The central bank's digital currency debuts, stirring up a storm

As of 24:00 on October 18, 47,600 people received digital RMB red envelopes, with payment volume reaching more than 60,000 transactions and a payment amount of 8.7642 million yuan.

Source | China Youth Daily

Author | Ning Di

The RMB is not only a currency, but also a testimony to China's economic take-off.

The first set of RMB was issued at the end of 1948. In the following 70 years, five sets of RMB were issued. Now in the digital age, it has also taken on a new form.

In October this year, the Shenzhen Municipal Government and the Central Bank launched a pilot program for the red envelope of the digital RMB (central bank digital currency). The Luohu District Government of Shenzhen invested 10 million yuan to distribute digital RMB to 50,000 citizens by lottery. The digital RMB, which debuted for the first time, has a face value of 200 yuan and is similar in design to paper money, with the "national emblem" and "People's Bank of China" printed on the left and right sides of the top.

Testing the waters for household consumption

Shenzhen citizen Wang Xin is a lucky winner of the digital RMB red envelope. On October 12, he received a text message notification. According to the requirements in the text message, Wang Xin clicked on the download link of the "Digital RMB" App and completed a few steps. Then, he could use the 200 yuan digital RMB in his mobile phone to spend at 3,389 designated merchants in Luohu District, Shenzhen.

For mobile phone users who are already accustomed to using Alipay and WeChat, the settlement of digital RMB is also fast and convenient. They only need to swipe upwards on the digital RMB picture on the mobile phone screen and scan it with a special POS machine to receive the payment.

However, the payment features of the digital RMB are more than that. With the NFC (near field communication) function in the mobile phone, users can also conduct normal transactions with POS machines when the mobile network is offline. According to the settings, the winning users can transfer money to the digital RMB App through their bank accounts, but the digital RMB cannot be transferred out.

The digital RMB has a validity period and expires before 24:00 on October 18. Red envelopes that are not used after the expiration date will be withdrawn. Data shows that as of 24:00 on October 18, 47,600 people have received digital RMB red envelopes, with a payment volume of more than 60,000 transactions and a payment amount of 8.7642 million yuan.

Huang Dazhi, a senior researcher at Suning Financial Research Institute, said that the digital RMB pilot is not small in scale, targeting 50,000 consumers and thousands of merchants. "The speed of the digital RMB depends on the determination of the central bank to promote it."

In 2014, the central bank initiated research on legal digital currency. In the past six years, the central bank's digital currency has moved from the discussion of technical routes to the final test step by step. This speed is already in the leading stage in the world.

The replacement of M1 and M2 should be determined by the market

However, some users who have won the lottery believe that the digital RMB is "convenient, but there is no qualitative breakthrough." The entire payment transaction experience is no different from using third-party payment software.

Scholars are not surprised by this. Behind this view is precisely a hot topic that everyone is discussing: the central bank's digital currency is only a substitute for M0, is there a possibility of replacing M1 or M2?

M0, M1 and M2 are three indicators that reflect the money supply. my country's currency stratification defines cash in circulation as M0, M1 is M0 plus unit demand deposits, and M2 also includes other deposits and deposits.

Regarding the design of my country's legal digital currency, the central bank has emphasized more than once that the current digital RMB is a substitute for M0. This is because the current issuance, printing and storage of cash are costly, easy to counterfeit, and even used for criminal activities such as money laundering.

In September this year, Fan Yifei, deputy governor of the People's Bank of China, also published "Analysis on the Policy Implications of the Digital RMB M0 Positioning", emphasizing that the digital RMB adopts the "central bank-commercial bank" dual operating model, that is, the central bank does not directly issue digital RMB to the public, but distributes it through commercial banks in the form of full reserve payments to the central bank.

Some experts have suggested that digital currency should not be limited to replacing M0, because the proportion of M0 in the total currency volume has been reduced to less than 4%, and cash will be difficult to completely eliminate for a long time, which may greatly reduce the actual value of the digital RMB's investment industry.

