Zhou Xiaochuan: Several questions and responses about digital currency

From April 15 to 17, 2022, the 2022 Tsinghua PBC Global Finance Forum with the theme of "Steady Progress, Finance Promotes High-Quality Development" was grandly held in Beijing.

2022 marks the 10th anniversary of the incorporation of the former Graduate School of the People's Bank of China (PBC) into Tsinghua University and the establishment of Tsinghua PBC School of Finance, as well as the 41st anniversary of PBC's establishment. On the morning of April 16, at the opening ceremony of the forum, the Tsinghua PBC Alumni Development Forum and the 10th Anniversary Commemoration Conference of Tsinghua PBC School of Finance were held.

Zhou Xiaochuan, President of the China Society of Finance and former Governor of the People's Bank of China, attended the forum and delivered a keynote speech on "Several Questions and Responses Regarding Digital Currency".

(Pictured: Zhou Xiaochuan)

Good morning, distinguished guests and delegates. First of all, I would like to sincerely congratulate Tsinghua University PBC School of Finance on its 10th anniversary. As a top university, Tsinghua PBC Global Finance Forum hopes that I can give an academic topic to highlight the research characteristics of the School of Finance. I have also thought about it and listened to everyone's ideas. Today I would like to share with you some issues about digital currency. There are actually two major overlapping areas in the discussion of digital currency. One is to focus on its financial services, including specific financial service policies and the acceptability of market entities; the other is more focused on technical measures. These two may be different, so I may still focus on the former area.

There have actually been a lot of discussions in this field, and many issues and concepts have been discussed many times, so I thought it would be helpful to pick out some issues that have not been discussed much in the past, or some issues that you may have questions about, and discuss them with you today.

First, I sorted out the issues that have been discussed in the past and made a list. A total of 35 issues on this list have been discussed, and I will not focus on discussing these issues today.

I would also like to say that I have been away from the People's Bank of China for four years, so the discussions I have made represent my personal research views and opinions, not those of the institution. Digital currency is a dynamic topic, and there are certain differences between the questions raised at the beginning and those raised later, especially some discussions seen internationally, which have raised some new statements, and we would like to discuss these issues.

The first question is how to distinguish and evaluate CBDC, that is, central bank digital currency. What is the feasibility and stability of the funds in commercial bank accounts, that is, the M1 currency of commercial banks, and other currencies? First of all, everyone is concerned about stability. I would like to say that stability is best not to be considered as a choice between two options, either stable or unstable. In fact, stability may be a continuous indicator. Some currencies will be very stable, close to 1, and some are not very stable or unstable, close to 0. There are also other currencies that have been implemented or are being designed, which may have a certain degree of stability, so they may be in between. Some people say that the central bank's currency is stable. The central bank issues M0, and the money in commercial bank accounts M1 is commercial currency, which is not 100% stable. I think this statement may actually have some problems, it is questionable, and it is also easy to cause some confusion in trust.

Let's start with this question. First of all, the currency of commercial banks or the funds in their accounts have a high degree of stability, but of course they are not 100% stable. Some commercial banks may have problems, and some may go bankrupt. When they go bankrupt, your funds may not be available, but that is also an individual phenomenon. In addition, how do we measure stability? One way of measuring is to find a reference system to measure. For example, this reference system uses the banknotes of the central bank to measure. Is it 100% equivalent? This involves the central bank's currency itself, which may not be 100% stable in the true sense, because the stability of the central bank's currency depends on purchasing power. You can also use the SDR, the US dollar, or a combination of commodities as a reference system, so there are actually different stable coordinate systems, and it is not necessarily the most reasonable to use the currency of the central bank of your country as the coordinate.

Why do we say that commercial banks can also issue M0? One example is Hong Kong, China. In the past, Hong Kong was under British rule. There were two note-issuing banks, HSBC and Standard Chartered. In 1997, Bank of China (Hong Kong) joined. It was three commercial banks that issued notes, but the requirements for the three commercial banks were very high, so the Hong Kong dollars issued by the three banks were also highly stable. Are the notes between the three note-issuing banks completely interchangeable? In fact, it is not necessarily 100%, especially from the beginning, but generally speaking, they are highly stable and interchangeable. Why can commercial banks be so stable? If a third-party institution issues currency, no matter what type or technical basis it has, is it stable? This depends on whether it meets high standards. We say that the requirements for commercial banks are quite high, especially for note-issuing banks. What are they? There may be many, and I will list five of them.

