Wang Yongli: The positioning of digital RMB needs to be adjusted urgently

The positioning of the digital RMB must be adjusted as soon as possible. What is changed is not the RMB, but only the form and operation of the RMB. The profound changes in financial formats and currency management promoted by the digital RMB, and the economic and social value that may be brought about, are the most profound changes and greatest value that the digital RMB will bring.

In July 2019, an authoritative person from the People's Bank of China (PBOC) announced that the research and development of the digital RMB has entered the "996 work mode" (9 am to 9 pm every day, 6 days a week), and the digital RMB is about to be released. In October 2020, the digital RMB was first tested in Luohu District, Shenzhen. Subsequently, the cities and application scenarios participating in the public test continued to expand, and the product types and terminal tools continued to enrich. Many people expected that before the Beijing Winter Olympics in February 2022, the digital RMB should be fully promoted and operated, and China would become the first country to launch the " Central Bank Digital Currency (CBDC) ". However, to this day, the digital RMB is still in the process of testing and adjustment, and there are still some key issues to be sorted out and resolved. The central bank has not yet clarified the timetable for full promotion and operation. The central bank's work meeting in early 2023 still clearly stated that "the digital RMB pilot should be promoted in an orderly manner."

Basic process of digital RMB research and development

At the end of October 2008, the "Bitcoin" white paper was released and officially launched in early 2009. As a result, a new decentralized, super-sovereign, peer-to-peer "digital cryptocurrency" concept based on blockchain technology began to spread faster and its influence continued to grow. It further led to the emergence of more and more cryptocurrencies such as "Ethereum (Ether)", which brought a huge impact on national sovereign (legal) currencies. This also prompted many central banks, including the Bank of England, to pay close attention to and begin to develop "central bank digital currency". The People's Bank of China also established a team in 2014 to start the research and development of central bank digital currency, and named it " DCEP " ( Digital Currency Electronic Payment ). In January 2016, it announced that it would "strive to launch the central bank-led digital currency as soon as possible."

However, in this process, the research and development of CBDC in various countries imitated or even copied the decentralized, peer-to-peer blockchain technology and model of Bitcoin or Ethereum too much, but ignored the fact that CBDC, as a national sovereign currency, must be centrally managed, which is logically inconsistent with the decentralized model of "cryptocurrency" of Bitcoin or Ethereum. As a result, they fell into technical difficulties and were unable to extricate themselves, and many were forced to stagnate or disband. The research and development of DCEP of the People's Bank of China also encountered bottlenecks and began to reflect and adjust their thinking. After the People's Bank of China and seven other departments jointly issued an announcement on September 4, 2017 to stop all token issuance and financing, it became clearer that the central bank's digital currency can only be the digitization and intelligence of sovereign currency, and it is impossible to become a new cryptocurrency outside of sovereign currency ; the research and development of CBDC can actively use advanced technologies such as blockchain and smart contracts, but it must get rid of the decentralized model of "cryptocurrency", conduct new explorations and innovations in accordance with the logic of centralized management of sovereign currency, and control the huge impact and major risks that may be brought to the financial system. As a result, the central bank gradually made it clear that what it wants to develop is the "digital RMB", which is still RMB, the digitalization of RMB (its symbol is clearly ECNY, replacing the previous DCEP), and needs to meet the regulatory requirements of RMB. This elevated understanding has pushed the research and development of CBDC back on track. The development of the digital RMB has begun to accelerate, and it has important implications for the accurate grasp of CBDC in countries around the world .

In June 2019, Facebook, a world-renowned social networking site, released the Libra white paper, saying that it would form a management association with hundreds of global companies to jointly promote and manage the super-sovereign stablecoin Libra, which is structurally linked to the US dollar, euro, yen, pound, and Singapore dollar, and is committed to building a simple, borderless currency and financial infrastructure that serves billions of people. Since the management association has users all over the world and is huge in scale, and there is no RMB in its currency basket, and the US dollar accounts for 50%, which is higher than its share in the SDR, many people believe that this will seize the initiative of the digital RMB in the global digital currency field and enhance the international status of the US dollar, thereby bringing great pressure to the research and development of the digital RMB . The central bank then clearly positioned the digital RMB as cash in circulation (M0) , and promoted the research and development work to enter the "996 work mode" to accelerate progress. Since October 2020, the social public test has been launched, becoming a leader in the research and development of CBDC in various countries.

