Battle on the digital frontier: Interpreting the upcoming central bank digital currency

通证通

特邀专栏作者

2019-08-12 10:09 (UTC+8)

This article is about 6142 words, reading the full article takes about 9 minutes

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1 CBDC has been planned for a long time, why is it launched at the current time?

Accelerate the launch of CBDC and actively respond to Libra challenges. In June 2019, the Libra white paper was released, which aroused huge repercussions around the world. In "Facebook issued currency, can Libra be refined into a super-sovereign currency?" "In the article, we proposed that Libra will have a certain impact on the legal currency of sovereign countries. The currencies of countries with poor government credit may be squeezed out of the market, while countries with good government credit will take the initiative to fight. The central bank's announcement at the current point in time that the CBDC is "ready to emerge" is a manifestation of actively responding to Libra's challenge.

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2 What is a two-tier system and what is the significance of a two-tier system?

China's CBDC will adopt a two-tier operating system, that is, the upper layer is the People's Bank of China, and the second layer is commercial institutions.

It is said that the choice of the "two-tier operating system" for the central bank's digital currency is mainly due to considerations such as performance, user habits, risk control, and impact on the existing financial system:
The central bank's digital currency is bound to face the retail scene and the public, while the performance of Bitcoin and Libra cannot meet high concurrency. After a period of research, it was decided to adopt a two-tier system.
The issuance of central bank digital currency by a major country is a complex systematic project.
The IT infrastructure application and service system of commercial banks and other institutions are relatively mature, with a huge user base and service habits have been formed; the talent pool is relatively sufficient, and there are many IT experts; the system has strong processing capabilities and has accumulated experience in financial technology applications. Have a certain amount of experience.
Through the design of two-tier operation, excessive concentration of risks on a single individual can be avoided.
Single-tier delivery will lead to "financial disintermediation". The central bank's direct release of digital currency to the public will have a crowding out effect on commercial bank deposits and affect the ability of commercial banks to issue loans; in extreme cases, it will also subvert the existing financial system, and a "big unification" situation in which the central bank dominates the world appears.
The double layer will not change the creditor-debt relationship of currency in circulation, will not change the existing currency delivery system and binary account structure; will not affect the existing monetary policy transmission mechanism.

Although the current specific information about the central bank's digital currency is still limited, it is enough to see that the central bank attaches great importance to the research and development of CBDC and has made considerable progress after years of research and development of CBDC. Many details in operation have been taken into account, and the implementation of CBDC is just around the corner.

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3 Defend the digital frontier and promote the internationalization of RMB

The research and development of China's CBDC has been widely concerned by the market. We believe that the launch of China's CBDC is of great significance in at least the following three aspects:

Defend digital sovereignty. We believe that in the future, digital sovereignty will constitute part of the comprehensive national strength of all countries, and digital sovereignty will be at least as important as financial sovereignty. Starting from underdeveloped countries and small countries, Libra will have an impact on all countries. The more active a country is in the face of Libra, the less impact it will receive, and the more initiative it will take in the digital currency trend.

Promote the internationalization of RMB. For China, making full use of its experience in digital payment and combining blockchain technology and digital currency can further promote the internationalization of RMB in a digital way.

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4 China's R & D is accelerating, and the digital war is about to break out?

The research and development of CBDC in various countries is accelerating, gradually entering the experimental and pilot stage from the research stage. In early 2019, the Bank for International Settlements conducted a survey of 63 central banks, including the central banks of countries (regions) such as China, the United States, Japan, South Korea, Britain, and France, showing that 70% of central banks were conducting research and development on CBDC in 2018, an increase compared to 2017. Most are still in the research or experimental stage, but many countries are moving from the research stage to the experimental stage.

Before Libra, the research and development of global CBDC was not in a hurry. The countries that have launched CBDC are all third-world countries. The main purpose is to achieve de-dollarization or reverse domestic economic difficulties. After the release of the Libra white paper, major powers have shown enough attention. In 2019, especially after the release of the Libra white paper, the research and development of CBDC in various countries seems to be accelerating.

