Recap

Recap

Jinqiu Blockchain Research Institute uses the perspective of combining blockchain & digital currency with banking and financial systems to launch a series of research reports to explore more comprehensively what is central bank digital currency (CBDC) and China's central bank digital currency (DC/ EP) policy interpretation, and a series of predictions and application concepts for the business of financial institutions after the central bank’s digital currency is launched.In the previous article, we discussed the definition and basic information of the central bank's digital currency; the difference between the central bank's digital currency and cash, demand deposits, electronic cash, and stable coins; whether the central bank's digital currency is a pseudo-demand. (Last issue review:）

Central Bank Digital Currency Research Report (1)

Author: Liu Mingrui

The main issues we will discuss in this article are:

1. From the perspective of demand, construct a currency evaluation model;

2. Use the currency evaluation model to quantitatively analyze the mainstream currency forms;

4. From the perspective of supply, discuss the impact of central bank digital currency.

secondary title

1. From the perspective of demand, construct a currency evaluation model

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.

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;

Default Risk Anti-default risk: The default risk of the currency issuer.

cryptocurrency

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 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.

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.

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.

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.

But there are also several disadvantages of certainty, or uncertainty: in the dimension of interest return, CBDC can provide a complete interest plan, but compared with deposits, there are more uncertainties; in the dimension of preventing theft and loss, If the anonymity of the CBDC is high, fraudulent transactions cannot be recovered and frozen. If the anonymity is low, the possibility of preventing theft and loss will be higher; in terms of scalability, the potential CBDC can support large payments, and it may also be like Like electronic cash, it is within the regulatory scope of small and medium amounts.

CBDC vs cash

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.

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.

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.

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.

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.

Under such a scoring system, as a payment method, Libra is lower than CBDC in multiple dimensions. At the same time, it also has obvious weaknesses compared with e-money and b-money. However, in addition to regulatory considerations, another reason why Libra puts its strategic starting point on the unbanked people in emerging markets is that Libra will have more advantages compared with currencies in third world countries, which is a very good entry point .

The soundness of the financial system Financial Integrity

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.

Depending on the design, CBDC can enhance or weaken the soundness of the country's financial system (Financial Integrity).

Depending on the design, CBDC can enhance or weaken the soundness of the country's financial system (Financial Integrity).

epilogue

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).

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."

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.

epilogue

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.

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 next 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. Welcome to pay attention.

Reference

Adrian, Tobias. 2019. “Stablecoins, Central Bank Digital Currencies, and Cross-Border Payments: A New Look at the International Monetary System,” speech given at the IMF-Swiss National Bank Conference, Zurich, May 2019.

https://www.imf.org/en/News/Articles/2019/05/13/sp051419 -stablecoins-central-bank-digital-currencies-and-cross -border-payments

Duffie, Darrell. 2019. “Digital Currencies and Fast Payment Systems,” mimeo, Stanford University.

Mancini-Gri oli, Tommaso, Maria Soledad Martinez Peria,Itai Agur, Anil Ari, John Ki , Adina Popescu, and Celine Rochon. 2018. “Casting Light on Central Bank Digital Cur- rency,” IMF Sta  Discussion Note, November.

"International Monetary Fund Policy Paper"- June 2019

“The Rise of Digital Money” Tobias Adrian, Tommaso Mancini-Griffoli, July 2019

From an economic point of view, it is necessary to inherit the reasonable connotation of the long-term evolution of traditional currencies. Therefore, there should be no change in the intrinsic value of the legal digital currency. The change lies in the digitization of the currency. ——Yao Qian, former director of the Central Bank’s Digital Currency Research Institute

Yao Qian, Tang Yingwei. Some Thoughts on the Central Bank’s Legal Digital Currency[J]. Financial Research, 2017, 445(7): 78-85.

About Jinqiu Technology

Founded in 2013, Jinqiu Technology is committed to using a new generation of information technology to help the financial industry realize digital transformation. It currently has four major businesses: regulatory technology, smart taxation, smart payment, and blockchain. Jinqiu's core team has more than 18 years of financial information and intelligent technology and service experience, and has participated in the central bank's modern payment CNAPS system, China UnionPay CUPS core system, super online banking, cross-border RMB payment CIPS system and other national financial systems building. At present, it has more than 80 banking, insurance and financial institution clients around the world, including Morgan Stanley Bank, Citibank, BNP Paribas, HSBC, Hang Seng Bank, China UnionPay, etc.

In 2015, Jinqiu Technology took the lead in laying out blockchain technology and first proposed "connecting the real economy with blockchain", and independently developed a safe, stable and independent intellectual property blockchain technology platform - Starfish Chain, providing blockchain Infrastructure network technology and services that can carry commercial blockchain applications and solutions. The starfish chain has the characteristics of componentization, pluggability, high performance, and high scalability, and has realized a number of technological inventions and innovations, such as the consensus algorithm DSC with balanced performance, scale, and security, and smart contracts that support more complex business logic applications etc., providing greener, inclusive, and high-yield blockchain technology for enterprises, governments, financial institutions, and industry associations, and helping them build blockchain infrastructure and solutions suitable for commercial use. At present, the starfish chain has accumulated a wealth of blockchain application cases in the fields of supply chain finance, credit card points, e-government, social governance, credit investigation, insurance, asset securitization, traceability, cross-border payment, etc.

Jinqiu Technology is the governing unit of the Ministry of Industry and Information Technology Blockchain National Standard Formulation Forum; the governing unit of the China Blockchain Technology and Industry Development Forum; the member unit of the Financial Blockchain Alliance (Shenzhen); the Hyperledger project (Hyperledger) led by the Global Linux Foundation Member unit; 2016 high-tech enterprise, dual-software enterprise; and won the 2017 Pudong New Area Economic Outstanding Contribution Enterprise Award "Top 20 Innovation and Entrepreneurship" as the only blockchain enterprise. Many experts from the company participated in the writing and formulation of China's blockchain national standards and ISO/TC307 blockchain international standards. Relying on the solid professional ability in the field of blockchain and financial technology, as well as the ability to explore and apply new technologies and make breakthroughs and innovations, he won the 2018 Shanghai R&D Enterprise Special Award Fund and the 2018 Guangdong-Hong Kong-Macao Greater Bay Area Blockchain Monopoly Beast Cultivation Enterprise Award, 2018 Hurun Report Top 20 Blockchain Industry Leading Enterprises, also recognized by Shanghai Pudong New Area R&D Institution, Shanghai "Specialized, Specialized and New" Enterprise, Guangzhou's first batch of blockchain certified enterprises , An award for enterprises supported by the Guangzhou Blockchain Million Fund.