First, a very high capital adequacy ratio. After the global financial crisis, a concept called capital quality was proposed. In addition to having capital, the quality of capital must also be high. What does high-quality capital mean? It means that the capital has sufficient ability to absorb losses. If the capital is placed there and then runs away when the time comes to absorb losses, it is not high-quality capital. In addition, there are some auxiliary security requirements, such as leverage ratio and NSFR net stable funding ratio. In addition, as a high-quality bank, especially an internationally trusted, systemically important bank, or a large bank among the G20 members, it must have a total loss-absorbing capacity (TLAC). There are higher requirements to do this.

Second, commercial banks are required to have reserves. There are deposit reserves. The deposit reserve requirements of various central banks may be different at different times, which also has a regulatory role. Another is the clearing reserve, which requires participation in the clearing system. There are bad debt reserves, and provisions for losses. The central bank will give these most important banks, if they are able to issue banknotes, a temporary overdraft line, which means that if there is a temporary problem with the clearing system, they can borrow money from the central bank. Many people are indifferent to this because it rarely happens, but it was needed during the global financial crisis. In the future, when everyone engages in CCP, that is, qualified central counterparties, other financial derivatives and securities products will need to have central counterparties if there are transactions, and they should have an account with the central bank, and they will need support from the central bank when necessary. This is the second point.

Third, there is a deposit insurance mechanism to ensure that repayment can be made when liquidation occurs. In China, deposits below 500,000 yuan can be fully repaid, and this has increased after the global financial crisis. When the financial crisis occurred in Cyprus, large deposits had to be converted into equity. In addition, any institution, especially an important bank, will have many international payments, so it is necessary to transform its domestic payment capacity into international payment capacity. One of the international payment capacities is to rely on the central bank's foreign exchange reserves to provide international payment guarantees and the possibility of overcoming fluctuations.

Fourth, there must be strong supervision. These supervisions have clear requirements for the quality of the balance sheet, the asset side and the liability side, and there are risk weight arrangements for the asset side. Some banks may want to determine the risk weights themselves based on internal ratings, but the Basel Accord also stipulates that you cannot do too much. In addition, there are transparency requirements and stress testing. These supervisions ensure the quality of banks.

Article 5: Corporate governance. These banks must have a check-and-balance structure, the team must be sufficiently professional, there must be qualified internal and external audits, and there must be certain requirements for senior executives. In particular, it cannot be like a while ago, when many problematic institutions were ruled by one person. Such corporate governance is very problematic. Therefore, in this case, the M1 of commercial banks has characteristics very close to central bank money. It cannot be said that this is commercial money and is unstable. We cannot say that.

If third-party institutions want to innovate, do digital currency or participate in payment systems, they must meet high standards to varying degrees and not play tricks. You say those standards are too high, the cost is too high, and I avoid them. This is not okay, and that is not okay. As a technology company, I will not follow your standards, but if you deviate from these standards, your stability may be in question, which will affect not only your own stability, but also the stability of the entire system. In addition, it is not easy for you to gain the full trust of the majority of users.