In March 2019, the Central Bank of the Bahamas announced a pilot program called Project Sand Dollar, which aims to serve the upcoming central bank digital currency of the Bahamas;

In April 2019, the deputy governor of the Riksbank stated that the possibility of issuing digital currency e-krona in the next ten years exceeded 50%;

On May 2, 2019, the Monetary Authority of Singapore and the Bank of Canada issued a joint announcement stating that the two parties conducted a successful payment experiment on cross-border and cross-currency payments of encrypted digital currencies;

On May 8, 2019, Wipro, the technology partner of the Bank of Thailand, announced that the Bank of Thailand is advancing its digital currency project by building a blockchain-based prototype solution;

On July 11, 2019, Turkey's eleventh development plan talked about the creation of a central bank digital currency;

On July 19, 2019, the deputy governor of the Bank of Thailand announced that the central bank's digital currency research project in cooperation with the Hong Kong Monetary Authority is entering the third phase.

As one of the world's major economies, the launch of China's CBDC is of great significance. The digital war around digital currency is already imminent. The accelerated launch of China's CBDC may be the first shot to defend digital sovereignty in various countries. Seize certain opportunities in the war.

Fourth, if we use a single-tier operating structure, it will lead to financial disintermediation. Under the single-tier delivery framework, the central bank launches digital currency directly to the public. Compared with the commercial bank deposit currency, the central bank digital currency is more competitive than the commercial bank deposit currency under the credit endorsement of the central bank, which will squeeze commercial bank deposits. This will affect commercial banks' ability to extend 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. At that time, the central bank will have to subsidize commercial banks. In extreme cases, it may even subvert the existing financial system, returning to the "big unification" of the central bank before 1984. pattern.

Let me talk about whether to use blockchain technology. At the very beginning, the digital currency research team of the People's Bank of China made a prototype and fully 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 an unavoidable problem. During Double Eleven last year, Netlink’s transaction peak reached 92,771 transactions per second, compared to 7 transactions per second for Bitcoin. Ethereum has 10 to 20 transactions per second, and Libra has 1,000 transactions per second according to the white paper it just released. It is conceivable that the issuance of digital currency in a big country like China cannot achieve the high concurrency performance required by retail with a pure blockchain architecture. So in the end we decided that the central bank should maintain technical neutrality and not preset technical routes, which means that it does not necessarily rely on a certain technical route.

DC/EP adopts a two-tier operating system. The single-tier operating system is where the People's Bank of China directly issues digital currency to the public. The People's Bank of China first exchanges the digital currency to banks or other operating institutions, and then these institutions exchange it to the public. This is a two-tier operating system.

There are several other considerations for adopting a two-tier operating structure:

First of all, China is a complex economy with a vast territory and a large population. The economic development, resource endowment, population education level and acceptance of smart terminals are all different in different regions. Therefore, issuing legal digital currency in such an economy is a complex and 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 availability and enhancing the willingness of the public to use it, we believe that a two-tier operating structure 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 institutions, promote innovation, and compete for excellence. Commercial organizations have relatively mature IT infrastructure and service systems, and relatively strong system processing capabilities. They have accumulated a certain amount of experience in the application of financial technology and have a relatively sufficient talent pool. Therefore, it would be a huge waste of resources to start a new business in addition to the existing infrastructure, human resources and service systems of commercial banks. Institutions such as the central bank and commercial banks can cooperate closely without presupposing technical routes, fully mobilize market forces, achieve system optimization through competition, and jointly develop and operate together. Later we discovered that the organizational structure of Libra is actually the same as the organizational structure adopted by our DC/EP back then.

Third, the two-tier operating system helps to defuse risks and avoid excessive concentration of risks. The People's Bank of China has developed and operated many payment and settlement systems and payment systems, including large and small amounts, including UnionPay, but the clearing systems we originally made were all for financial institutions. However, the issuance of central bank digital currency must directly face the public. This involves thousands of households. It is not easy to develop and support such a huge system only by the central bank itself, and to meet the needs of efficiency, stability and security, and to improve customer experience. So from this point of view, whether it is in terms of technical route selection, operational risk, or commercial risk, we can avoid excessive concentration of risks in a single institution through the two-tier operation design.

To sum up, the central bank is the upper layer, and the commercial banks are the second layer. This dual investment system is suitable for our national conditions. It can not only mobilize the enthusiasm of commercial banks by using existing resources, but also smoothly improve the acceptance of digital currency.

