Central bank digital currency is getting closer: the ultimate place for future financial competition

"At present, the digital RMB has achieved phased results and is undergoing internal closed testing." This important information revealed by Fan Yifei, deputy governor of the central bank, in public recently has once again aroused heated discussions on the central bank's digital currency (DC/EP). Since the establishment of the Central Bank Digital Currency Research Institute in 2016, the research and development of the central bank's digital currency has lasted for 5 years. Since last year, officials have said that digital currency is "about to be released", and the official has also explained its design mechanism. The central bank's digital currency has gradually unveiled its mystery; this year, it has been piloted in four places including Shenzhen, Suzhou, Xiongan New Area, and Chengdu. At the end of August, CCB briefly opened the registration channel for its central bank digital currency wallet to the public. All signs indicate that the central bank's digital currency is getting closer and closer and will soon "fly into the homes of ordinary people."

As technology matures, it is not difficult for the central bank to issue digital currency. However, the central bank's digital currency will not only increase the complexity of currency operations, but also have a greater impact on the financial system. Blindly issuing central bank digital currency will not only fail to achieve the expected results, but will also be more likely to end in failure. The key to the problem is: what kind of central bank digital currency do we need? The real central bank digital currency is not just as simple as issuing it. In the circulation and trading process after issuance, how to better serve social and economic development, the central bank's policy goals, and financial regulatory requirements is the key.

M0 attributes avoid financial disintermediation

Adhere to the centralized management of the central bank

"Take the central bank's digital currency as an example. The digital RMB is an important part of the supply-side structural reform of the financial industry. It uses new technologies to digitize cash in circulation (M0), and aims to provide a universal technical currency for the development of the digital economy. At present, the digital RMB has achieved phased results and is undergoing internal closed testing." Fan Yifei said in public recently.

Judging from the current public information, the central bank's digital currency has value characteristics and legal compensation, and supports controllable anonymity. The digital RMB is mainly positioned as cash in circulation, and this positioning contains rich theoretical connotations and policy choices.

Fan Yifei analyzed that, first of all, in recent years, crypto assets such as Bitcoin and global stablecoins have attempted to play the role of currency, and a new round of private currency, foreign currency and legal tender has begun. In response to this situation, it is necessary for the country to use new technologies to digitize M0 and provide a universal base currency for the development of the digital economy. Secondly, various payment systems such as commercial bank internal systems and non-bank payment institutions have been continuously improved and upgraded to better meet the needs of economic development. Replacing M1 and M2 with digital RMB will not help improve payment efficiency, but will also cause a huge waste of existing systems and resources.

In the operation of the central bank's digital currency, DC/EP adopts a two-tier operating system of "central bank-commercial bank/other operating institutions". Li Lianxuan, chief researcher of OKLink, told the Securities Times reporter that if a single-tier operating system is adopted, the central bank will have to face all users directly, which is back to the era of "unified central bank". Commercial banks and other payment institutions are becoming more mature in IT infrastructure applications and service systems, which is conducive to giving full play to the talent and technical advantages of commercial institutions. In addition, DC/EP has a certain competitive advantage over bank deposits. If a single-tier operating system is adopted, it will directly lead to the loss of bank deposits and the phenomenon of "financial disintermediation".

Li Lianxuan introduced that at the user terminal, DC/EP mainly exhibits three characteristics: First, it is a balance between privacy protection and combating crimes. DC/EP is to protect the privacy needs of the public in their normal economic life, so controllable anonymity must be achieved. Secondly, it is a dual offline payment function. Third-party payment tools such as online banking and Alipay need to be connected to the Internet when conducting transactions, otherwise transactions cannot be conducted; and the dual offline payment function of DC/EP, even if the two parties to the transaction are offline, as long as the two mobile phones are touched and the wallet keys are exchanged, the transfer transaction can be completed. Third, it is mainly for small retail scenarios, with amount and time limits. It helps to solve the "double-spending problem" and is also out of consideration to protect commercial banks and prevent "financial disintermediation".

From the perspective of the M0 management model, currency issuance is the basic responsibility of the central bank, and the digital RMB should adhere to the centralized management of the central bank. From a global perspective, centralized management of the issuance and circulation of M0 is a common practice for central banks around the world. In order to ensure the ability to regulate currency issuance and monetary policy, central banks and monetary authorities in major economies around the world have implemented centralized management of the issuance and circulation of cash.

