forecast.
Since they are all up-to-date and the amount of information is limited, indicators need to be done under several assumptions. In the third part of the research report, we will focus on the central bank digital currency (DC/EP) to be launched by the People's Bank of China, and make quantitative forecasts and policy interpretations on DC/EP.
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Part3: Interpretation of China's central bank's digital currency DCEP policy
The first two parts of the "Central Bank Digital Currency Research Report" mainly discussed CBDC (central bank digital currency in a broad sense). Now let us focus on the digital currency DC/EP of the Central Bank of China. Simply summed up in one sentence, my country's central bank digital currency DC/EP is launched in a loosely coupled manner, and adheres to a centralized management model and a two-tier operating system, focusing on the replacement of M0.
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3.1 The "centralized" management model of the central bank's digital currency and the utopia of Hayeks
Many people still have some doubts and misunderstandings about the "centralized" management model of the central bank's digital currency DC/EP. This research report tries to answer such a question from the perspective of supply and demand: "Why should central bank digital currency be designed with centralized management instead of decentralized management?"
Since encrypted assets such as Bitcoin are also called "digital currencies", the natural attributes of these encrypted assets are "decentralized", so many Bitcoin fundamentalists believe that the central bank's digital currency is designed to be "decentralized" The route has a technical advantage. The concept of currency denationalization embodied in Bitcoin was actually first proposed by Hayek in the 1970s. 50 years later, many people used this theoretical basis to discuss the design of central bank digital currency.
The currency form is an inevitable product of social and economic development to a certain stage, and is inseparable from economic operation and economic development. Hayek's concept of denationalization of currency and its currency system design have many flaws in theory, and it is not operable in practice; while the "decentralization" design seems beautiful, but it cannot be used as a legal currency. The core function of legal tender on the supply and demand side. So these ideas are just a kind of economic utopian thinking.
From the perspective of demand, the "centralized" management mode can maintain the relative stability of the currency value, so as to exercise the most basic function of currency as a commodity exchange medium; from the perspective of supply, only the "centralized" management mode can guarantee the country's The primary means of regulating the economy, that is, the effectiveness of monetary policy.
"Centralized" management can maintain the most basic functions of currency
The most basic function of money is to act as a medium of commodity exchange (a tool for payment)
We mentioned the three major functions of money in Part II: a unit of account, an instrument of payment, and a store of value. Acting as a medium for commodity exchange (a tool for payment) is the essential attribute and most basic function of currency, and it is also a distinctive sign that currency is different from other things.
The function of the "unit of account" of currency ultimately serves its function of "means of payment". means of value storage, but it cannot be said the other way around, currency is the means of "value storage", because in addition to currency, there are many things that people can also use as value storage, to a large extent, because currency is used as a medium of exchange , so it will inevitably play the role of "value storage".
Therefore, the essence of currency is the medium of commodity exchange (payment tool), and the functions of "unit of account" and "value storage" of currency are only natural derivatives of its function as a medium of exchange.
Centralized control can ensure the stability of currency value. Relatively stable value is a prerequisite for a currency to act as a commodity medium of exchange. As a means of circulation, what people care about is the stability of the value of money, not the form of money itself.
The so-called "decentralization" without centralized issuing and regulating institutions is a core feature of many encrypted assets like Bitcoin. Because they lack the central adjustment mechanism of the standard currency, it is difficult to smooth out the fluctuation of the currency value; the violent fluctuation of the currency value provides a huge arbitrage space, which further promotes excessive speculation and forms a vicious circle.
The central adjustment mechanism with the monetary authority as the core is the basic guarantee for the normal operation of the modern credit currency system. Modern credit currency is regulated by the national monetary authority, and its own value will not fluctuate violently, so it cannot be viciously hyped.
Yao Qian, former director of the Central Bank’s Digital Currency Research Institute, said in the report: “The core principle of the central bank’s digital currency is the centralization of control. The stability of the currency value of the central bank’s digital currency is the most basic attribute, which requires a central institution to enforce constraints. It is the natural law of currency development.”
