Mu Changchuns Talk about Central Bank Digital Currency: Five Years of Research

category:Finance
 Mu Changchuns Talk about Central Bank Digital Currency: Five Years of Research


Two-tier operation system

Regarding whether to adopt the block chain technology, Mu Changchun said that because the legal digital currency is replaced by M0, if we want to reach the retail level, high concurrency is a problem that can not be avoided. At the time of last years Double Eleventh, the trading peak of Netcom reached 92,771 transactions per second. By comparison, Bitcoin was 7 transactions per second. Ether coins are 10 to 20 pens per second, and Libra uses the white paper it just issued, 1000 pens per second. It can be imagined that the pure block chain architecture can not achieve the high concurrency performance required by retail sales in a big country like China when issuing digital currency. So in the end, we decided that the central bank level should be technically neutral, not necessarily relying on a certain technical line.

Reporters learned that DC/EP adopted a two-tier operation system. The single-tier operation system is that the Peoples Bank of China issues digital money directly to the public, while the Peoples Bank of China first converts digital money to banks or other operating institutions, and then converts these institutions to the public, which belongs to the double-tier operation system.

The central bank is the upper level and the commercial bank is the second level. This dual investment system is suitable for our national conditions. It can not only use existing resources to mobilize the enthusiasm of commercial banks, but also smoothly enhance the acceptance of digital money. Mu Changchun said that there are several considerations for adopting a two-tier operation structure:

Secondly, the dual-tier structure is also designed to give full play to the resources, talents and technological advantages of commercial institutions, promote innovation, competition and selection. The IT infrastructure and service system of commercial institutions are relatively mature, and their system processing ability is strong. They have accumulated some experience in the application of financial science and technology, and their talent reserve is relatively adequate. The central bank and commercial bank can cooperate closely, without presupposing the technical route, fully mobilize market forces, optimize the system through competition, and jointly develop and operate.

Thirdly, the two-tier operation system helps to mitigate risks and avoid excessive risk concentration. The issuance of central bank digital currency directly faces the public, involving tens of thousands of households. It is very difficult for the central bank to develop and support such a huge system only by its own strength, and to meet the needs of high efficiency, stability and security, as well as to enhance the customer experience. Whether from the choice of technology route, or from the operational risk, business risk, through the double-tier operation design can avoid the risk over-concentration to a single organization.

Fourthly, the single-tier operation structure will lead to financial disintermediation. Under the framework of single-tier investment, the central bank directly invests digital money in front of the public. Compared with the deposit money of commercial banks, the central banks digital money is more competitive than the deposit money of commercial banks under the condition of the central banks credit endorsement, which will have crowding-out effect on the deposits of commercial banks, affect the ability of commercial banks to loan and increase business. Industrial banks depend on the interbank market.

Mu Changchun stressed that although the natural attribute of encrypted assets is de-centralization, under the arrangement of two-tier operation system, DC/EP must adhere to the centralized management mode for the following reasons: First, the central banks digital currency is still the central banks debt to the public. The relationship between creditors rights and debts does not change with the change of monetary form. Therefore, it is still necessary to ensure the central banks central position in the process of investment; secondly, in order to ensure and strengthen the central banks macro-prudential and monetary control functions, it is necessary to continue to adhere to the centralized management model; thirdly, to designate operating agencies for currency exchange, centralized management should be carried out to avoid the designated operating agency currency. Finally, in the whole process of exchange, the dual account system has not been changed, so the original transmission mode of monetary policy should be maintained, which also needs to maintain the central management position of the central bank.

Emphasis on M0 Substitution

What impact will the two-tier operation system have on monetary policy?

Mu Changchun believes that the two-tier operation system will not change the relationship between the creditors rights and liabilities of currency in circulation. In order to ensure that the central banks digital currency does not exceed its allowance, commercial institutions pay reserve funds to the central bank in full and 100%, the central banks digital currency is still a liability of the central bank, guaranteed by the central banks credit, and has unlimited legal repayment. In addition, the two-tier operation system will not change the existing currency delivery system and the dual account structure, and will not compete with the deposit money of commercial banks. Because it does not affect the existing monetary policy transmission mechanism, nor does it strengthen the pro-cyclical effect under the pressure environment, so it will not have a negative impact on the real economy.

In addition, the adoption of a two-tier system for issuing and converting the statutory digital currency of the Central Bank will also help to curb the publics demand for encrypted assets and consolidate our national monetary sovereignty. Mu Changchun said.

Mu Changchun said that at this stage, the central banks digital currency design focuses on the replacement of M0, rather than M1 and M2. Because M1 and M2 have been electronized and digitized, there is no need to digitize with digital money. In contrast, the existing M0 (banknotes and coins) are easy to forge anonymously, and there are risks for money laundering, terrorist financing and so on. The design of the central banks digital currency maintains the properties and main features of the cash, meets the needs of portability and anonymity, and is a good tool to replace the cash.

Mu Changchun said that because the central banks digital currency is a substitute for M0, no interest payment on cash will not trigger financial disintermediation, nor will it have a major impact on the existing real economy. At the same time, we should abide by all the current regulations on cash management and anti-money laundering, anti-terrorism financing, and report to the Peoples Bank of China on large-scale and suspicious transactions in digital currency.

In addition, Mu stressed that the central banks digital currency can be loaded with smart contracts. The digital currency of the central bank is still a currency with unlimited legal remuneration, which is a substitute for M0. Its monetary function (trading medium, value storage, billing unit) determines that if it loads intelligent contracts beyond its monetary function, it will degenerate into valuable tickets and reduce the usability, which will have a negative impact on the internationalization of the RMB. Therefore, we will load smart contracts in favor of monetary functions, but we will remain more cautious about smart contracts that exceed monetary functions.

Source: First Financial Responsibility Editor: Guo Chenqi_NBJ9931