However, Libra, a so-called super-sovereign currency designed to be structurally linked to a basket of (multiple) sovereign currencies, must coexist with its basket of currencies (it is impossible to completely replace the original sovereign currencies of its member states like the euro and become the only legal currency in the region, that is, the " regional sovereign currency "). In fact, it violates the principles and logic of currency. If it can really be widely circulated, it will inevitably bring the greatest impact to the US dollar, the most important international currency at present, rather than enhancing the international status of the US dollar (even if the US dollar occupies a 50% share in it). It is impossible to get the support of the United States (for this reason, the " SDR " structurally linked to a basket of currencies by the International Monetary Fund is also impossible to become a real circulating currency). As a result, by 2020, Libra could not obtain US regulatory approval at all and could not be launched as scheduled. It was forced to take a step back and prepare to launch the stablecoin " Diem " that is only linked to the US dollar. However, this stablecoin linked to a single sovereign currency has flooded the market, and the competition is very fierce. Diem has no advantage. As a result, it was completely abandoned by 2022, resulting in huge investment losses. In this process, some other stablecoins designed in the same way as Libra and structurally linked to a basket of sovereign currencies also died in the womb. Even stablecoins that are only linked to a single sovereign currency, as well as various cryptocurrencies and stablecoin exchanges, have exposed serious problems by 2022 due to the lack of effective supervision. The prices have fallen sharply, and the actual scenes of fraud and misappropriation are shocking, which has also prompted people to rethink about currency and currency management, and the enthusiasm for CBDC has also cooled down.

The digital RMB has gradually exposed some deep-seated problems and challenges during the testing process. The actual effect is difficult to achieve as expected, and it is difficult to clearly define the time target for its official launch and full operation. Among them, the positioning of the digital RMB has become a fundamental issue that must be rethought .

The positioning of digital RMB needs to be adjusted urgently

After the central bank clearly positioned the digital RMB as cash in circulation, the design and management of the digital RMB are highly comparable to cash. It needs to be specially produced by the central bank and implement a "two-tier operation" model between the central bank and its designated operating institutions. The exchange and wallets of the digital RMB are all free of charge and interest-free, adhering to the principle of "limited anonymity" (to a certain extent, the holding and use of digital RMB are anonymized or privacy protected).

But this positioning actually has big problems.

1. This positioning will make the scale and role of the digital RMB extremely limited. Positioning the digital RMB as cash ( the central bank will include it in M0 statistics starting from December 2022 ) can easily be understood as being able to only replace cash or supplement cash, and can only be used for small retail payments, not for large payments, and certainly not for bank loans and the derivation of new digital RMB (deposits) and for other financial services.

But the reality is that with the widespread use of bookkeeping and mobile payments, the proportion of cash in circulation in the total currency volume continues to decline (it has been less than 4% since the Spring Festival in 2019), and the proportion of cash payments in the total payment volume is even lower (many people rarely use the cash they have). In this case, if the digital RMB created with huge resources can only be used to replace cash (in fact, it is difficult to completely replace it in the short term) and used in a small range, its scale and role will be very limited, and it will be even more difficult to meet the needs of international payment circulation, and its actual value and vitality will be very problematic.

2. The digital RMB is bound to be significantly different from traditional cash in terms of form and operation, and is not cash in essence. The digital RMB no longer has a paper or metal carrier, and does not require different layout designs for different denominations and fixed numbers for each banknote. Instead, it is uniformly expressed directly in the wallet balance (including corners and cents); the wallet needs to be verified by the unified rule password (public key) assigned by the operating system and the password (private key) set by the owner before it can be used to ensure the authenticity and security of the wallet; each time the wallet is used for payment, it can directly increase or decrease its balance, and there is no problem of change; after use, the wallet is immediately updated (the old wallet is lost), showing the latest balance, and the operating system will assign it a new password (without affecting the user's own password); the digital RMB wallet is supervised by its opening bank or payment institution throughout the process, and each use requires verification of the password, etc., unlike cash, after it is paid to the holder, its payment use, destruction, loss or theft, etc., are all the responsibility of the cash holder himself.