"Centralized" management can ensure the effectiveness of monetary policy
Monetary policy is one of the main means for the state to regulate the economy and an important part of the state machine
According to Sheng Songcheng, a professor at China Europe International Business School, monetary policy is a series of measures taken by the central bank to indirectly affect aggregate demand by regulating and controlling money supply, bank credit, and market interest rates, so as to balance aggregate demand and aggregate supply. Compared with fiscal policy, which is also a means of aggregate adjustment, the fine-tuning function of monetary policy is more obvious. Fiscal policy instruments such as taxation, national debt, and budget revenue and expenditure are quite rigid once determined within a certain period of time and cannot be easily changed, while monetary policy is relatively flexible. Unexpected changes often occur in economic and financial operations, and one of the basic responsibilities of monetary authorities is to make timely and appropriate monetary policy decisions in response to changes in the situation.
At present, the central banks of various countries are making full use of monetary policy to regulate economic operation. The macro-control practices of major Western countries in recent decades have also confirmed that "monetary policy is crucial."
After the Second World War, Western countries adopted Keynesian policy suggestions one after another and used fiscal policy to stimulate effective demand. This policy helped Western countries get out of depression and maintain economic prosperity for more than 20 years when a large amount of production capacity was idled after the war.
However, after the 1970s, due to the monopoly of oil exporting countries to raise prices and the accumulation of internal contradictions in the economic systems of Western countries, the complications of high inflation and relatively stagnant economic growth generally appeared in various countries. Under such circumstances, some governments have successively adopted the policy propositions of the Monetary School, using monetary policy as the main tool for macroeconomic regulation and control. Monetary policy has played a positive role in maintaining price stability and promoting economic growth.
In response to the latest international financial crisis, the United States implemented a quantitative easing monetary policy, which has achieved remarkable results. This is a classic case of the effectiveness of monetary policy, and it is also the latest practice of using monetary policy to regulate the economy and resolve crises.
It can be said that monetary policy is one of the most important means for the country to regulate the economy. Monetary policy, like state machinery such as taxation and courts, is the basis for the operation of a modern state and an important part of state machinery. As long as there is no fundamental change in the social organization form of the state, the currency system based on state credit will always exist.
"Decentralized" central bank currency design is not conducive to effective monetary policy
If a "decentralized" central bank digital currency is designed, it will be difficult to play the role of economic adjustment means. While emphasizing that DC/EP must adhere to the "centralized" management model, Deputy Director Mu Changchun also pointed out the potential problems of the "decentralized" management model:
First, the central bank's digital currency is still a liability of the central bank to the public. This creditor-debt relationship has not changed with the change of currency form. 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 central bank’s macro-prudential and monetary regulation functions, it is necessary to continue to adhere to the centralized management model; third, the second layer designates operating agencies to carry out Currency exchange requires centralized management to avoid over-issuance of currency by designated operating agencies; finally, because the binary account system has not been changed during the entire exchange process, the original monetary policy transmission method should be maintained, which also needs to be maintained The status of central bank management.
Hayek's idea of currency denationalization and the design of its currency system have many flaws in theory, and it is not operable in practice. After 40 years of silence, this idea has aroused people's discussion again due to the emergence of Bitcoin. However, the currency form is an inevitable product of social and economic development to a certain stage, and is inseparable from economic operation and economic development. The currency form of market-oriented management or "decentralized" management is just a Utopia in design.
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3.2 Quantitative Policy Interpretation of the Central Bank of China's Digital Currency DC/EP
According to the public information released by the People's Bank of China, we conducted a forecast assessment of the central bank's digital currency DC/EP. The information for the assessment comes from "Vice President Fan Yifei: Some Considerations on the Central Bank's Digital Currency" recently released by the People's Bank of China's public account and "Mu Changchun, Payment Secretary of the People's Bank of China: The digital currency of the People's Bank of China adopts a two-tier operating system, focusing on M0 Replacement" two articles. Different from other media interpretations, we summarize and reconstruct information according to the dimensions of the currency evaluation model, and give a quantitative evaluation forecast of DC/EP (5 points are the lowest and 30 points are the highest).
