Wang Yongli: Challenge of Digital Money Landing Operation of Central Bank

category:Finance
 Wang Yongli: Challenge of Digital Money Landing Operation of Central Bank


Is it too early to call out? This is a real problem.

It seems that the release of the Libra White Paper has accelerated the process of the central banks digital currency.

On June 18, 2019, Face book held a conference on its encrypted digital currency Libra, claiming to launch a borderless currency linked to a basket of currencies, which aroused great concern around the world, especially in China.

On July 9, Wang Xin, Director-General of the Research Bureau of the Central Bank of China, revealed that the State Council has formally approved the development of the central banks digital currency. At present, the central bank is organizing market institutions to do corresponding work and will launch the central banks digital currency as soon as possible.

On August 10, Mu Changchun, deputy director of the Department of Payment and Settlement of the Central Bank, said: From 2014 to now, the research on the central banks digital currency DC/EP (DC: Digital Current-cy, digital currency; EP: Electronic Payment, electronic payment) has been carried out for five years. Since last year, the relevant personnel of the Institute of Digital Money have been 996 (working from 9 a.m. to 9 p.m. every day, six days a week). With the development of relevant systems, the central banks digital currency is now ready to be called out.

Following that, Fan Yifei, deputy governor of the Central Bank, gave a more comprehensive explanation of the central banks digital currency in written form.

So, what is the basic model of the central banks digital currency?

The information disclosed by central bank officials mainly includes:

At present, the central banks digital currency design adheres to the centralized management mode, focusing on M0 substitution, rather than M1, M2 substitution. The central banks digital currency will adopt a two-tier operation system, that is, the Peoples Bank of China will first exchange digital currency to banks or other operating institutions, and then to the public by these institutions. Through the double-tier operation design, we can avoid excessive risk concentration to a single institution (central bank), avoid crowding-out effect on bank deposits and affect bank lending capacity.

In order to ensure that the central banks digital currency does not exceed its allowance and that commercial institutions pay 100% of the reserve to the central bank, the central banks digital currency is still a liability of the central bank, which is 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 dual account structure, avoid the deposit moving that may be triggered by the direct registration of the public on the central banks digital currency platform, and will not compete with the deposit money of commercial banks and payment institutions. 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.

The central bank does not preset a technical route, and it is not necessarily a block chain. Any technical route is possible. Several designated operation agencies adopt different technical routes to do DC/EP research and development. Whoever has a good route and who will be accepted by the people and the market will win the competition in the end. That is to say, the central bank is technically neutral at this level. Whether it is a block chain or a centralized account system, electronic payment or so-called mobile currency, the central bank can adapt to any technological route. Of course, it is necessary to meet the threshold of central bank functionally, for example, because it is for retail sales, at least to meet the high concurrent demand, at least 300,000 pens per second.

At this point, the market will ask: Why should we launch the central bank digital currency as soon as possible?

On Jan. 20, 2016, the central bank issued a notice on its website that said, strive for the early introduction of digital currency dominated by the central bank. As early as 2014, the use of block-chain technology in Bitcoin, Ethercoin and other network-encrypted digital currency began to heat up. Many people believe that this network-encrypted digital currency will subvert the traditional legal currency system and bring huge impact on the central bank and commercial banks. Therefore, central banks of some countries, even the IMF, have claimed that the network-encrypted digital currency will subvert the traditional legal currency system. We should develop our own digital currency to ensure our currency authority. The Peoples Bank of China has also set up a research team on digital currency for this purpose.

However, in the actual operation of network-encrypted digital money such as Bitcoin, it is increasingly found that because there is no corresponding social wealth that can be protected by law, it belongs to the virtual assets of the network. Its price is very easy to rise and fall, and even many of them are as smoky as the air, and can not be used as money at all. The central bank may subvert or replace the legal currency, and it is impossible for the central bank to design and operate the legal digital currency dominated by the central bank by imitating the de-centralized network-encrypted currency such as Bitcoin. Therefore, the research and design of the central banks digital currency once fell into silence, and some countries even announced the discontinuation of relevant research plans.

