Zhou Xiaochuan clarified three major misunderstandings about digital currency at Wudaokou (with full text of speech)

Zhou Xiaochuan believes that the payment system must strike a balance between protecting privacy and anti-money laundering, anti-terrorism, anti-drugs and anti-cross-border gambling.

On May 22, Zhou Xiaochuan, honorary dean of Tsinghua University PBC School of Finance and former president of the People's Bank of China, delivered a keynote speech on "Digital Currency and Electronic Payment Systems" at the "2021 Tsinghua PBC School of Finance Global Finance Forum".

In his speech, Zhou Xiaochuan first clarified three misunderstandings about digital currency: first, China's digital currency will replace the dollar's status as a reserve currency and an international payment currency; second, digital currency will be closely linked to the internationalization of the RMB; third, DECP and e-CNY want to replace the current role of third-party payment.

"The purpose and direction of digital currency design are not to replace the dollar's status as a reserve currency and an international payment currency. Digital currency will help enhance the status of the RMB and its cross-border use, but the internationalization of the RMB depends more on institutional and policy choices and the progress of reform and opening up, rather than on technical factors. DECP is a two-tier system, jointly developed by commercial banks, telecom operators and several major third-party payment institutions. We are all in the same boat," said Zhou Xiaochuan.

Zhou Xiaochuan also expressed his views on the controllable anonymity of digital currency. Zhou Xiaochuan believes that the payment system must strike a balance between protecting privacy and combating money laundering, terrorism, drugs and cross-border gambling. "The concept clearly proposed by China's DECP is called controllable anonymity. Controllable anonymity itself is not a point that can be precisely located mathematically, but it means to find a balance between protecting privacy and combating money laundering and drug trafficking. You can further study where this balance point is, but don't use this matter to deliberately or deliberately belittle or attack the progress of DECP."

The following is the full text of Zhou Xiaochuan's speech:

Good morning, distinguished guests and delegates! I am very happy to attend the Tsinghua PBC School of Finance Global Finance Forum. I just heard the very important speeches by President Qiu Yong and Dean Zhang Xiaohui. This year is the 110th anniversary of Tsinghua University. The national leaders personally gave important instructions on the development of Tsinghua University and placed high hopes on it. In this context, Tsinghua University PBC School of Finance and the Global Finance Forum hosted by it are getting better and better. Today, I would like to talk about an academic issue, "Digital Currency and Electronic Payment Systems."

This topic has been discussed a lot for some time, and it is indeed something that the Party Central Committee and the State Council have paid clear attention to and included in the "14th Five-Year Plan". We must actively explore the content of pilot development and promotion. However, I have read a lot of media reports and comments on this issue, and found that there are still many concepts that need to be further clarified, and some directional issues need to be explored. Although China has entered the research and development and pilot stage of DC/EP, there may be a lot of discussion on this issue, so I would like to take this opportunity to communicate with you again, and I feel that it is also an issue of international interest. Of course, I am also a bystander in my current position. I am actually a certain distance away from some specific issues in the research and development and pilot process, and my observations are not very accurate. I would like to discuss this topic with you.

First of all, some discussions on this issue by the media, especially foreign media, may cause some misunderstandings. As I said earlier, we have discussed these basic concepts a lot in the past few years, but it does not mean that everyone has reached a consensus or has a deep understanding of this issue.

To give a few examples, there is a common saying in foreign media that China's DC/EP or e-CNY will not replace the dollar's international dominance no matter how it develops. I think this statement itself is not quite right, because the development of DECP is mainly based on the modernization of the domestic payment system, keeping up with the pace of the digital economy and the Internet era, improving efficiency, reducing costs, especially serving the retail payment system. The original design purpose and direction of efforts did not intend to replace the dollar's status as a reserve currency and international payment currency.

Another view, which is also frequently mentioned by foreign media, is to closely link the development and pilot of digital currency with the internationalization of RMB, and believe that digital currency is not very helpful for the internationalization of RMB, or it cannot achieve the internationalization of RMB. I think that the modernization and digitization of RMB payment system will help to improve the status of RMB and the cross-border use of RMB to a certain extent, but it is not too much help. The internationalization of RMB depends more on the choice of system and policy, and more on the progress of my country's reform and opening up, rather than on technical factors.

