People's Daily: Global central bank digital currency research and development enters the fast lane, and China has a good foundation

Source: People's Daily, author: Jingyi, Zheng Bin, Zhu Dongjun

Core Reading

Central bank digital currency is a digital currency issued by the central bank. Its functional attributes are the same as those of paper currency and can be regarded as the digital form of paper currency.

During the COVID-19 epidemic prevention and control period, the trend of cashless payment has accelerated, and many countries have accelerated the development and testing of central bank digital currencies. In the future, digital currencies will profoundly change financial infrastructure and people's daily lives.

The Bank for International Settlements recently released a report pointing out that 2020 is the year of the rise of central bank digital currencies. As of mid-July this year, at least 36 central banks around the world have released central bank digital currency plans. Among them, Ecuador, Ukraine and Uruguay have completed the pilot of retail central bank digital currency; China, the Bahamas, Cambodia, the Eastern Caribbean Currency Union, South Korea and Sweden are currently conducting pilots.

With many countries planning to develop or conduct on-site testing, the central bank's digital currency is getting closer and closer. How will it affect economic and social development, and what changes will it bring to our lives?

Balancing risks and benefits in financial innovation

Central bank digital currency is a digital currency issued by the central bank. Its functional attributes are the same as those of paper money and can be regarded as the digital form of paper money. At present, central bank digital currency is mainly divided into "wholesale" and "retail". The use of wholesale type is limited to central banks and financial institutions and is not open to the public. The Bank of Canada's Jasper project, the Monetary Authority of Singapore's Ubin project, the Bank of Japan and the European Central Bank's Stella project all belong to this category. The retail type is open to the public and is mostly used for retail market transactions, such as China's DC/EP (digital currency and electronic payment tools) and Sweden's "electronic krona", which will have a wide and profound impact on people's daily lives. "At present, most countries are developing retail central bank digital currencies." Yang Tao, director and researcher of the Payment and Clearing Research Center of the Institute of Finance of the Chinese Academy of Social Sciences, told reporters.

As early as 2014, the Central Bank of Ecuador launched a digital currency project that allowed individuals to make mobile payments through a system operated by the central bank. In 2017, Uruguay launched a six-month "electronic peso" pilot. But these central bank digital currencies were unsuccessful due to their failure to attract a large number of users.

In 2019, Facebook released the white paper on the encrypted digital currency "Libra", which attracted widespread attention from central banks and financial regulators around the world. "Libra" is a relatively stable cryptocurrency, backed by sovereign currency and with a huge user base. Public opinion generally believes that the issuance of digital currencies such as "Libra" will challenge the monetary sovereignty of central banks around the world and bring more financial risks, which is an important reason for central banks in various countries to accelerate the development of central bank digital currencies. "Currently, innovation in electronic currency and payment systems is mainly led by private institutions, which will bring challenges to the financial system and monetary sovereignty." European Central Bank President Lagarde said, "Central banks need to balance the risks and benefits of financial innovation by providing safer and more reliable services to the public."

The rise of non-cash payments has driven the development of central bank digital currencies. According to statistics, the cash usage rate in Sweden was only 13% in 2018. The high degree of cashlessness is one of the main driving forces for Sweden to accelerate the pilot of central bank digital currencies. During the COVID-19 epidemic prevention and control period, the trend of cashless payments has accelerated. The Bank for International Settlements reported that social isolation policies, public concerns about the possible spread of the virus through cash, and government plans to provide subsidies to individuals have further accelerated the shift to digital payments.

China has a good foundation to issue central bank digital currency

The research, development and testing of central bank digital currencies have been carried out in many countries. At the end of 2019, the European Central Bank announced the establishment of a special committee on central bank digital currencies and launched a new proof-of-concept project called "European Chain" to explore the anonymity issues and practices of digital currencies. Recently, the European Central Bank released a report saying that the bank plans to decide whether to launch a digital euro project in mid-2021. The report pointed out that the digital euro may provide European citizens with a safe form of currency. In January this year, the United Kingdom, Switzerland, Sweden, Japan, Canada, the European Central Bank and the Bank for International Settlements established a working group to study the potential application scenarios of central bank digital currencies. In February, Sweden began a one-year "electronic krona" test to simulate people's daily use in an isolated environment, such as making payments and deposits and withdrawals through digital wallets. The Federal Reserve Bank of Boston is working with MIT to study more than 30 blockchain technologies to explore technologies that can support the Federal Reserve to issue digital dollars.