As a result, some networks and financial institutions began to introduce stable currencies supported by legal currencies as reserves, including stable currencies only linked to a single French currency 1:1, and stable currencies linked to a basket of currencies.

As a result, Facebook, the worlds largest social networking site operator, led by 27 other large e-commerce and payment companies, released a white paper on Li-bra, a block-chain digital currency backed by several major national legal currencies, on June 18 this year, claiming that Libra would build a simple, stateless system. Money in the world serves the financial infrastructure of dozens of people. As soon as the white paper was released, it had a huge impact on the world. Many people believe that with the huge user base of about 3 billion people of Facebook and its hundreds of large start-up companies, Libra will become a huge and far-reaching super-sovereign world currency.

Considering that there may be no RMB in the basket currencies linked by Libra, many Chinese are deeply anxious that this will further enhance the international influence of the US dollar and inhibit the internationalization of RMB. China must speed up the development and implementation of digital currency and seize the leading position of digital currency.

The Challenge of Landing Operation

Nevertheless, the landing operation of the central banks digital currency still faces great challenges with its full ideal and realistic skeleton.

First, how to exchange the central banks digital currency

That is to say, the central banks digital currency is only the digitization of RMB cash, so it should be more appropriate to call it central banks digital cash. Correspondingly, members of the community should only be able to exchange RMB cash to banks or other operating institutions for RMB digital currency. Banks or other operating institutions can only exchange RMB digital currency with the central bank at 1:1 RMB cash. In this way, the central bank will replace RMB cash into RMB digital currency, forming a digital currency to replace M0. Among them, bank deposits should not be converted into digital currencies to avoid the substitution of M1 and M2 (Chinese deposits). This means that after the introduction of digital currency by the central bank, China will maintain the currency system in which electronic currency and digital currency coexist.

But the question is, in this case, how to control the size of the central banks digital currency?

If the efficiency and cost of digital money is indeed better than that of electronic money (bank deposits), people are willing to hold more digital money, but what if they do not have enough cash? Is it allowed to convert bank deposits into digital currency? If people are allowed to exchange bank deposits for digital currencies, there will be an alternative to M1 and M2 deposits. However, if not allowed, it is strictly limited to converting cash into digital money. Considering that cash in circulation has increasingly been replaced by electronic money (currency digitization), its proportion in total currency has been quite low and is still declining, and even if the Central Bank launches digital money, cash in circulation is not allowed. If it can be abolished completely in a short period of time, what is the significance of investing huge human and material resources in a new digital currency system besides the existing electronic currency system and rushing to launch and operate a digital currency that only replaces cash?

Second, how to preserve and use digital money

The monetary unit of digital currency is fixed (e.g. RMB yuan). There is no longer any physical carrier (e.g. banknote) and carrier number, and there is no longer a distinction between face value. Digital currency represents the number of monetary units (which can be infinite or several decimal places). It needs to exist in the form of account records.

In 2018, the Bank for International Settlements (BIS) first proposed that there are two basic paradigms of money: the account paradigm and the Token paradigm. The so-called account paradigm refers to the money deposited by the money owner in the deposit account of the payment and liquidation institution, such as electronic money; the password paradigm refers to the money owners control with his own private key password (Token), and the currency can be paid only after it has been recorded and verified by the Distributed Accounting system. Money, such as encrypted money.

This statement seems to be conducive to the distinction between electronic money and encrypted money. Recently, it has been cited by Chinese authorities, but this distinction is not accurate.

In fact, money can only be divided into cash and non-cash in terms of its manifestation. Correspondingly, the ways of payment and settlement of money mainly include cash liquidation and bookkeeping liquidation, while non-cash currencies can only be based on accounts.