Here I also want to talk about the impact of the two-tier operating system on monetary policy. The two-tier operating system will not change the creditor-debt relationship of the currency in circulation. In order to ensure that the central bank’s digital currency is not overissued, commercial institutions pay the central bank’s full and 100% reserve funds. The central bank’s digital currency is still the central bank’s liability, and the central bank’s credit Guarantee with unlimited legal indemnity. In addition, the two-tier operating system will not change the existing currency delivery system and binary account structure, and will not compete with commercial bank deposit currencies. Since it will not affect the existing monetary policy transmission mechanism and will not strengthen the pro-cyclical effect in a stressful environment, it will not have a negative impact on the real economy.

In addition, adopting a two-tier system to issue and exchange the central bank's legal digital currency is also conducive to curbing the public's demand for encrypted assets and consolidating our national currency sovereignty.

Talk about the technical route again. Just now Director Shao said that it is possible to use the blockchain. Let me say here again that in the original design, there was an idea of using blockchain, and the architecture of "one currency, two warehouses and three centers" was also envisioned. But in fact, we do not preset the technical route, that is to say, at the level of the central bank, we are technology-neutral. Characteristic of unlimited legal indemnity. From the perspective of the central bank, whether you are a blockchain or a centralized account system, electronic payment or so-called mobile money, the central bank can adapt to any technical route you take. Of course, your technical route must meet our threshold. For example, because it is aimed at retail, it must at least meet high concurrency requirements, at least 300,000 transactions per second. 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 will have to queue up. From the perspective of the central bank, we have never preset a technical route, and it is not necessarily a blockchain. Any technical route is possible. We can call it Long Term Evolution.

In addition, we have repeatedly emphasized that the central bank's digital currency must have high scalability and high concurrent performance. It is used in small retail high-frequency business scenarios. In order to guide the central bank's digital currency to be used in small retail scenarios, without crowding out deposits, and avoiding arbitrage and procyclical effects in stressful environments, 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 pro-cyclical situations in stressful environments.

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 exchange currencies, and centralized management is required 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 requires maintaining the central management position of the central bank.

Centralized management is different from electronic payment tools. From a macroeconomic point of view, the transfer of electronic payment tools must be completed through traditional bank accounts, and the account is tightly coupled. For the central bank's digital currency, we are loosely coupled with accounts, that is, to achieve value transfer without traditional bank accounts, so that the transaction link's dependence on accounts is greatly reduced. In this way, the central bank's digital currency can be as easy to circulate as cash, which is conducive to the circulation and internationalization of RMB, and at the same time can achieve controllable anonymity. , anti-tax evasion), a balance must be struck between these two.

Third, the central bank’s digital currency design at this stage focuses on the replacement of M0, rather than the replacement of M1 and M2. This is because M1 and M2 are now electronic and digital. Because it is originally based on the existing commercial bank account system, there is no need to use digital currency for digitization. In addition, the inter-bank payment and clearing system, the internal system of commercial banks, and various online payment methods of non-bank payment institutions that support the transfer of M1 and M2 are increasingly efficient and can meet the needs of my country's economic development. Therefore, using the central bank's digital currency to replace M1 and M2 again will not help improve payment efficiency, and will cause a huge waste of existing systems and resources. In contrast, the existing M0 (banknotes and coins) are easy to forge anonymously, and there is a risk of being used for money laundering, terrorist financing, etc. In addition, electronic payment tools, such as bank cards and Internet payments, are based on the tightly coupled model of existing bank accounts, and the public's demand for anonymous payment cannot be fully met. Therefore, electronic payment tools cannot completely replace M0. Especially in areas with poor account services and communication network coverage, people still rely on cash to a relatively high degree. Therefore, our DC/EP design maintains the attributes and main features of cash, and also meets the needs of portability and anonymity. It is a better tool to replace cash.

In addition, everyone has 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 currency derivatives and currency multipliers when Libra enters the credit market. This may lead to over-issued currency.

In addition, because the central bank's digital currency is a substitute for M0, no interest is paid on cash, which will not trigger financial disintermediation, nor will it have a major impact on the existing real economy.

Since the central bank's digital currency is a substitute for M0, all current regulations on cash management, anti-money laundering, and anti-terrorism financing should be followed, and large and suspicious transactions of the central bank's digital currency should be reported to the People's Bank of China.

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

Note:

Due to some reasons, some nouns in this article are not very accurate, mainly such as: general certificate, digital certificate, digital currency, currency, token, crowdsale, etc. If readers have any questions, they can call or write to discuss together.

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