From this perspective, there are many innovative attempts at stablecoins. The reason is that we first had so-called unstable coins like Bitcoin. Of course, they are not necessarily real coins. Some people also say that they are digital assets. Libra’s initial concept did not intend to compare with any reference system. The stability of this coin is not self-proclaimed. It is not stable just because you say it is stable. You need to see what supports your stability. You say you have 100% reserves. Is it true? Who do you put it with? Has anyone proved it to you? Has anyone audited it? Generally speaking, this coin is on the liability side. Do you really want to use it? Including buying treasury bonds, if it is put on the asset side, how safe is the asset side? How is the liquidity? These are all questions that need to be answered. In addition, do you want to obey strict supervision, or do you try every means to circumvent these supervisions? Have you considered stress testing under severe conditions? Because some innovative ideas, due to weak strength, often take very smooth conditions to say that I can use it and it is pretty good, but you must consider whether you have done stress testing under severe conditions, and what to do if something goes wrong? Is there transparency when something goes wrong? Because only with high transparency can there be opportunities for improvement after mistakes. In fact, in the current IT development, many FinTech and BigTech companies often make mistakes. Mistakes are not terrible in technology. The key is how to change technology. But after making mistakes, they may be covered with money. I use my own money, especially some companies with high valuations and a lot of money. When mistakes are made, they are covered with money and not told to the outside world. Stablecoins are not self-proclaimed. There must be a series of conditions to assess whether you are a stablecoin. We should not easily shake our trust in the funds in commercial bank accounts. Issuing banknotes is the highest level. Participating in payment is a role in a certain link in payment. Even participating in payment acquiring banks is also participating in payment. The work requirements at each level are different. If you want to be bigger and stronger, the requirements will be higher. In addition, you must understand that issuing banknotes is a liability. From the perspective of the central bank's balance sheet, issuing M0 is a liability of the central bank. It should be said that the development of large technology companies and technology finance companies is promising and has great prospects in the payment industry, but you must pay attention to integrity, don't be clever, improve your quality, and meet high standards. This is the first problem.

The second question is how to understand the digital currency e-CNY (digital RMB) emphasized by the People's Bank of China, which is positioned at M0. Some people said they understood this question, while others raised some doubts. I think the leaders of the People's Bank of China have already explained this issue, and they have made it very clear. I would like to make a few more additions here.

First of all, the People's Bank of China emphasized that the development of digital currency is to replace M0, which shows that it wants to focus its application on the retail sector, that is, it hopes to be able to be applied in the retail sector, especially with the help of the Internet and mobile Internet terminals to provide greater convenience for everyone.

In addition, as a large institution, the central bank, like commercial banks, needs to rely on a certain department to manage any business within it. One department manages M0, and another department manages M1. The R&D expenses and pilot expenses are all managed. Therefore, the positioning of M0 also avoids chaos and makes work easier. This is also a reason.

Let me give you an example of management. For example, when you go to a bank to exchange foreign currency, you look at the exchange rate on the sign. One is for banknotes and the other is for foreign currency. These two are different. That is to say, the exchange rate rules for M0 and M1 are different when exchanging foreign currency. There was a difference in management in the past.

Another thing is that we believe that the operation of M1 in the central bank and the financial system is still relatively normal. Although with the advancement of technology, there is room for improvement in any business, such as improving efficiency, reducing costs, increasing safety, and correcting mistakes, but it seems that there is not much room for improvement in M1. Don't say that replacing M1 makes people feel that the management methods of M1 will be completely changed in the future, as if it will cause such a shock, making the current system seem not very useful and need to be replaced.

In the development of digital currency, when the concept of digital currency was first involved, it was mainly divided into two categories internationally. One is based on tokens, and the other is based on accounts; one has an account, and the other does not. I think we can also add check-based, that is, based on payment instructions. You give a payment instruction, but the actual payment is completed later. So the payment instruction is a bit like the practice of checks in the United States and some Western countries. In the past, checks were more developed. Individuals only needed to sign a check to buy something, which in itself was considered a payment, but in fact it was just a payment instruction. There were still some tasks to be completed later. To be honest, this task was not simple. These tasks must be completed before the payment is truly completed. This also involves checking accounts. In the United States, checking accounts are M0, so checking accounts have not paid interest for many years, just like paper money, so there is an account that is close to paper money that can be paid. But in China, M0 only has cash, and the money put into bank payment accounts and Alipay is M1, so there is also a difference in the understanding of M0 and M1, so there is a lot of knowledge between M0 and M1.