There is another argument that the DECP and e-CNY promoted by the People's Bank of China are intended to replace the current role of third-party payment. I think this is also a presumptuous argument. The People's Bank of China clearly stated that the DECP plan is a two-tier system, and the entire R&D team is organized by the People's Bank of China, and major commercial banks, including Industrial and Commercial Bank of China, Agricultural Bank of China, China Construction Bank, etc., as well as telecom operators and several major third-party payment institutions, are jointly involved in the R&D. They are all based on their previous work and aim at a new level of upgrading. We are all in the same boat. Of course, people in the same boat sometimes have different opinions, and sometimes there may be disputes on some issues, but after all, we are in the same boat. It is not as some people say that it is an internal struggle, who will replace who.

I happened to watch a movie a few days ago, which was about volleyball. I want to give an example. How do volleyball players train? If volleyball players want to increase their offensive and spiking power, they need to train their muscles. As a result, some people may start to make sarcastic remarks after seeing this training, saying, "Your muscles are well trained, but no matter how you train, you will never win a place in the weightlifting competition." The team said that we have no intention of participating in the weightlifting competition, so don't make sarcastic remarks about such irrelevant things. In addition, the current volleyball style is to pay more and more attention to the back row attack, and jump from beyond the three-meter line. When training the back row attack, some people will say that the coach and the second setter deliberately belittle the offense of the second and fourth position players, and focus on the back row attack. This kind of provocation is meaningless, because in fact everyone in a team hopes that when the first pass is good, there will be opportunities to attack and score. To put it bluntly, volleyball competitions often select the best spiker, and whoever is given more opportunities will score more points, so there will be some disputes within the team sometimes, which is normal, but after all, they are a team, and everyone should cooperate to make progress together.

I give this example to say that some unfounded concepts or terms are actually a lack of understanding of the R&D plan and pilot projects, and it is also easy to cause "the grass is greener on the other side". Obviously, the plan has been proposed and is already in the process of system construction and pilot projects. Don't play volleyball and want to win championships in other sports at the same time. This may be problematic.

Another one is about the discussion of controllable anonymity. In fact, the payment system must strike a balance between privacy protection and anti-money laundering, anti-terrorism, anti-drug and anti-cross-border gambling. On the one hand, privacy must be guaranteed, and at the same time, necessary monitoring must be carried out on certain activities. Therefore, if you look at this matter from two perspectives, some people will stand on the left and say that you do not protect privacy enough, and some people will stand on the right and say that you condone money laundering and drug trafficking. So there must be a balance point in the middle, but this balance point can also be chosen to be slightly left or slightly right. The concept clearly proposed by China's DECP is called controllable anonymity. From the perspective of controllable anonymity itself, it is not a point that can be accurately located mathematically, but what it means is to find a balance between privacy protection and anti-money laundering and anti-drug transactions. You can further study where this balance point is, but don't use this matter to intentionally or deliberately belittle or attack the progress of DECP.

Another question is whether the right to issue digital currency needs to be subject to special legislation, etc. I will say a few words about this later if I have the chance. There may be many conceptual aspects that need to be discussed here.

In short, in the face of various media discussions and voices, we still need to strengthen communication and enhance discussions in this regard so that society, including all aspects of the world, can have a clearer understanding of the progress and development of digital currency and a better understanding of China's DECP and e-CNY.

The second aspect I would like to talk about is the modernization of the payment system. What should we focus on?

