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In fact, we do not presuppose technical routes, that is to say, we are technology-neutral at the level of the central bank... Whether you are a blockchain or a centralized account system, electronic payment or so-called mobile money, you take any The central bank can adapt to any technical route.
On August 10, at the 3rd China Financial Forty People Yichun Forum, Mu Changchun, deputy director of the Payment and Settlement Department of the Peoples Bank of China, introduced the practice of the central banks legal digital currency DC/EP (DC, digital currency, digital currency; EP, electronic payment, electronic payment), has aroused widespread concern in the society.
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The flower that has been blooming for 5 years is about to bear fruit?
You know, the Peoples Bank of China has started research on the central banks digital currency since 2014, and it has been five years now. However, the central bank is extremely cautious as the launch of a central bank digital currency could have an unprecedented impact on the entire financial system. However, Mu Changchun said in his speech: The central banks digital currency can now be said to be ready to come out. The meaning of this is thought-provoking.
What is said is important, but what is more important is who is speaking. For some time, Mu Changchun, deputy director of the central bank’s payment department, was seen as the successor to Yao Qian, director of the central bank’s digital currency research institute. For example, Tencents First Line once reported that after Yao Qian, the former director of the Central Banks Digital Currency Research Institute, resigned in October 2018, many people close to the regulator said that the post of director of the Central Banks Digital Currency Research Institute will not be appointed. Mu Changchun, deputy director of the payment department of the central bank, will take up the post. Although it has been more than half a year, there is no public appointment information, but judging from the relevant speeches made by Mu Changchun, he should already be in charge of related matters.
In June 2019, the white paper of Libra, the digital currency project of the American technology giant Facebook, was published, which caused huge waves around the world. Chinese academic circles and people inside the central bank have also expressed great concern about this. Some experts pointed out that once Libra is successfully implemented, it may become a tool for further invasion and extension of the dollar hegemony. At this critical juncture, the central bank emphasized in the work video conference in the second half of 2019 that it is necessary to accelerate the pace of research and development of my countrys legal digital currency (DC/EP), track and study the development trend of virtual currencies at home and abroad, and continue to strengthen Internet financial risk management.
It can be said that although the central banks digital currency has been studied for 5 years, this is the first time that it has received this level of attention within the central bank.
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The difference between Mu Changchuns speech and Yao Qians article
This latest speech by Mu Changchun deserves careful reading. But the most important thing is to read the difference from Yao Qians point of view. From these differences, we can see how the central banks research on digital currency has changed, and what changes have taken place in its judgment.
One of the most visible shifts has been in attitudes towards blockchain technology. Unlike Yao Qian, who is keen on the technological revolution, Mu Changchun pays more attention to the understanding and elaboration of the currency and financial system itself.
In his speech, Mu Changchun mentioned: Actually, we do not presuppose technical routes, that is to say, we are technology-neutral at the level of the central bank...whether you are a blockchain or a centralized account system, electronic payment or For the so-called mobile currency, the central bank can adapt to any technical route you take.” In other words, the central bank’s digital currency does not necessarily use blockchain technology.
This attitude is also transmitted to the attitude towards smart contracts. Mu Changchun emphasized that although the central banks digital currency can be loaded with smart contracts, its currency functions (transaction medium, value storage, and accounting unit) determine that if it loads smart contracts that exceed its currency functions, it will degenerate. If it becomes a valuable ticket and reduces the degree of usability, it will have an adverse impact on the internationalization of the RMB. He pointed out that the central bank can load smart contracts that are beneficial to currency functions, but will be more cautious about smart contracts that exceed currency functions.
Another important change is to emphasize the central banks central position in the central banks digital currency system. Mu Changchun pointed out that although the natural attribute of encrypted assets is decentralization, the DC/EP of the central banks digital currency must adhere to a centralized management model. The reason for making such a decision is to ensure and strengthen the central banks macro-prudential and monetary regulation functions, and to avoid excessive issuance of currency by designated operating agencies.
Whats more interesting is that Mu Changchun believes that adopting a two-tier system to issue and exchange the central banks legal digital currency will help curb the publics demand for encrypted assets and consolidate the countrys currency sovereignty.
Although people in the currency circle are happy for the central banks digital currency and think that the launch of the central banks digital currency is a great benefit, but in fact the central banks vision is far broader than what the currency circles think. The central banks digital currency may not use blockchain technology at all in the end. The central banks digital currency is not the same thing as the digital currency currently seen by people in the currency circle. This is worth thinking about.
From a certain point of view, perhaps the digital currency that people in the currency circle refer to is not a real digital currency at all, and it is more appropriate to call it encrypted assets. Its just that at a certain historical stage, we used the wrong name.
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Attachment: Full text of Mu Changchuns speech
Today I want to talk about the practice of the central banks legal digital currency, which is DC/EP. As Director Shao said just now, I remember that in the summer of 2014, President Zhou said one day that we need to study the possibility of issuing central bank digital currency. At that time, there were many questions that needed to be answered. For example, why should we issue our own central bank digital currency when electronic payment is already so developed? For another example, what kind of technical route should this technical route take? Is it to adopt a blockchain or a centralized account system? For example, whether to pay interest or not, how to arrange the organizational structure, etc. We have conducted research on these issues and obtained some results.
From 2014 to the present, the central bank’s digital currency DC/EP research has been carried out for five years. Since last year, the relevant personnel of the Digital Currency Research Institute has been 996. Doing related system development, the central bank’s digital currency can now be said to be ready to come out up.
Let me talk about whether to use blockchain technology. At the very beginning, the digital currency research team of the Peoples 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 Peoples Bank of China directly issues digital currency to the public. The Peoples 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 Peoples 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 Peoples 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.
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.
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 banks legal digital currency is also conducive to curbing the publics demand for encrypted assets and consolidating our national currency sovereignty. (Carbon chain value note: Please note that what is mentioned here is suppressing the publics demand for encrypted assets and consolidating my countrys 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.
Second, in order to ensure and strengthen the central banks macro-prudential and monetary regulation functions, it is necessary to continue to adhere to the centralized management model.
First, the central banks 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 banks 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.
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 banks digital currency, we are loosely coupled with accounts, that is, to achieve value transfer without traditional bank accounts, so that the transaction links dependence on accounts is greatly reduced. In this way, the central banks 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 countrys economic development. Therefore, using the central banks 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 publics 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 banks 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 banks 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 banks digital currency should be reported to the Peoples Bank of China.
In addition, we have repeatedly emphasized that the central banks 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 banks 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.