In addition, in the early stage of developing digital currency, we did not intend to replace financial market transactions, such as the stock market, bond market, and foreign exchange market. Some people also proposed that blockchain-based digital currency could be used as a substitute, which is also likely to cause research and development focus considerations. One is whether it will cause some kind of impact and confusion to the current system. Therefore, what we said about focusing on replacing M0 can be observed and interpreted in many aspects; the other is that M0 and M1 are not isolated and completely separated, and there is a channel between them. Everyone knows that if the money in the account is compliant, it can be withdrawn for cash, especially for residents. Residents can withdraw small amounts of cash, but withdrawing large amounts of cash must comply with anti-money laundering procedures and cash management regulations. Under certain conditions, there is a channel connecting M0 and M1, which is approximately equivalent, and there will be no situation where M0 is highly stable if it is the central bank currency and M1 is unstable if it is not the central bank currency.

The third question is, some people ask whether the central bank, especially the People's Bank of China, should speed up the issuance and issue more digital currencies? Especially cross-border digital currencies. This is indeed related to the current geopolitical issues. I hope that digital currencies can also play a certain role in this regard. How do we view this issue? I personally think that the amount of currency printed can be decided by oneself, but whether it can be circulated depends on the application and whether people use it. Many people do not understand the process of banknote production of the People's Bank of China. They think that it can be used after printing with a printing press, but it is not. After the banknotes are printed, they are placed in a large warehouse, which is a wonder to be honest. For example, Beijing has a highly automated three-dimensional warehouse operated by all robots. There are two types of things stored in the warehouse: one is the raw materials for production, such as paper and ink, and the other is the finished products, which need to be placed in the warehouse and cannot be directly taken out. Then, the finished products are transported and allocated to the cash vaults of various branches. The cash in the cash vault is collected by commercial banks. Whether the commercial banks collect it or not depends on the supply and demand difference of their own M1. The supply and demand difference of M1 refers to the deposit-loan difference, or more strictly speaking, it is the difference between cash deposits and cash withdrawals. Large cash withdrawals lead to cash outflow. Otherwise, the cash will remain in the vaults of commercial banks or the People's Bank of China and cannot be taken out.

When is the most cash going out each year? Before the Spring Festival. In the past, many people would take cash home, but now this situation has decreased. After the Spring Festival, many people will deposit the money they took home back into the bank, and the money will be returned to the commercial banks in large quantities. After the Spring Festival, the commercial banks have too much cash backlog, so they return it to the central bank's issuance warehouse. In this process, there is also the handling of incomplete currency. In other words, the central bank must ensure that the currency it issues is actually in demand in the market, especially in the retail market. In fact, the central bank can only issue currency if there is a demand for it in the market, not just printing it.

In addition, there is a substitution relationship between this M0 banknote and other payment tools. If other payment tools are used well, this M0 will decrease, such as credit cards and debit cards. In particular, if debit cards are used more, M0 will decrease. For example, third-party payment wallets do not actually contain real currency cash, but account funds. If they are used well, people will feel that they don’t need to carry so much cash, and the scarcity of cash will decrease, so there is also a substitution relationship.

All cash issued by the central bank is a liability of the central bank. Because in many international discussions, they say that China's digital currency is developing very fast, it will be a great weapon in the future, and it is your asset. People who really work in the central bank know that currency issuance is the liability side of the balance sheet, which means that the central bank must ensure that the currency issued by the central bank has purchasing power through institutional guarantees, commitments and back-up support, so it is a liability. Therefore, from this perspective, it is not so easy to apply it to other aspects, especially geopolitics.

There is another situation where the state can give a mandatory order to the currency, such as what kind of transaction must use a certain currency, which may improve the status of the currency, but it may also be just a formality. In other words, if the government requires that this kind of transaction must use this currency, in fact, the two parties to the transaction do not like this currency, and the buyer will exchange it into this currency before the transaction. After the transaction is completed, the recipient is worried that this currency is not reliable, so he will exchange it back immediately. So it may just be a handover. This phenomenon has occurred in our border trade. Although we encourage the use of both the other party's currency and the RMB in trade between China and border countries, there are places where the RMB is easy to use and the other party's currency is not easy to use; there are also transactions where merchants, whether in the form of M0 or M1, try to return the currency to the bank before the end of the day, and the bank also tries to work a little overtime after the end of the day to transfer the currency to the other country, and does not retain this currency position. Why? Generally speaking, it is because of the worry about exchange rate risk. But there are also many cases where it is due to the requirements of the superior bank, which does not allow them to retain the other party's currency position. In other words, if digital currency is to be developed, it must focus on its real application, not on mandatory use of this currency for certain types of transactions. From the perspective of ordinary people, in the end, we must see that ordinary people are willing to put this currency in their wallets, use it today or tomorrow, and are not in a hurry to return the money (whether paper or digital) to the bank after receiving it. This is a test that needs to be considered.