First of all, we say that digital currency has many different focuses from a global perspective. Some focus on improving the efficiency of retail systems, some focus on wholesale transactions, and some focus on whether transactions in exchanges and financial markets can adopt new payment and settlement systems. Some people say that there are so many trades in the world, including commodity trade and service trade. Can commodity and service trade be more convenient? When Facebook first promoted Libra, it felt that cross-border remittances were inconvenient and could not improve the convenience of cross-border remittances. Some people also mentioned the convenience of cross-border investment, so there may be development prospects in multiple fields. I would like to talk about what issues we should focus on. Overall, the modernization of the payment system is a step taken every once in a while. Generally speaking, this step is a relatively large step, so everyone has enough motivation. For example, like the replacement of mobile phones, some manufacturers release a version every few months, but from the user's perspective, my mobile phone has only been bought with money, and it can still be used, and the performance is not much different. So it must be considered that this step must be relatively large before we consider upgrading in the future. Especially for small steps, if we have to change the system for minor improvements, there may be insufficient motivation. So we should use this kind of gap to measure how big the step is and what direction we choose.

How to look at this step? First, look at the function of the system, its efficiency, and its performance. Second, look at the cost, whether the cost can be reduced. The cost-effectiveness is the ratio of efficiency to cost. In addition, we need to look at the possibility of error in the system, because the financial system involves stability and confidence, and is very concerned about the probability of error. Another thing is that it is difficult to avoid 100% error-free, but there is a small probability of error. Can the error be corrected after the error occurs? For example, if the payment is wrong, can a refund be made? Can the loss be stopped? There is also a charge back function in credit cards, which can get the money back. Another thing is the ability to control risks in terms of performance. How strong is the risk control ability of this system? Sometimes, from the perspective of technology development, some technologies are very much expected to be used, but from the perspective of the financial system, the emphasis on stability, risk control, error probability, and error correction capabilities may be higher than from the technical perspective.

Let's look at it from these perspectives. China attaches great importance to the retail system, so this step can be taken. China is a society that uses cash more, but it is not particularly prominent from a global perspective. I estimate that developed countries, even those where credit cards are more popular, will feel that with the emergence of the Internet, especially mobile Internet, this step is still worth taking. In addition, this is also the demand of customers. Customers do not want too complicated and too diverse payment methods. They hope that after the emergence of mobile phones, mobile Internet will become a mainstream retail payment method. Therefore, this step can also save a lot of costs, and the motivation to move forward is relatively large.

From the wholesale perspective, some countries are now trying to develop CBDC. From my personal observation, China's e-CNY is not a complete CBDC. Of course, it can also be attributed to the discussion of the big topic of CBDC, but it also has its own characteristics. There is a type of CBDC that is mainly turned to the wholesale system. Most ordinary people and people in the non-financial system do not know much about the wholesale link of the payment system. They do not know the clearing system behind it, and do not know how the bank clearing and settlement behind it work. They also do not know whether the system is currently inefficient, whether it makes mistakes, whether the cost is too high, whether it charges banks too much, and whether these fees are indirectly passed on to other bank customers. With the development of technology, the wholesale system also has great potential for further improvement. However, there is not much room for improvement in efficiency and cost at present. Even if there is improvement, it is not too obvious, and the society will not feel much. In general, we think that the wholesale link should also be paid attention to, but it seems that this step cannot be taken too far now. If it is taken, it will be a very small step. This is the approach.

As for the exchanges, all the systems of the exchanges are running very well now, except for some cases, especially due to high-frequency trading, such as the flash crash in the UK, but generally speaking, the operation is still relatively good. Although the entire system of the exchange, including the so-called price priority and time priority queuing automatic matching system, and the subsequent securities registration and delivery system, also has a lot of costs. However, there is not much demand in this regard. If everyone wants to reduce transaction costs, it may be more about reducing stamp duty, which is more concerned than the cost of technical systems.

In addition, it is not the case that the faster the transaction settlement, the better. For many years, everyone has been discussing whether the exchange technology system has the ability to provide T+0, same-day turnaround transactions, and more high-frequency transactions. But in fact, market participants have raised certain doubts and challenges about this. It is not the case that the faster the better. The entire payment system, including the exchange system, may realize a real-time full transaction system in the future, but the real-time full transaction system is not a good choice for all links. This is why the ISDA Derivatives Trading Association repeatedly advocates that you should do differential settlement, which is more beneficial to the risk control of market participants and reduces the economic capital required for each real-time full transaction, and the so-called risk measurement required. From the perspective of the exchange system, it is not the case that the faster the speed and the more full the real-time transaction, the better. Therefore, it also involves the question of how much room there is to take this step.