Cash liquidation is the way in which both sides of the transaction liquidate (buyer pays, seller receives) directly by cash receipt and payment. Because cash itself is universal in society and does not carry out the owners mark, it is anonymous and the owners ownership is basically controlled by the owner; the two sides of the transaction need not recognize each other, they only need to recognize each others quality and price of the commodities or services traded, they can exchange directly, pay both money and goods, and do not owe each other. However, in order to prevent currency counterfeiting, the recipient often needs currency inspection.

Accounting and liquidation is the way in which the clearing institutions with deposit accounts opened by both sides of the transaction carry out currency (capital) liquidation by reducing the balance of the payers account and increasing the balance of the payees account. In the process of bookkeeping and liquidation, both sides of the receipt and payment need to open deposit (reserve) accounts in the liquidation institutions (the same needs to be done between the liquidation institutions for receipt and payment and liquidation) or jointly open deposit accounts in the centralized liquidation institutions to establish account connections) and obtain deposit accounts. In order to prove or control the encryption tools used, it is necessary to maintain sufficient deposit balance for external payment in the account, or within the overdraft allowed by the liquidating institution; secondly, there is a need for information transmission system between the receiving and paying parties and the liquidating institution; thirdly, in order to avoid errors, protect the interests of all parties, account and liquidation should be carried out. Generally, it can only be initiated by the payer to notify its liquidating institution to deduct its deposits and transfer them to the deposit account of the payee. At the same time, every payment and liquidation often needs to check and verify the account name, deposit voucher or password, account balance, etc. involved in deposit account and payment information. Therefore, it is necessary to establish a set of clear operational rules and strictly enforce them.

With the development of information technology, accounting and liquidation are increasing, which greatly reduces the cost of the whole process of printing, escorting, receiving, checking, keeping, recycling and destroying money, continuously improves the efficiency of money collection and liquidation, and strengthens anti-money laundering, anti-terrorist transportation, anti-tax evasion and bribery. At the same time, it is also conducive to idling the society. Money is more concentrated in banks, and allocated to places where society needs it through bank loans, so as to improve the efficiency of capital utilization and create greater social wealth. Therefore, bookkeeping and liquidation has become the most important way of liquidation in the world. Correspondingly, the digitization of money has been promoted continuously, and the proportion of cash in the total amount of money has been decreasing.

Among them, the establishment and management of deposit accounts can be divided into centralized mode, which is centralized by clearing institutions, and distributed mode, which is managed by all participants on the clearing platform, or selected some representative participants at the same time. That is to say, all non-cash currencies can only exist in the form of deposit accounts, that is, they can only exist in the account paradigm but not in the non-account paradigm. Even in the distributed account system, the password directly overlaps with the account name, no longer has the real name system of the account, but only changes in the form and processing of the account, the essence of the account is not different. Distributed bookkeeping does not subvert double-entry bookkeeping, because for each transaction, the records of each node must simultaneously reduce the account balance of the payer and increase the account balance of the payee, that is, double-entry bookkeeping, which records only one transaction on multiple backup account systems at the same time.

As a result, the holders of the central banks digital currency must open deposit accounts, and their use also requires a supporting information transmission and processing system.

Then, how to open accounts and use digital money?

This involves a problem: at present, the system of the central bank, commercial banks and other liquidation institutions is not unified, but basically independent. In order to run digital money, the central bank has studied and developed for a long time, and seems to have formed a new operating system. Then, whether commercial banks and other operating institutions need to establish a corresponding operating system and connect with the central bank system, or whether the existing electronic money operating system can be used for digital money. Operation? Or can commercial banks and other operating agencies also open accounts on the central banks digital currency platform and operate on the central bank platform?

At the same time, when individuals or units actually use digital money, they also need specific information carriers of digital money (such as mobile two-dimensional code and scanning code, Facebook scanning and identification). Then, do digital money need to develop new information carriers, or can they use bank cards or use Alipay or WeChat payment? Information carriers such as machine or face recognition? If the operation system and information carrier have not changed much, how much improvement will be made between the development of a new digital money system and the current electronic money system? What are the advantages of its input-output efficiency?