It can be seen that the operation and management of digital RMB wallets are fundamentally different from cash. In essence, they are completely deposits and do not require special layout design. They should be included in the bank deposit account system for overall planning and classification and hierarchical management (just like existing deposits and payment wallets), without deliberately requiring wallets to be isolated from deposits to form a unique operating system, otherwise it will bring many unnecessary troubles to the design, promotion and operation of digital RMB . Due to the excessive emphasis on positioning at M0, the current digital RMB needs to be specially produced by the central bank, equipped with a special layout design, and form a complete operation and management system isolated from deposits, resulting in a lot of ineffective investment, seriously affecting the extension of digital RMB to all deposit accounts and financial services, and making it difficult to support international payment applications.

3. It is difficult for the digital RMB to have obvious advantages over Alipay and WeChat Pay in payment terminals. Relying solely on commercialization to attract users and increase traffic for promotion will not produce ideal results.

The application carrier of digital RMB is mainly mobile phones, and its user experience is not much different from Alipay and WeChat Pay. This is a very rational and smart choice for digital RMB : if digital RMB is to replace mobile payment methods such as Alipay and WeChat Pay, it will have to re-establish a new set of application carriers and operation methods, and let users accept and form application habits. The cost and difficulty of cultivation will be very high, so the best choice is to have no big difference with Alipay and WeChat Pay on the user side, thereby greatly improving the efficiency of actual promotion.

Some people put the highlights of digital RMB on Bumper Pay and dual offline, which is not accurate. In fact, this NFC technology has existed for a long time, but all non-cash payment businesses are very risky if there is no third-party supervision. Its wallet hardware and software are completely circulated and used by the public, and it is very likely to be hacked and cause serious problems. Therefore, applications such as Bumper Pay can only be a means of small-amount emergency, and should never become the main method of monetary payment. Don't regard Bumper Pay as an important function of digital RMB to attract people's attention, and invest too much resources in research and development and promotion. This is unrealistic.

It can be seen that the application scenarios and user experience of the digital RMB are difficult to surpass Alipay and WeChat Pay. In addition, the digital RMB wallet does not bear interest, making it difficult to attract and retain users to use the digital RMB more. At present, all pilot projects are basically funded by pilot cities or operating institutions, with preferential policies (such as issuing consumer coupons, red envelopes, etc.) to attract users to use them. The actual payment scale and wallet balance are limited ( by the end of 2022, the pilot payment scale has just exceeded 100 billion yuan, and the wallet balance is only 13.61 billion yuan ). User enthusiasm and usage activity are not high, and the cost and efficiency are unsatisfactory.

4. The relationship between designated operating institutions and other payment institutions is difficult to handle. At present, the issuance of digital RMB highly imitates cash. The digital RMB produced by the central bank is first sent to the designated operating institution, and then it can be forwarded from the operating institution to other banks or payment institutions to form a legal person or personal wallet. But the problem is that after cash is released to the society, its payment use has little to do with the bank, and has little impact on banks or payment institutions. The digital RMB wallet is actually a deposit, which needs to be managed by the deposit institution, and will directly affect the interests of the deposit institution. The "two-tier operation" model that completely imitates cash will inevitably affect the fair competition between the operating institution and other banks and payment institutions. This arrangement is not reasonable.

5. Positioning the digital RMB as cash and counting it in M0 is likely to cause data distortion. If it can be widely used, it will inevitably lead to a significant expansion of the scale of M0, and its share in the total currency and the share of cash payments in the total payment will increase instead of decrease, which is inconsistent with the general trend of the global M0 share in the total currency and the share of payments in the total payment being continuously reduced.