"Default risk anti-default risk" 30 points
Fan Yifei, Vice President: "The central bank's digital currency is a substitute for M0 and has unlimited legal repayment." The score of anti-default risk is the same as cash, with unlimited legal repayment, so it is a full score.
"Anonymity" 20 points
Fan Yifei, Vice President: "...If there is no third-party anonymity for transactions, personal information and privacy will be leaked; but if complete third-party anonymity is allowed, it will encourage crimes such as tax evasion, terrorist financing, and money laundering. So for To strike a balance, it is necessary to achieve controllable anonymity and only disclose transaction data to the central bank as a third party. Under the loosely coupled account system, operating institutions can be required to asynchronously transmit transaction data to the central bank on a daily basis, which is convenient for the central bank to grasp the necessary data to ensure Regulatory goals such as prudential management and anti-money laundering can be achieved, and the systemic burden on commercial institutions can also be reduced."
It can be seen from the above statement that what the central bank needs to achieve in the digital currency DC/EP is controllable anonymity. The scope of currency anonymity includes whether "traders" and "transaction details" can be disclosed to transaction parties, third parties and government regulators. Controllable anonymity guarantees the basic anonymity traders need. It can be expected that anonymity will generally remain available to the government, except when required by a court or administrative order to declassify transaction details.
"Return" does not accrue interest 5 points
Vice President Fan Yifei: "Because the central bank's digital currency is a substitute for M0, interest should not be paid on it. This will neither trigger "financial disintermediation" nor lead to inflation expectations. Correspondingly, it will not It will have a big impact on the existing monetary system, financial system and the operation of the real economy.
The central bank's digital currency DC/EP does not pay interest, so this indicator is the same as cash, with the lowest score of 5 points.
"Scalability" 20 points
Vice President Fan Yifei: "Because the central bank's digital currency is a substitute for M0, all current regulations on cash management, anti-money laundering, and anti-terrorist financing should also be complied with. In order to cooperate with anti-money laundering and other related work, relevant institutions can be required to provide information on the central bank's digital currency. Report large and suspicious transactions to the central bank. At the same time, in order to guide the central bank's digital currency to be used in small retail business scenarios, not to crowd out deposits, and to avoid arbitrage and pro-cyclical effects in stressful environments, it can be set daily and The cumulative transaction limit is set every year, and a large amount of reservation exchange is stipulated."
The central bank's digital currency DC/EP is designed to set daily and annual cumulative transaction limits to avoid arbitrage and pro-cyclical effects in stressful environments. This is somewhat similar to our daily cash withdrawal limit at the bank counter, which helps guide the use of DC/EP in small-amount scenarios, so the scalability score of Scalability is about 20 points.
"Transaction transaction" 20 points
Vice President Fan Yifei: "When necessary, we can also consider implementing hierarchical charges for the exchange of the central bank's digital currency. There is no charge for small-amount, low-frequency exchanges, and higher fees are charged for large-amount, high-frequency exchanges and transactions to increase exchange costs. Institutional friction."
The design concept of the digital currency DC/EP of the People's Bank of China should be free to use in small and low-frequency transactions, while charging higher fees for large and high-frequency exchanges and transactions. Therefore, the transaction cost score is 20 points, which is slightly lower than the "transaction" dimension score of bank deposits and electronic cash. However, compared with cash, since two people no longer need to meet in the physical world, the score of the "transaction" dimension has been greatly improved.