The central bank officials explanation is that the current electronic money, using electronic payment tools, such as bank card and Internet mobile payment, can only be transferred through traditional bank accounts. It adopts the way of tight account coupling. The publics demand for anonymous payment can not be fully met, so it can not be completely replaced. Generation M0. The central banks digital currency is account loosely coupled, which can realize value transfer without traditional bank accounts, and greatly reduce the dependence on accounts in transaction links. The central banks digital currency can be as easy to circulate as cash, which is conducive to the circulation and internationalization of RMB, and can achieve controllable anonymity.

Third, how to coordinate the operation of digital currency and electronic currency

According to the central banks explanation about digital money, it mainly replaces M0, aiming at reducing the printing and circulation of cash. It is not allowed to pay interest, nor can it be used to grant loans. It needs to be managed separately. This means that more than 95% of the total amount of money is still deposited by banks, and the current e-money model is still maintained. That is, after the Central Bank launches the digital currency, the digital currency and the e-money will be parallel at the same time.

So, what is the relationship between the digital money operation system and the electronic money operation system? Why should we introduce the central bank digital money as soon as possible? How much is the actual role and value of replacing cash instead of digital money for all currencies? What are the advantages of input and output? Can the current e-money system play a similar role with a slight improvement? How to coordinate the management of the two monetary systems? Among them, the most prominent problem is how to control the scope and total size of the central banks digital currency, so as not to impact deposits, but also to play a full role?

In fact, if the central banks digital currency is strictly controlled within the scope of 20, it will not have much impact on the deposit and payment business of banks and payment institutions. In this case, it seems unnecessary to re-emphasize the double-tier operation system. We can fully consider the implementation of the central banks one-tier operation system, allowing social subjects to be directly at the central level. Register and process receipts and payments on the banks digital currency platform.

In short, the impact of the monetary system reform is extremely extensive and profound. We must be very cautious, carefully demonstrated and comparatively analyzed. We should not rush to introduce the central banks digital currency because of the emergence of encrypted digital currency or digital stabilized currency in society. In fact, competition exists among different digital currencies. The most fundamental factor of their international influence is their application scope and actual effect (just like sovereign currencies of other countries, whether they can become international central currencies depends on the comprehensive national power and international influence of the currency issuing countries), not who takes the lead. With the introduction of digital currency, whoever can lead the development path and standard of digital currency will surely seize the international dominance of digital currency. Considering that network-encrypted currencies such as Bitcoin have proven difficult to be real currencies, that the stable currency linked to a single legal currency of 1:1 can only be tokens, and that it is impossible to subvert and replace legal currencies, and that the Libra linked to a basket of currencies has many difficulties in itself, whether it can be introduced and shipped effectively. The application of block chain technology also has the triangle problem which is hard to get at the same time, such as de-centralization, security and high performance. We should not only attach great importance to positive research on digital currency, but also maintain enough calmness and rationality. To sum up, there are still many problems to be solved, and there are still great challenges to be faced. It may be too early for the central bank to call it out. Source: Responsible Editor of Economic Observation Network: Zhong Qiming_NF5619

Considering that network-encrypted currencies such as Bitcoin have proven difficult to be real currencies, that the stable currency linked to a single legal currency of 1:1 can only be tokens, and that it is impossible to subvert and replace legal currencies, and that the Libra linked to a basket of currencies has many difficulties in itself, whether it can be introduced and shipped effectively. The application of block chain technology also has the triangle problem which is hard to get at the same time, such as de-centralization, security and high performance. We should not only attach great importance to positive research on digital currency, but also maintain enough calmness and rationality.

To sum up, there are still many problems to be solved, and there are still great challenges to be faced. It may be too early for the central bank to call it out.