The fourth question is that there are now multiple solutions and multiple products competing for excellence. We require interoperability or universality, but in fact it may take a process. How should we grasp this relationship? In general, we should encourage innovation and encourage the development of new products. After development, we should also create certain conditions for them to be piloted. Only after they have been piloted, there are multiple solutions and there is competition between them, will the survival of the fittest occur. But will the process of disappearance cause social problems? Will anyone suffer? So we still have to be very careful.

Unlike other manufacturing and production fields, the monetary field may be more sensitive and not necessarily so simple. Therefore, we must pay attention to fairness in the competition process, not maliciously suppress the opponent, and not destroy the financial infrastructure, because easily replacing the financial infrastructure may cause greater risks. Competition brings about optimization convergence, and finally the good things will be selected. At this time, it should be noted that the good things that are innovated must lack universality or interoperability at the beginning. At a certain stage, there must be some competent departments, regulatory departments or associations to strengthen universality and develop some universal standards and interoperability. In this way, it is possible for multiple parties to run in parallel, but it will increase universality and truly facilitate the people in the future.

People like me who are over 70 years old may have experienced the problem of multiple color TV solutions when we were around 20 years old. China now uses the PAL standard, the United States and Japan use NTSC, and the former Soviet Union and the Middle East use the SECAM standard. People who buy TVs must make sure that the standard you buy is correct. If it is not correct, you can't use it when you take it home. Various standards are developed to be comparable, and there is no way to emphasize which one will be eliminated. They will coexist for a period of time. After a period of coexistence, someone will develop new integrated circuits to unify them. At first, the two simpler ones are easy to unify, such as the unification between SECAM and PAL, and finally all three standards can be unified. Now no one knows that there are three standards. Anyway, when you turn on the TV, no matter which country you buy it from or which channel you receive, you can watch it. The same is true for digital currencies, such as products such as aggregated payment that have appeared on the market. It also includes credit cards. Before the new century, when the Chinese credit card market was very chaotic, there were VISA, ICBC Peony Card, Agricultural Bank of China Golden Harvest Card..., and large shopping malls had eight or nine POS machines on the counter at the same time, with basically the same functions, but not universal. Later, the state asked the People's Bank of China to be responsible for this matter, requiring that a POS machine could solve all the problems, and thus UnionPay was born. In other words, digital currency may also have this process. It is impossible to emphasize high consistency at the beginning, and it is impossible to decide in advance who will make the standard. Advanced standards cannot be formulated. No one can sit in the office and think through all these issues in advance. Only in practice can multiple plans run in parallel, compete and select the best, and then at a certain stage some institutions will enhance this universality, and then interoperability can be promoted compulsorily or semi-compulsorily. This is also a current international practice for digital currency.

Generally speaking, there are several different tracks for digital currency. One is the token-based track, the other is the account-based track. The payment instruction-based track, as I said, can also be a track. In fact, some wallets contain tokens, some wallets contain cash, some wallets are connected to bank accounts, some wallets contain checks, and there can also be mixed wallets. In the development of digital currency, the concept of wallet is used more frequently. Truly different products compete in different tracks.

Another track is consumer credit. When consuming, you first write a bill, which is equivalent to issuing a currency to the consumer. Products based on consumer credit are also a track, but there are many disputes and problems are prone to occur. There are also many examples of problems. In the token-based track, one of the hottest issues is the track based on blockchain or distributed ledger technology.

In addition, from the perspective of competition standards, security is an important point. For example, our QR codes, in the early days, contained Trojans and were easily used as fraud tools. Later, under the promotion of the People's Bank of China, everyone upgraded the QR codes, so now they still look good. However, individual QR codes, static QR codes and dynamic QR codes are different. Some big technology companies also say that QR codes will not last too long after all, and may disappear in a few years because of their low security level. Therefore, some companies vigorously promote NFC, that is, near-field communication, and some people advocate the promotion of Bluetooth. In short, there are all kinds of things.