Let's take a look at international trade. International trade is actually the main content of cross-border payments, including trade in goods and trade in services. However, as an outsider's imagination, it is easy to think that international trade can be just like when we go to the store to buy things, we just pay for the things we like and then hand them over. In fact, in most cases, international trade has a certain batch size and involves a much more complex system than this. First of all, most of the current goods, except for bulk goods, are in containers. A container can hold many things, and a lot of information such as varieties and specifications needs to be stipulated in the contract, and a lot of communication needs to be done in advance. More importantly, it involves transportation, warehousing and insurance. What is the transportation link like? Will there be risks? Will there be losses in the transportation link? What is the warehousing link like? Will the things go bad in it? These things lead to a series of further services, and will involve finance.

From the perspective of payment, cross-border payment involves exchange rates and currency selection. In addition, exporters also need trade financing. After the goods are shipped, the other party will receive and inspect the goods before payment. During this period, the next production has already begun, so trade financing is needed. A typical tool for trade financing in the past was letter of credit financing. After the letter of credit is opened, financing can be obtained, and the next round of production can be borrowed from the bank. This kind of financial service must also be included as an important component.

In addition, there are quite a number of small and medium-sized enterprises doing international trade. They cross countries and sometimes cross states, and they don’t know each other very well. Some people know each other but don’t know each other well, so they must find a bank. Country A finds a bank that he is familiar with, the bank where he opens an account, and Country B also finds a bank that he is familiar with. The banks establish a correspondent relationship. In addition to making payments, the correspondent relationship actually establishes a trust relationship and helps companies establish interpersonal relationships. Although the entire system is very complicated, and some people complain that it may be inefficient and can be improved, it is not like what some people imagine, just like ordinary people go to the store to buy things, one hand pays the other hand, and the other hand delivers the goods. Why make it so complicated? We also need to think about the reasons. The transformation of this system does not mean that it can be easily replaced by digital currency as imagined now. This step may require more functional considerations, and then see what opportunities there are for upgrading in the next step.

Another one is remittance. Cross-border remittance is indeed more expensive. Some banks charge too high fees for cross-border remittance. However, the main obstacle to cross-border remittance is that Facebook has caught the hot spot of cross-border remittance, so it proposed to use Libra for cross-border remittance. In order to make more countries accept it, it knows that many countries will worry about dollarization, so it uses a basket of currencies. As a result, he did not expect that a basket of currencies has been discussed internationally for many years. Everyone has tried to look at how to make the international monetary system from various angles, so this is not a very simple thing. After trying for a year, it was found that a basket of currencies was difficult to achieve, so it changed from Libra to Diem, which only targets the US dollar.

Cross-border remittances are difficult in terms of both technology and policy formulation, especially when it comes to remittances from cross-border workers to their families, and when it comes to remittances between developed and developing countries, and between developed countries. Although the U.S. dollar, Japanese yen, and euro are relatively efficient and not too costly, the cost in developing countries is relatively high, and there are more time delays. Therefore, this is an opportunity to take a step forward, but it cannot be solved by technical systems alone. It depends on institutional and policy solutions, especially when it comes to exchange rate systems and foreign exchange management. Some countries have foreign exchange controls. Many young people may not know that before China's reform and opening up, there were so many overseas Chinese who sent money home. The money they sent might be in U.S. dollars or Japanese yen, but you couldn't get it. You had to exchange it into RMB. The exchange rate at the time was very unreasonable. What if you got less? They would give you an additional part of the exchange coupons.

Although China has long passed these stages of reform and opening up, many other developing countries are still facing similar problems. In addition, they are also worried about the risks brought by dollarization. Therefore, when we choose to use digitalization and the Internet to improve the modernization of the payment system and take a step forward, in which direction can this step be bigger and the effect achieved more obvious? This is what I think we need to consider in our choice.

