Zhou Xiaochuan: The development prospects of central bank digital currency

On October 12, the China (Beijing) Digital Finance Forum was held in Beijing. Zhou Xiaochuan, Vice Chairman of the Boao Forum for Asia, delivered a keynote speech on the development prospects of the central bank's digital currency. Zhou Xiaochuan said that in the digital currency development ecosystem, the digitalization of the payment system and the digitalization of currency are two sides of the same coin. From the perspective of the development of digital finance and digital currency, we should advocate the digitalization of the payment system and digital currency in a broad sense, and be cautious in using the narrow concept of digital currency. Zhou Xiaochuan pointed out that we must deeply understand and persist in using the two-tier operating system. In the two-tier operating system, the central bank is the first layer, and commercial institutions including commercial banks, Internet platform companies and telecommunications operators are the second layer. The core feature of this system is dynamic evolution, not static solidification. It is a system that improves service levels and promotes innovation through mutual competition. It is also a system of multiple coexistence, which may be more important for a big country. It should allow multiple coexistence and competition for excellence.

On October 12, the China (Beijing) Digital Finance Forum was held in Beijing. Zhou Xiaochuan, Vice Chairman of the Boao Forum for Asia, delivered a keynote speech on the development prospects of central bank digital currencies.

Zhou Xiaochuan said that in the digital currency development ecosystem, the digitization of payment systems and the digitization of currency are two sides of the same coin. From the perspective of the development of digital finance and digital currency, we should advocate the digitization of payment systems and digital currency in a broad sense, and be cautious in using the narrow concept of digital currency.

Zhou Xiaochuan pointed out that we should deeply understand and adhere to the two-tier operating system . In the two-tier operating system, the central bank is the first layer, and commercial institutions including commercial banks, Internet platform companies and telecom operators are the second layer. The core feature of this system is dynamic evolution, not static solidification. It is a system that improves service levels and promotes innovation through mutual competition. It is also a system of multiple coexistence. This may be more important for a big country. It should allow multiple coexistence and competition to select the best.

"There is a saying internationally that the currency issued by the central bank itself is CBDC, and the currency issued by other commercial institutions is not the central bank's digital currency, not legal tender, and has certain risks. This statement is quite misleading." Zhou Xiaochuan said that under the central bank's regulatory system, the funds in most commercial bank accounts (M1) are quite secure and are not so-called commercial currencies, let alone the stablecoins or cryptocurrencies developed by some financial technology companies.

Zhou Xiaochuan pointed out that under the two-tier operating system, policy formulation should allow the digital payment system to survive independently and set a price system so that the digital payment system can charge for services . If there is no charging mechanism, it will lead to cross-subsidy and cross-selling, and payment system service providers will focus on other aspects that should not be paid attention to. For example, some system service providers use payment as a portal and then make money by reselling data or using data for other businesses, which poses the risk of data abuse. Or the payment system is used as an entrance to divert traffic instead of an independent profitable financial service product, which may lead to some distortions.

In addition, we must adhere to the principles of safety, convenience, low cost, and anti-abuse . As the cost of technology becomes lower and lower and the system becomes more convenient, the cost of abuse will also become lower and lower. Weapons transactions in military conflicts and drug transactions such as fentanyl are mostly paid for using crypto assets and stablecoins, which is an area that needs to be focused on. In addition, we must combat cross-border gambling and anti-fraud.

Image source: Provided by the organizer

The following is the full text of the speech:

Dear guests, ladies and gentlemen, friends, good morning!

I am very pleased to be invited to participate in the 2023 China (Beijing) Digital Finance 3rd Forum, and discuss with the guests how digital finance can serve the real economy and digital payments, especially the development prospects of central bank digital currency.

The theme of today's conference is "Integration and Upgrading: Building a New Digital Financial Ecosystem." We have seen that the Lize Financial Business District where we are located has made many new attempts in building a digital financial ecosystem, striving to improve the efficiency of economic activities through digital finance and serve the majority of financial consumers. Just now, many leaders have made speeches and speeches, and we have also seen the release of some new products and systems, which is also very encouraging. I have personally done some work related to digital currency in the past, and I would like to share a few opinions with you here. Of course, I am only discussing with you from the perspective of an observer.

First of all, today's theme is financial ecology, and there are many issues that need to be discussed. Under the competitive two-tier operating system, everyone has promoted the development of the digital economy ecology, and the Digital Research Institute has also done a lot of work. In this ecology, some systems are bound to be successful, some are not so successful, and some systems need to be continuously upgraded after they succeed, so discussing integration and upgrading is also very meaningful.

I gave a popular lecture on digital currency to ShanghaiTech University some time ago. I would like to share a few points with you. First, in the digital currency development ecosystem, the digitalization of the payment system and the digitalization of currency are two sides of the same coin. From the perspective of technology and system, the payment system is being digitized using a variety of technologies. In this process, the content and tools of the payment system have changed. It is no longer traditional paper money, but digital currency. If we look at it from the perspective of evolutionary results, the digitalization of the payment system has produced a variety of payment products. After these products have developed to a certain stage, they need to emphasize interoperability, which will lead to integration, and it will also be a process of survival of the fittest.