The correct positioning of digital RMB

As the digitalization and intelligence of the national legal currency, the digital RMB should be able to be applied to any place and business where the RMB is currently used, including the formation of deposits, payment settlement, payment of taxes and fees, issuance of loans (including re-loans issued by the central bank), and handling of various financial businesses (financial businesses should still be handled by financial institutions, not by the central bank), etc., and should be charged and calculated according to business agreements, rather than just used for retail payments and free of charge. Therefore, the digital RMB does not change the RMB, but only the form and operation of the RMB; the digital RMB should not be limited to cash, and should not be printed in accordance with cash, first specially made by the central bank and then released, but should actively replace the existing RMB (including cash and deposits, wallets, etc.), and expand the release through central bank re-loans and bank credit; the emergence of the digital RMB should reduce rather than increase cash and promote the proportion of cash in the total currency and the proportion of cash payments in the total payment amount to accelerate the decline. Therefore, the digital RMB should not be positioned as cash and counted to M0.

Some people believe that in order to control risks and advance steadily, the digital RMB can start with cash and retail, and then extend to deposits and wholesale when conditions are ripe. However, this will cause a serious deviation in the concept of digital RMB, which will bring many contradictions and difficulties in design, operation and management, making it difficult to launch and fully expand as soon as possible. This idea and arrangement of "cash first, deposits later, retail first, wholesale later" is unrealistic .

Therefore, it is necessary to adjust the positioning of digital RMB as cash as soon as possible and restore its essence as a deposit . The central bank should make it clear that all businesses of all financial institutions should accept digital RMB, and necessary system transformation needs to be carried out within a time limit, and it should be fully promoted and operated within a certain period of time, replacing all unified RMB as much as possible. The central bank should take the lead and start with me, and first change all clearing accounts opened in the central bank to the digital RMB operation mode. It is required that all account entities in the whole society need to first download the unified digital RMB APP of the People's Bank of China, and the central bank will assign a unified identity code in accordance with the account management rules to realize the large concentration of all user information of digital RMB in the central bank and their uniqueness. Users can open a digital RMB account in a financial institution or payment institution of their choice with this identity code, and the account opening institution will transfer all previous account balances to the digital RMB account and send the new account change information to the central bank. The central bank will collect all accounts of the same user in different account opening institutions, which can fully reflect the payment and balance of digital RMB of each user. Banks and other account opening institutions need to mobilize and help users to open digital RMB accounts in a timely manner, and convert the original RMB accounts into digital RMB accounts within a time limit. Only in this way can the authority of the digital RMB as a sovereign (legal) currency be reflected, the comprehensive promotion and formal operation of the digital RMB can be accelerated through administrative means rather than voluntary means, and the sufficient supply of the digital RMB can be ensured to give full play to the functional role of the digital RMB after its launch.

In this way, not only can the relevant costs of the whole society in the whole process of cash printing, storage, circulation, etc. be greatly reduced, but also the central bank can have all the user information and transaction data of the digital RMB, and then conduct all-round and full-process monitoring of currency circulation, which is conducive to improving the accuracy and effectiveness of monetary policy, and using its intelligent payment and collection to strengthen targeted allocation and strict monitoring of illegal use . Banks and payment institutions mainly grasp the information of people who open accounts in their institutions and their payment and collection data. It is difficult to understand the identity information of both parties to the payment and collection and their transaction content and data for each transfer and collection as before, which is conducive to breaking the monopoly of commercial institutions on big data, better protecting customers' privacy or business secrets and legitimate rights and interests, and better understanding users through the most complete information of the central bank and providing them with tailor-made personalized services, actively promoting fair competition in society, thereby promoting profound changes in financial formats and monetary management, and the economic and social value that may be brought will be very huge - this is the most profound change and the greatest value that the digital RMB will bring.

Therefore, the positioning of the digital RMB must be adjusted as soon as possible. The central bank should organize forces to conduct in-depth research and re-planning according to the new positioning, come up with an implementation plan as soon as possible and start simulation operations.