However, some experts pointed out that based on the consideration of M0, on the one hand, from the perspective of the functions of the central bank, the central bank itself is not an institution that absorbs residents' savings deposits; on the other hand, if the digital RMB is expanded to M1, it will directly affect the existing business of commercial banks. From the perspective of the stability of the financial system, the digital RMB will not replace M1.

In the view of Huang Guoping, director of the Investment and Financing Research Center of the Chinese Academy of Social Sciences, one of the characteristics of the digital RMB is controllable anonymity. If it involves businesses such as deposits, it involves how to develop a "digital wallet", and the controllable anonymity of the digital RMB must be achieved in this digital wallet. Controllable anonymity can also be achieved in deposits, wealth management and other businesses.

Liu Bin, director of the Financial Research Office of the Pudong Institute of Reform and Development, believes that the current discussion on the characteristics of the digital RMB is based on its replacement of M0, including peer-to-peer and offline transactions. At present, there is no consensus on the characteristics of legal digital currency in the world. Now M1 and M2 based on bank accounts are already "digital" transactions in form. On this basis, we need to think about whether it is really necessary for the digital RMB to replace M1 and M2, and what policy goals are used to replace M1 and M2.

Some experts also pointed out that from the current pilot situation, the use of digital RMB in areas and groups where cash is widely used is more groundbreaking. However, it should be noted that these areas usually have low penetration of smartphones or a "digital divide". This requires that in order to promote the use of digital RMB in these areas, the shortcomings of hardware facilities must be addressed first.

Li Lihui, former president of the Bank of China, pointed out at a digital currency conference at the beginning of the year that whether legal digital currency can replace traditional currency forms, or even replace emerging electronic payment tools, and become the main form of currency and the main payment tool, will ultimately be a process determined by the market. "The decision criteria are whether (legal digital currency) will be more convenient, whether the circulation cost is lower, whether the public is willing to accept it, and whether it will form an economic scale with commercial value."

It is too early to restructure the financial system

What impact will the trial of digital RMB have on the financial system?

Some experts believe that as long as the dual system is in place, the digital RMB will not impact commercial banks. In the future, if the digital RMB is used to issue special loan funds, the central bank can control the flow of funds, and banks will not give special funds to companies or individuals that should not be given the funds.

In Huang Dazhi's view, there are a large number of intermediary institutions in the operation of the monetary system, including not only commercial banks, but also payment and settlement institutions. In recent years, the functions of commercial banks and payment institutions have gradually expanded. The emergence of digital RMB may cause some changes and adjustments to their functions.

"Commercial banks and payment institutions have already built a relatively complete personal account system. In this case, it is difficult to say that the central bank will abandon its existing advantages to develop and operate a new account system. It is more likely to be a state similar to compatibility or parallelism." Huang Dazhi believes that in the next 100 years, there may be disruptive changes to commercial banks, but this phenomenon will not occur in the foreseeable years or decades. In the choice of whether to use digital RMB payment or third-party payment, Wang Xin mainly considers two factors: security and convenience.

Digital RMB is the digitization of legal tender, and no one can refuse to accept it. In addition, digital RMB is backed by the government and is more secure than third-party payment platforms. Mu Changchun, director of the Digital Currency Research Institute of the Central Bank, recently explained that digital RMB and WeChat and Alipay are not in the same dimension. WeChat and Alipay are financial infrastructure and wallets, while digital RMB is a payment tool and the content of the wallet. After the issuance of digital RMB, you can still use WeChat and Alipay to make payments, but the content of the wallet has been increased by the central bank's currency.

Huang Dazhi believes that the digital RMB exists in the form of a balance on the third-party payment platform, and it will not necessarily affect the third-party payment platform in terms of usage. However, it may have an impact on the transaction flow data, because some third-party payment platforms currently use the data generated by analyzing the transaction flow as a reference for credit rating when providing loans. In the future, digital RMB will be traded through third-party payment platforms, and the transaction flow may not be controlled by the platform.