Another security is passwords. We know that many processes need to be encrypted, such as the amount in the wallet, the payment to the merchant, and the merchant uploading information to complete the transaction. So there are several encryption links. How to add these encryptions? It is also a kind of competition. Everyone knows about Internet browser encryption. In the past, there were 64-bit, 128-bit, and 256-bit encryption. There are many encryption methods. One of the questions is whether to use domestic encryption methods or foreign encryption methods? This consideration is what will happen to the security situation in extreme cases. This is also a track.

In short, there are many different tracks for development competition. The most important thing to be vigilant about is that innovators, BigTech, and FinTech should not embezzle customer funds. It is true that some people want to embezzle other people's money when they first design the system, but they are a minority; in most cases, problems and holes arise during the operation, and they have to embezzle customer funds. We have also seen some collapsed institutions, which actually had good intentions at the beginning, but later embezzled customer funds and committed crimes such as illegal fundraising.

We say that in this situation, we must emphasize that after a period of time, there must be institutions including associations that can take on this responsibility, so that what needs to be upgraded can be upgraded, including encryption technology. If everyone wants to use domestic encryption, they must use domestic encryption, and if interoperability is required, interoperability must be achieved, which requires some external force.

The fifth question is that some people say that digital currency must be legislated first and international standards must be established. This wish is good, but it is impossible to make the legislation so clear during the process of research and innovation. Let's first look at the provisions of the "Law of the People's Bank of China": The People's Bank of China is responsible for issuing RMB, managing the circulation of RMB, and maintaining the normal operation of the payment and clearing system. Everything related to currency is basically in the first one or two pages of the "Law of the People's Bank of China". If the People's Bank of China wants to issue a new version of RMB, whether it is coins, banknotes or any other type of currency, it must issue a notice in advance, prohibit counterfeiting of currency, and no unit or individual may print or sell token tickets. To a certain extent, it prevents token products from being issued casually, because no unit is allowed to do so.

In addition, the People's Bank of China is responsible for the recovery and management of the issuance warehouse and the issuance fund. Therefore, if the digital currency we develop belongs to the RMB, there is no need to legislate first. Without legislation, there can be no digital RMB. Therefore, we say that there are no legal barriers to the e-CNY pilot of the Winter Games. Don't say that it cannot be done if there are legal barriers. Such statements are also wrong. It is not okay for a third party to issue currency. There must be legislative support and high standards must be met first. However, if the currency issued is not M0, it may be okay if it is M1, but it is not okay if it is a token.

In addition, from the Law of the People's Bank of China, it can be seen that issuing currency is a sovereign matter, which is defined by each country. There is no mention of international standards. Therefore, although we hope that international organizations can play a certain role, especially in guiding and establishing order in cross-border payment standards, there is no legal requirement that it must have standards before it can be done. And imagine that there is no international organization that can play such a role in this regard. International organizations mainly play a certain role in the field of cross-border payments. If it is not a cross-border payment, but involves other countries' domestic payments, there is no need for international organizations to worry too much in the middle. Cross-border payments involve many issues, especially those involving exchange rates, etc., which are also big problems for international organizations and cannot be solved in a short time. Everyone should have a clear understanding of this concept.

Finally, let me talk about the role that SWIFT, CIP, and digital currency will play in the current geopolitical instability. I just want everyone to sort out a few things from a conceptual perspective.

First, unlike what the media or some people say, SWIFT is not a cross-border international payment system. The specific name of SWIFT is Society for Worldwide Interbank Financial Telecommunications. It is not a financial transaction organization as some people think, but a communication organization. That is to say, there must be a lot of communication before payment, and these communications go through SWIFT. The final payment and settlement are all based on the currency system of each country. This should be made clear.

In addition, CIPS (Cross-border Interbank Payment System) is designed for cross-border RMB payment, that is, the system for cross-border RMB payment, settlement and clearing. Of course, this system also allows other currencies to be used, including a few mainstream currencies, but so far not many people use them. In addition, this system also integrates some communication functions, but the communication functions are not used much. This is the current situation, and we cannot expect it to do this or that.