"Extra Service Extra Service" 15 points
Although there is no direct expression of "extra services" in the reference materials, we can judge the design ideas of the "extra services" of the central bank's digital currency from the central bank's description of "smart contracts". Fan Yifei, Vice President:"The central bank's digital currency ... assumes the functions of value scale, circulation means, payment means and value storage. The original cash did not carry any other social and administrative functions. The "Regulations of the People's Republic of China on the Administration of Renminbi" stipulates that deliberate damage to renminbi is prohibited. Therefore, adding additional social or administrative functions to cash is actually suspected of damaging the renminbi... Loading smart contracts other than the functions of the legal currency itself will affect its legal compensation function, and even make it fade into a valuable ticket. Reducing the degree of free use of my country's central bank's digital currency will also have an adverse impact on the internationalization of the renminbi. It will also reduce the velocity of money circulation, affecting the transmission of monetary policy and the central bank's performance of macro-prudential functions. At the same time, it may also infringe on the privacy of citizens, which is not conducive to the protection of personal rights and interests. Therefore, smart contracts that are beneficial to currency functions can be considered, but we should be cautious about smart contracts that exceed currency functions. "
It can be seen that additional services can be added, but they are limited to services related to the basic functions of currency such as value scale, means of circulation, means of payment, and value storage. Credit and other services cannot be derived like bank deposits and electronic cash. Mu Changchun also explained the hidden dangers of deriving other additional services in the comparison with Libra: "You have also seen that Libra is also mortgaged with so-called 100% reserve assets, but it does not limit itself to M0, because there may be When Libra enters the credit market, there will be currency derivatives and currency multipliers. This may lead to a situation where currency is overissued.” The scoring of the following three parameters cannot find a direct expression about DC/EP, but it can be inferred from the existing information:
"Acceptance" 25 points
DC/EP replaces M0 and can be used in C2C, B2C, and B2B transaction scenarios. At present, cash has been limited in many transaction scenarios, and digital scenarios will be more popular in the future, so the score of "acceptability" is slightly higher than the 25 points of cash.
"Settlement settlement risk" 30 points
Like cash, the central bank's digital currency DC/EP can be settled in real time, so the settlement risk score is full.
"Theft&Loss risk of theft and loss" 15 points
Regarding anonymity and the prevention of theft and loss, the controllable anonymity mentioned above can provide a certain guarantee, and it is traceable to illegal activities, rather than completely anonymous like cash. In addition, the management of DC/EP in digital wallets has the same network risks as electronic cash. Therefore, the predicted score of this item is slightly lower than that of e-money, which is not anonymous at all, with 15 points.
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Part4: Interpretation of the technical route of the central bank's digital currency DCEP
When it comes to the technical aspects of the central bank's digital currency, the most commonly heard are blockchain technology (Blockchain), distributed ledger technology (Distributed Ledger) and distributed database technology (Distributed Database). Understanding the specific differences between these technologies is a prerequisite for discussing the choice of technical routes.
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4.1 Blockchain, Distributed Ledger and Distributed Database
In order to understand the differences between Blockchain technology (Blockchain), Distributed Ledger technology (Distributed Ledger), and Distributed Database technology (Distributed Database) more clearly, we need to establish a simple database classification model. The definition is clarified.
4.1.1 Database Technology Classification Model
To classify different database technologies, we divide them into a two-dimensional four-quadrant model based on whether the data storage method of the database is distributed and whether the data management method is decentralized.
Data storage method Data Storage, as the name implies, refers to the storage method of data;
Data management method Data Management refers to the permission management of how the stored data is used, including read and write permissions, change permissions, delete permissions, etc. In centralized databases and most distributed databases, administrators have the authority to read and write data, change data, and delete data. In a distributed ledger, management authority can only read data or add data.
According to this model, it helps us to better distinguish distributed databases, distributed ledgers and blockchain technologies:
Distributed Database Distributed Database (DD) distributed database is a logically unified database composed of multiple physically dispersed database storage units connected by computer network. Distributed database management systems use consensus mechanisms to ensure fault-tolerant communication, and provide concurrency control through timestamp and locking mechanisms. Most of the distributed database DDs are logically centralized in the management system. The main distributed databases include: 1. Peer network node data stores; 2. Distributed SQL data warehouses; 3. Hadoop; 4. NoSQL; 5. NewSQL; 6. Distributed Ledger (DL) is a distributed ledger. Distributed databases (DD) also have consensus algorithms, common ones include Paxos or Raft.
Distributed Ledger Distributed Ledger (DL) Distributed Ledgers Technology/DLT is a database that is shared, replicated and synchronized among network members. There is no central administrator or centralized data store. Each network member replicates and stores an identical copy of the ledger, and each node of the network is automatically updated independently. Distributed ledger (DL) is a decentralized, multi-version concurrency control mechanism built on the basis of distributed database (DD) using cryptography to achieve consensus without trusting a third party. Unlike distributed databases, distributed ledger data management systems are also decentralized. R3's Corda and IBM's Hyperledger are distributed ledger technologies.