There are prerequisites for helping the internationalization of the RMB

There is no clear timetable for the official launch of the digital RMB, but in the "People's Bank of China Law (Draft for Comments on the Revised Draft)" published by the central bank last week, the added sentence "Renminbi includes physical and digital forms" provides a legal basis for the issuance of digital currency.

"Digital RMB = digital consumption voucher?" Some Shenzhen users feel that the digital RMB red envelope tested this time is more like a consumption voucher, with restrictions on the time limit and scenarios of use. "Will all subsequent applications adopt this approach?"

Liu Bin pointed out that the digital RMB is the digital form of the RMB. If it is used to replace M0, then its transactions should be equivalent to the RMB, and there should be no time limit for use. According to Mu Changchun, the digital currency pilot in Shenzhen this time uses a relatively simple smart contract to realize the real payment function, and more technologies will be used in the future.

Previously, the academic community has discussed whether the central bank’s digital currency should be loaded with smart contracts. Some experts said that the central bank’s digital currency should not assume functions other than the value scale, means of circulation, means of payment, and value storage of currency. Loading smart contracts will make the digital people degenerate into valuable tickets, so caution should be exercised.

Liu Bin believes that the promotion of digital RMB requires clarification of two basic issues. First, digital RMB should not change the basic characteristics of RMB or weaken some functions of RMB; second, it is necessary to clarify the main application scope of digital RMB in the future. "Domestic and cross-border payments need to face different problems and require different technical solutions and supporting systems."

Adrian, director of the IMF's monetary and capital markets department, said in a recent interview with the media that cross-border payments involve the issue of full convertibility of digital currencies, and there is still a lot of coordination work to be done at the international level in this regard.

In 2019, the RMB ranked eighth and fifth in the world in terms of daily foreign exchange market transactions and global payments respectively. my country's currency status does not match the size of its economy. Although the RMB has been included in the SDR (Special Drawing Rights) currency basket, its internationalization is not as high as that of the US dollar and the euro. Therefore, some scholars expect that the digital RMB can help the internationalization of the RMB and take the lead in cross-border payments.

Last month, Professor Ju Jiandong, Director of the Center for International Finance and Economics Research at the National Institute of Finance at Tsinghua University, and Xia Guangtao, Assistant Director of the Center, published an article on the "New System for Cross-border Payment and Settlement of Digital RMB". They pointed out that under the background of Sino-US economic and trade frictions, my country should build a new cross-border payment and settlement system with digital RMB as the medium and pricing currency, break the US monopoly on the cross-border payment and settlement system of the US dollar, thereby resisting the adverse impact caused by external financial blockades and safeguarding my country's financial security. They believe that a key issue in the operation of the new digital RMB cross-border payment and settlement platform is to determine the reasonable exchange rate between digital RMB and other legal currencies, because this not only involves the attractiveness to users, but also directly involves the risk of capital arbitrage.

Huang Guoping believes that the application of digital RMB in the field of cross-border payments is not only a technical issue, but the key is to involve my country's overall arrangement for the progress of RMB internationalization. "RMB internationalization cannot be quickly promoted due to changes in the currency form." Liu Bin believes that the use of digital RMB in other countries requires a lot of supporting systems, and will also face strict supervision by local regulatory authorities.

"The central bank's digital currency is essentially the RMB. The premise for promoting the internationalization of the RMB is that the RMB is credible and accepted internationally." Huang Dazhi pointed out that the key to improving the international competitiveness of the RMB lies in the security, liquidity and profitability of the RMB. "Security is the most important, which depends on the political stability of a country. my country's comprehensive national strength has been significantly improved, the RMB has a basis for appreciation, and profitability has begun to manifest. In the future, the liquidity of the RMB needs to be further improved."