At the same time, don’t think that you can achieve success overnight by boasting that you have created a system that can solve both retail payment and wholesale systems, and that the exchange system has been completely transformed, and that all problems such as trade settlement and remittance have been solved. I don’t think this is realistic, so if you make this choice and conduct research and development and pilot projects, you must have determination and not look at the grass on the other side.

Finally, let me talk about the internationalization of the RMB. I think the internationalization of the RMB is a good topic. As the world's second largest economy and the world's largest trading country, China's currency status should be improved, and it does have the potential to improve, but the technical system mentioned just now will have an impact on this. So in recent years, there have been a lot of developments and support in technology, such as the cross-border RMB payment system (CIPS), etc. Can we use digital currency CBDC and other things to take a big step forward? I think we should not overestimate the technical factors. It is more about institutional and policy factors. It is still a choice of reform and opening up, and how big a choice to make in the next step.

First of all, whether a currency can be widely accepted may depend on the size of your economy, trade volume, and degree of openness to the outside world. It does not mean that you can force international users to make any choice. (Customers) have the right to choose independently. Therefore, the extensiveness of this operation is not only a technical feature. One of the main contents is the free usability of the currency. In 2016, the International Monetary Fund included the RMB in the SDR. One of the factors is that the free usability of the RMB has been greatly improved, but it is a continuous process and there is still a lot of room for further improvement. However, no matter how free it is, it is still necessary to pay attention to the anti-money laundering function, and to prevent tax havens, tax evasion, drug trafficking, etc. This is one aspect.

Another factor is the currency's ability to resist shocks. As we all know, every country in the world will have financial crises at different stages. Now everyone knows that it was the global financial crisis in 2008. But in fact, if you really look at every country, financial crises will occur every ten years or even decades, so the ability to resist shocks is also very important. Therefore, we think it is still an institutional factor. China may further increase the intensity of reform and opening up in the future and make more distinct choices. And this choice also depends on the path of development, the path of reform and opening up, and the balance of views. In fact, this view is also a kind of distribution, just like what I just said about the balance between currency privacy and anti-money laundering. Some people think that the free use and convertibility of RMB is a very good thing and can be promoted as soon as possible. Some people think that this is a very bad thing, with great risks, and try not to do it. Maybe it will be a normal distribution in the end, with more views in the middle, and it is constantly shifting with reform and opening up. So we say that the changes in the process of opening up may have more to do with the internationalization of RMB. Technical factors are the foundation and are relatively easy to do. Including the financial system when doing CIPS, for banks like Bank of China, which have played a major role in cross-border payments in the past, it is not too difficult to develop a system using existing technologies given the clear policies and systems. Of course, we cannot underestimate this effort.

At the same time, I would like to say that I have always emphasized the internationalization of the RMB. From the perspective of the central bank, the currency issued is your liability, and many people think it is your asset. I still remember that at a very important international conference, a very famous guest commented on the internationalization of the RMB, saying that in the future you can issue RMB globally, and you have a great asset. I said that you are not right. From the perspective of the balance sheet, issuing currency is the liability of the central bank. You have to make your liability part redeemable, have purchasing power, and be stable. And when you use currency to achieve a certain function, it is the central bank that provides this convenience and guarantee. So from this perspective, it is a liability. In other words, don't look at the internationalization of the RMB too much as an asset that I can create out of thin air. Instead, you should consider more about the commitments you have to make and the obligations you have to bear, and consider them from the perspective of the balance sheet.

Therefore, the modernization of the payment system, DECP and E-CNY will first bring improved experience to cross-border retail use, including use between business visits by travelers, as well as the now more popular retail online shopping, and will also be beneficial to the RMB. From a broader perspective, wholesale financial transactions, trade from remittances and other aspects, to achieve the internationalization of the RMB, we need to continue to move forward in terms of policy systems. We believe that progress in these areas in the future will be a major step in making substantial progress in the internationalization of the RMB.

At the same time, I have emphasized on different occasions that it is also a relative thing. The major international currencies do have a certain share in each other, but it cannot exceed 100%. If I have more, you will have less. In addition to how well you do, it also depends on how well others do.