The biggest difference between the Blockchain Blockchain and the distributed ledger is that the Blockchain uses cryptographic signatures and forms data records into blocks and connects them into chains. The blockchain is essentially a growing list of records, and its data records use an "add-only" structure, that is, only data is allowed to be added to the chain, and it is impossible to tamper with or delete already entered data.
4.1.2 Relationship among the three technologies
If a formula is used to describe the relationship between these three technologies, the "subset relationship" is most appropriate:
Blockchain technology ⊆ distributed ledger technology ⊆ distributed database technology
Every blockchain is a distributed ledger, but not every distributed ledger is a blockchain. Every distributed ledger (DL) is a distributed database (DD), but not every distributed database is a distributed ledger.
Distributed ledger can be regarded as the initial action of forming a block chain, but it does not need to build a chain connecting the blocks. What needs to be realized is to store the ledger distributedly on many different servers, so that Communicate with each other to ensure accurate and timely recording of transactions.
Through the above expression, we can also get the following formula:
Distributed database (DD) + decentralization of database management system = distributed ledger (DL)
Distributed ledger (DL) + cryptographic signature and linking data records into a chain = blockchain Blockchain
4.1.3 Narrowly defined blockchain and broadly defined blockchain
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4.2 Comparison of Distributed Database and Distributed Ledger
It is known that blockchain belongs to distributed ledger technology. Next, we will focus on analyzing the advantages and disadvantages of distributed database and distributed ledger technology:
4.2.1 Different Value Propositions
There is a big difference between distributed database technology and distributed ledger technology, the core of which is that the underlying value propositions of the two parties are different. The traditional distributed database core focuses on data storage and query, while the core value proposition of distributed ledgers (including blockchain) is to establish a new ecology of trusted data assets and automatic trusted services, and the attributes of data services are relatively rudimentary.
4.2.2 Triangle problem Trillemma
Distributed database technology and distributed ledger technology are both facing their own "impossible triangle" problem, that is, the trade-offs and games in the technical optimization route.
The Trilemma of distributed ledger technology refers to the trade-off between security, decentralization and scalability. For example, sacrificing the degree of decentralization can easily achieve high security and scalability.
Trilemma of distributed database technology, as a data service provider, database managers must make a trade-off between business support, engineering implementation complexity, and hardware iterative upgrades. (Due to space constraints, I won’t go into details here, but it must be clear that the root causes of the respective limitations of the two technologies lie in these two “impossible triangles”)
4.2.3 Limitations of Distributed Databases
System construction costs, especially in the inter-system communication part;
Complex access structure, the original technology for effectively accessing data in a centralized system is no longer applicable in a distributed system;
Data security and confidentiality are difficult to handle;
Hardware upgrade iterations.
4.2.4 Limitations of distributed ledgers (including blockchain)
Scalability The problem that distributed ledger technology has always faced is the problem of scalability. This is due to the distributed architecture. For each transaction, all nodes in the system must keep an account, and all data must be calculated and stored. If the consensus algorithm is not well optimized, nodes with low performance may drag down the performance of the entire blockchain. To meet retail-level commercial requirements, high concurrency requirements must be met, such as at least 300,000 transactions per second as mentioned by Director Mu.
Security Many people think that the security of the blockchain is the best. In fact, this understanding also has certain deviations. The blockchain does not have a native encryption mechanism, and still has to rely on traditional encryption mechanisms. Its security means that you cannot change the ledger, as long as it is recorded, it cannot be tampered with and irreversible, but it does not mean that it protects personal information well. This security does not include the security of private assets. If a hacker intercepts the private key of your encrypted assets (such as Bitcoin), your Bitcoin will be stolen. This account is also recorded on the blockchain and cannot be tampered with. That is to say, if you steal it, you will not be able to get it back.