Latin American countries have tried central bank digital currencies earlier. The Central Bank of Uruguay said it is studying the next phase of action and plans to improve related technologies such as payment systems. The Central Bank of Brazil said Brazil is expected to adopt central bank digital currency in 2022. The Central Bank of the Eastern Caribbean Currency Union, which consists of eight economies in the region, is testing a blockchain-based legal digital currency. Timothy Antoine, the governor of the Central Bank, said: "It is hoped that this move will reduce the use of cash by 50%, improve the stability of the financial sector, and promote the development of member countries."

In Asia, the Bank of Korea plans to conduct a pilot in 2021 and has completed the first phase of the research and development review. The Bank of Japan recently announced that it will launch a digital currency experiment in fiscal 2021 to test the basic core functions of digital currency.

As one of the countries that started the research on central bank digital currency earlier, China's central bank digital currency DC/EP has been piloted in Shenzhen, Suzhou and other places. Recently, the Shenzhen Municipal Government launched a pilot project of digital RMB red envelopes, distributing a certain amount of funds to individuals' digital wallets in the form of lottery, and users can use digital RMB for consumption in more than 3,000 merchants. The Bank for International Settlements said that DC/EP is one of the most advanced digital currencies in the world. "The high penetration rate of smartphones and the penetration of mobile payments into all aspects of life have laid a good foundation for China to issue central bank digital currency." Huang Yiping, deputy dean of the National School of Development at Peking University and director of the Digital Finance Research Center, told our reporter.

Commercial institutions are also actively conducting research and development and cooperating with central banks. Mastercard recently launched a central bank digital currency testing platform, which enables central banks to evaluate and explore central bank digital currencies on the platform. It is reported that the platform can be used to simulate the issuance, distribution and exchange of central bank digital currencies between banks, financial service providers and consumers.

Supported by national credit, with traceability and other characteristics

The islands in the Caribbean are small and scattered, and it is not easy for people to get services from physical financial institutions. The central bank's digital currency will improve financial inclusion and the convenience of financial services, reduce the cost of using cash, and improve the efficiency of financial institutions. This is also an important reason for the rapid development of the central bank's digital currency in the region. Yang Tao pointed out that as a legal tender, the central bank's digital currency is supported by national credit. Compared with the mobile payment methods provided by commercial institutions, it is safer and more stable. Its traceability makes it traceable in every link from issuance to circulation, which is conducive to strengthening financial supervision and combating illegal activities such as tax evasion, money laundering, and terrorist financing. It also helps to use funds for specific purposes and targeted poverty alleviation.

"Central banks can establish more efficient and compatible financial markets and make monetary policy transmission more precise," said Sarah Allen, project manager of the Cryptocurrency and Smart Contracts Initiative. "The transparency and other characteristics of central bank digital currencies will enable policymakers to gain a more macro perspective on the global economy." "Now, it is difficult to know whether or when monetary policy will have the expected impact on the economy. If economic stimulus policies are implemented through central bank digital currencies, they can be accurately monitored, providing a basis for future monetary policy." Mohit Joshi, head of financial services and insurance at Indian information company Infosys, said.

In the field of cross-border payments, central bank digital currency is also worth looking forward to. The International Monetary Fund believes that the introduction of central bank digital currency will promote faster and safer cross-border settlement. Simon Scoler, a senior financial technology expert at the Bank of England, pointed out that although people are now more concerned about the use of central bank digital currency in China, one of its potential advantages is to lay the foundation for more complete cross-border payments in the future.

"One of the trends in innovation in the financial sector is to increase cashless operations in economic activities." Yves Mersch, a member of the Executive Board of the European Central Bank, said that the focus of the ECB's digital monetary policy in the future will be on the development of retail digital currencies. Key issues include the legal status of retail digital currencies and the supervision of intermediaries responsible for promoting digital currencies.

After the issuance of central bank digital currency, will cash still have a place? Research by the Bank for International Settlements shows that none of the central bank digital currency models currently designed by various countries aims to completely replace cash, but rather hopes to be a supplement to cash.

However, the central bank's digital currency also poses considerable challenges to traditional banks and other financial institutions. Huang Yiping said that in a single-tier operation model, the central bank directly issues digital currency to the public, and the intermediary function of commercial banks will be significantly weakened, facing structural disintermediation risks. The digital RMB adopts a two-tier operation model, which can fully mobilize the enthusiasm and creativity of all parties in the market and maintain the stability of the financial system.

"In the next five years, digital currencies will profoundly change our financial infrastructure." Several analysts at Boston Consulting Group suggested that financial system participants should use this time to analyze the potential impacts, prepare for possible situations, and actively explore the roles they want to play and the partnerships they need to establish in order to maximize the value of digital currencies and influence their development direction.

(From Beijing, Brussels, and Rio de Janeiro)