Digital currency, at least China's e-CNY, is designed for retail, for the convenience of the people and merchants, not to replace the US dollar. So since it is not designed for that goal, it may not be able to support it if it is suddenly given this function. Of course, we do not rule out the possibility of cross-border payment in the future of e-CNY, but I think it will also focus on retail, and cross-border retail applications will not be easily used as a military weapon.

Why is SWIFT related to trade, investment, and financial markets? For example, some countries are sanctioned and their assets are frozen. Investment is not of much concern to everyone, and financial market transactions are basically blocked. Therefore, the most important thing is trade, and SWIFT also plays a very important role in trade. Before payment, international trade needs to solve many trade information problems through communication, including whether contracts, warehousing, transportation, specifications, varieties, and quality are compliant, goods must go through customs, and taxes must be paid when going through customs, and some goods will be returned after the transaction. In terms of finance, there are payment instructions, letters of guarantee, trade financing, and factoring. A lot of things need to be communicated in advance. Even because SWIFT is doing well, some people who are a little bit away from trade financing also use this channel to communicate, so everyone should understand the current status of communication.

What really involves payment is payment instructions. Many payment instructions go through SWIFT. When SWIFT really does cross-border payment, it involves the choice of currency. SWIFT is not an institution for US dollar payments. It can pay in multiple currencies. As for which currency is popular, that is the current choice of the market. We don’t know what the future will be like. Involving multiple currencies involves the exchange rate mechanism, which is also a very important issue. In this case, everyone says that if we avoid SWIFT, can this be done? In theory, it should be possible, because its basis is trade. If it really doesn’t work, barter, barter trade, but in barter trade, it is best that both sides have equal amounts. What if there is a difference when the amounts are not equal? ​​Currency is still needed. In the past, this difference may be a bookkeeping trade difference. For example, the difference between China and some countries in the CMEA was booked in Swiss francs, which is not the real value, because it is not the real Swiss franc.

Therefore, if SWIFT is used as a tool for sanctions, it should be considered that others can find other communication channels to continue to complete trade. However, SWIFT has already formed its efficiency and market scale. First, there are a large number of participating financial institutions, and there is a scale effect there. As long as you enter SWIFT, it is very convenient to contact anyone. Second, SWIFT does a good job in confidentiality. In the past, there were encryption machines, and now there are many encryption methods. It is rare to hear about problems with encryption. As you may know, the Bangladesh Central Bank lost a sum of money a few years ago. Everyone suspected that SWIFT had security problems. In the end, it was found that the money was leaked from the connection between the Bangladesh Central Bank and the printer, not from the SWIFT channel. Of course, this is a matter of one foot higher than the other, and it cannot be said so definitely. SWIFT has automated information processing, and a lot of information does not require human intervention, so the level of automated processing is also relatively high, so it has advantages. If you avoid SWIFT and open another channel, you may first have a transition period. At the beginning, the number of participating parties in this system may be too small, and many communications cannot be resolved, which will affect trade efficiency. Some trades that used to be done in a week have not been done in two months because many channels have been disconnected. Another reason is that there may be security concerns and errors in processing. Manual processing sometimes has loopholes and the possibility of errors. So SWIFT is not irreplaceable, but there are many things to do to replace SWIFT. There are many things before and during the transition period that may affect trade.

In January this year, I talked about the trade pattern that avoids slipping into the Cold War period at Tsinghua University. To be honest, if our financial payment system or payment communication system slides into a Cold War pattern, it will be a loss for everyone. Since many people are concerned about what role SWIFT and digital currency can play in the middle? Finally, take this opportunity to say a few words about this issue.

I don’t know if the above can answer some of the questions that everyone is concerned about, but this is all my personal. Of course, some of my research colleagues around me have communicated a lot, and it may not be right. Please criticize and correct me if it is wrong. I hope it will have a certain reference effect for everyone. At the same time, it can also be regarded as making some small investment in Tsinghua Wudaokou Global Financial Forum.

Thank you everyone.

(This article is compiled based on the on-site speech and has not been reviewed by me)