Privacy Protection As a shared transparent ledger, how to protect the privacy of recorded business secrets? If it is a public chain, its node information is completely open. As long as you become one of the nodes, you can copy all the data of other nodes. In fact, there is no privacy at all. Although the information is anonymous, through data mining, coupled with node data, the true identity of anonymous nodes in the real world can be discovered. So from this perspective, there are no secrets on the public chain. If it is a consortium chain, how can the privacy protection between nodes that are permitted to participate in bookkeeping be realized? Since the blockchain does not have a native encryption mechanism, it is not difficult to break it in theory.
Legal Issues The Bank for International Settlements mentioned a point in the "Principles of Financial Market Infrastructure", that is, you need to specify the time point when each transaction is completed. Once this time point is determined, you can determine the time point when the transaction is finally completed. This A point is a point that cannot be rolled back. If there is no such a clear point in time, it will lead to a series of legal and economic problems. In addition to the above problems, the distributed ledger technology represented by the blockchain also has problems in storage, interaction between systems, business continuity, etc., because of the space relationship, I will not expand it in detail.
4.2.5 Summary
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4.3 Technology selection analysis of DCEP
Because distributed databases and distributed ledger technologies have their own advantages and disadvantages, the Digital Currency Research Institute of the Central Bank has long had the idea of designing a hybrid database that combines traditional distributed databases and distributed ledgers to differentiate and process data and give full play to their respective advantages. Learn from each other.
Director Mu Changchun proposed in his speech that the central bank’s digital currency will maintain technology neutrality, and there is no preset technical route. It does not necessarily have to be a blockchain, but any technology will do. He also mentioned in the latest "get" course that the design logic of DC/EP is similar to that of Libar in many ways. Libra's technical choice is a layered combination of centralized distributed processing architecture and blockchain technology. Hybrid technology route, "the structure is layered, because only layering can improve processing performance, the transactions at the bottom are all centralized processing, because of centralized processing, the speed will be very fast, and when it reaches the top layer, which is the final settlement The first layer uses the blockchain, and there will not be many nodes, because the more nodes there are, the slower the speed will be.”
Disassemble Libar's technical route: centralized distributed processing architecture = centralization (data management) + distributed processing (database) = distributed database (DD)
A layered hybrid technology route combined with blockchain technology: transaction processing layer (using DD), settlement layer (using DLT)
We can also deduce the technical route of DCEP: what is certain is that in order to meet high concurrency, the underlying transaction processing layer of the central bank's digital currency DC/EP must use a distributed database Distrbuted Database. As for whether the settlement layer uses a distributed ledger Regarding technology, Director Mu did not give a clear answer. However, he mentioned that the central bank authorized several designated operating institutions to adopt different technical routes for DC/EP research and development, and the main technical difference between different routes is the technology adopted by the settlement layer.
• Long-term evolution of technology
In the digital world, keys are the most important thing to users. In addition to the database technology discussed above, the central bank is also paying attention to various developing security technologies and trusted technologies, so as to ensure the end-to-end security of the central bank's digital currency DC/EP in the transaction process.
The background cloud can use trusted technology, the front desk can use chip technology, and the transmission process can use channel security technology. When choosing a technical route, the transformation at the application level must be carried out according to actual business needs. System construction does not stick to any technology, but only maintains the technical concept of long-term evolution.
epilogue
epilogue
The Digital Currency of the Central Bank of China (DCEP) may be the next milestone change in the evolution of currency. Judging from the history of currency evolution, the most basic currency functions may not change, but the form of currency existence has been evolving with the needs of users.
In a digital world, many economic behaviors have quietly changed. In the era of the Internet of Everything and the future where the boundary between the physical world and the digital world is gradually blurred, users' demand for currency will also undergo tremendous changes, so the evolution of currency forms is inevitable.
About the author: Liu Mingrui, senior vice president of Jinqiu Technology, vice president of Jinqiu Blockchain Research Institute; member of the Collaborative Computing Committee of China Computer Association; main research directions include: central bank digital currency, blockchain integrated application, incentive and Collaborative computing, data privacy protection.
Quote|Reference
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