Since technology develops very fast, there will be many upgrades in the process of digitalization of payment systems. In the concept of digital currency, some inventors and system builders believe that only their own digital currency is digital currency, and do not recognize the digital currency of others that adopts other technologies and models. Most people do not agree with this self-centered and exclusive digital currency concept. There are also some self-proclaimed stablecoins, but whether they are stable or not cannot be based on their own claims. It must be based on the design of the system and the asset support arrangement, and the stability must be tested by customers and the market.

The digital currency of the People's Bank of China was originally called DCEP (this name has been used for internal system construction), which is a digital currency and an electronic payment system, so electronicization and digitization are closely related and difficult to strictly distinguish. It is possible that early electronicization is not completely digital, but mid- and late-stage electronicization is actually mixed with digitization, and most electronicization processes are also digitization processes. Due to the supply of new technologies, some things have gradually become possible from impossible. Therefore, from the perspective of the development of digital finance and digital currency, we should advocate the digitization of payment systems and digital currency in a broad sense, and be cautious in using the narrow concept of digital currency.

Secondly, with the development of the digital currency ecosystem, some concepts will be gradually clarified, and everyone is gradually exploring. In fact, concepts are also being integrated and upgraded. At present, the development of digital currency, including the digital RMB, is mainly based on account-based digital currency. Of course, token-based digital currency is also a path that may have room for development, but the mainstream is still account-based digital currency. In addition, this also involves the question of whether to decentralize or continue to use the centralized route. Technically speaking, digital currency and payment systems use a lot of Internet technology, so Internet technology itself and its upgrades will have an important impact on digital finance and digital currency. At the same time, payment terminals include desktop terminals, mobile terminals, and hardware media such as prepaid cards introduced by Postal Savings Bank just now. Some prepaid cards are based on IC card technology and can also be integrated and complementary with the digital payment system.

All these applications rely on financial infrastructure, and infrastructure is very important. Many concepts of infrastructure are being discussed, and there are different understandings and debates, which is a good thing. For example, RTGS refers to the real-time full payment system. Of course, not all transactions have to be real-time. Some quasi-real-time arrangements may be more promising applications in the market. For infrastructure, on the one hand, the interconnection of systems must be achieved, and on the other hand, universality must be achieved to achieve interoperability to the greatest extent. For another example, cross-border and cross-currency transactions are provided by market institutions at the front end, but a clearing system with a central bank background is required to provide support services at the back end.

Third, we must deeply understand and adhere to the use of a two-tier operating system. In the two-tier operating system, the central bank is the first layer, and commercial institutions, including commercial banks, Internet platform companies and telecom operators, are the second layer. The core feature of this system is dynamic evolution, not static solidification. It is a system that improves service levels and promotes innovation through mutual competition. It is also a system of multiple coexistence, which may be more important for a large country. In other words, it is difficult for anyone to accurately judge that a certain system or a certain technology is superior to other systems and technologies, so multiple coexistence should be allowed and competition should be selected. At the same time, in the process of multiple coexistence and development, interoperability should be emphasized, which involves the theme of today's forum, "integration". Moreover, the system is dynamically evolving and needs to be upgraded after a period of time. By upgrading to enhance interoperability, newer and more efficient technologies can also be introduced.

There is a saying in the international community that the currency issued by the central bank itself is CBDC, and that the currency issued by other commercial institutions is not the central bank's digital currency, not legal tender, and has certain risks. In fact, this statement is quite misleading. Because under the central bank's regulatory system, the funds (M1) in most commercial bank accounts are quite safe, not so-called commercial currency, and cannot be compared with the stablecoins or cryptocurrencies developed by some financial technology companies.

Under the two-tier operating system, policy makers need to allow digital payment systems to survive independently and set a price system so that digital payment systems can charge for services. In fact, the fee rate can be very low, and the impact on customers is quite small. If there is no charging mechanism, it will lead to cross-subsidy and cross-selling, and payment system service providers will focus on other aspects that should not be paid attention to. For example, some system service providers use payment as a portal, and then make money by reselling data or using data for other businesses, which poses the risk of data abuse. Or the payment system is used as an entrance to divert traffic, rather than as an independent profitable financial service product, which may lead to some distortions. We believe that in the development of the two-tier operating system, these problems can be gradually optimized through integration and upgrading.

I would like to emphasize that we must adhere to the principles of safety, convenience, low cost, and anti-abuse. Safety has always been a key issue in finance, especially in currency. As the cost of technology becomes lower and lower and the system becomes more convenient, the cost of abuse will also become lower and lower. What I mean by anti-abuse includes preventing money laundering and arms trade. Arms trade in military conflicts and drug trade such as fentanyl are mostly paid for using crypto assets and stablecoins, which is an area that needs to be focused on. In addition, we must also combat cross-border gambling and anti-fraud. The Ministry of Public Security has made considerable achievements in anti-fraud, and many of the cases solved were cross-border payments using crypto assets. This is also a struggle between the devil and the road. New technologies can bring benefits to the people, but they may also be used by criminals. This should be given high attention in the development of digital currency.