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Central Bank Digital Currency Research Report (1)
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特邀专栏作者
2019-08-14 14:56
This article is about 4682 words, reading the full article takes about 7 minutes
What exactly is the central bank's digital currency CBDC, and the policy interpretation of the central bank's digital currency DC/EP

background introduction

background introduction

On August 10, 2019, Mu Changchun, deputy director of the Payment and Settlement Department of the People's Bank of China, said at the third China Finance Forty Forum, "The central bank's digital currency can now be said to be ready to come out." The digital currency of the Central Bank of China (DC/EP) has been developed since 2014, and it has been five years now. This explosive news can be said to be both expected and unexpected. All walks of life have launched extensive discussions on this, but the current interpretation of the central bank's digital currency by many media experts is not very complete and in-depth, so this is also our original intention for this research report.

Jinqiu Blockchain Research Institute will use the perspective of combining blockchain & digital currency with the banking and financial system to launch a series of research reports to explore more comprehensively what is central bank digital currency (CBDC) and the digital currency of the central bank of China. The policy interpretation of the currency DC/EP, and a series of predictions and application concepts will be made on the business of financial institutions after the launch of the central bank's digital currency.

This article will focus on the following three questions:

1. Definition and basic information of central bank digital currency (DC/EP);

2. The difference between the central bank's digital currency and cash, demand deposits, electronic cash (the balance in Alipay/WeChat), and stable coins;

first level title

1. Definition and basic information of central bank digital currency (DC/EP)

secondary title

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 thecentral 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)

secondary title

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 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.

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.

first level title

2. What is the difference between the central bank's digital currency CBDC and bank deposits, electronic cash (Alipay/WeChat balance), 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?

Through the distinction of these four dimensions, it can help us distinguish 5 different currencies/payment methods:

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:

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.

2. B-money,bank cash. The most commonly used "statement correspondence" type of currency, our deposits in commercial banks fall into this category;

3. 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.

4. 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.

first level title

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.

3. How to judge whether the central bank's digital currency is a pseudo-demand

The above two parts give us a basis for discussion to understand the necessity of central bank digital currency issuance.

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!

To judge whether a form of currency is valuable, it should be judged from two dimensions of supply and demand, one is from the dimension of currency used by users, and the other is from the perspective of the central bank issuer. From the point of view of users, whether CBDC can increase the benefits of payment, reduce the cost of payment, and reduce the risk of payment and storage of value at the same time, these are the values; from the perspective of the central bank, can CBDC maintain financial stability? The credit system, maintaining the stability of the monetary system and the effectiveness of the central bank's monetary policy are also of value.

epilogue

epilogue

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.

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.

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

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/

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

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


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