Fan Yifei said that in order to maintain the central bank's centralized management position in the issuance of digital RMB, the following points must be achieved: First, coordinate the management of digital RMB quotas and formulate unified business standards, technical specifications, security standards and application standards. Second, coordinate the management of digital RMB information, record and monitor the exchange and circulation of digital RMB by mastering the full amount of transaction information, and improve the central bank issuance system in the digital era. Third, coordinate the management of digital RMB wallets. On the premise of adhering to the unified cognitive system and anti-counterfeiting function of digital RMB, in line with the principle of two-tier operation, the central bank and designated operating institutions will jointly develop the wallet ecological platform in a co-construction and sharing manner, while realizing their respective visual identification and special functions. Fourth, coordinate the construction of digital RMB issuance infrastructure, realize interconnection across operating institutions, and ensure the stable and orderly circulation of digital RMB.

Improving cross-border payment efficiency

Promoting the internationalization of the RMB

Previously, an important feature of digital cryptocurrencies including Libra is that they are very convenient in international payment and settlement. Therefore, some people believe that the central bank's digital currency can promote the internationalization of the RMB, but some people believe that the degree of RMB internationalization mainly depends on its own competitiveness. Digitalization is just a form, not a decisive factor. Sky Guo, CEO of Cypherium, a New York blockchain development company, told the Securities Times reporter that some countries, such as the United States, believe that DC/EP is one of the important ways for China to internationalize the RMB, while other countries are concerned about how the digital RMB can interoperate with the digital currencies of other countries and how to protect user privacy.

Huang Yiping, deputy dean of the National School of Development at Peking University, said at a public event of the National School of Development that at present, the direct relationship between the digital currency to be issued by the central bank and the internationalization of the RMB is not obvious. Whether a currency can be accepted internationally has nothing to do with whether the currency is digitized, but depends on whether the exchange rate of the currency is flexible, whether the market is open, and whether foreign investors have the confidence and willingness to use the currency. "So the internationalization of the RMB is a process that we have to move forward on our own, and then our digital RMB may help the process of RMB internationalization more convenient, such as cross-border payment, cross-border trade, and cross-border investment settlement, these costs can be reduced," Huang Yiping said.

Li Lianxuan told the Securities Times reporter that DC/EP has advantages in cross-border payments, which can not only increase the speed of cross-border transfers, but also reduce the cost of remittances; in addition, the current central bank digital currency adopts a loosely coupled account design, which means that users do not need to bind a bank account to make transfers and payments when using the central bank digital currency, which is very attractive to those overseas in poor and remote areas, and to the local people who lack traditional financial infrastructure (banks). In the future, as DC/EP gradually relaxes restrictions on payment time and amount, it will promote the internationalization of the RMB in trade and financial transaction settlement and pricing.

Ju Jiandong, a professor at Tsinghua University's PBC School of Finance, recently wrote that in order to cope with the challenges facing my country's financial security, it is necessary to accelerate the construction and upgrading of digital financial infrastructure and promote the establishment of a new cross-border payment and settlement system for digital RMB. New technologies such as blockchain should be used to fully realize the cross-border payment function of RMB, solve the pricing problem through the digital currency issued by the People's Bank of China, temporarily put aside the reserve function of RMB, and improve the direct exchange rate inquiry mechanism between RMB and other currencies under the DC/EP framework. On this basis, a "new cross-border payment and settlement system for digital RMB" should be established.

Digital currency may be

The ultimate place for future financial competition

At present, most countries have realized the importance of central bank digital currency, but they are cautious about issuing central bank digital currency. According to Christian's questionnaire survey of 63 central banks around the world, all central banks have begun theoretical and conceptual research on digital currency, 49% of central banks have entered the trial/concept verification stage, and only 10% have entered the development/pilot stage. In the short term (within 3 years), more than 85% of central banks are unlikely or very unlikely to issue any central bank digital currency, and only 3% of central banks will issue retail central bank digital currency in the short term.

Judging from current practices, the People's Bank of China has a clear and comprehensive understanding of the necessity and urgency of legal digital currency, and its practices are undoubtedly at the forefront of the world.

"Crypto assets and other payment transactions processed through decentralized technology will erode national monetary sovereignty, and the pressure to digitize cash is actually increasing. This historical trend and demand for monetary development requires us to work on the 'supply side' and use new technologies to digitize M0. As the provider of national credit, in order to ensure the stability of the monetary and financial system, the central bank should respond to the needs of the retail sector and provide digital cash supply," Fan Yifei pointed out.

In response to a question from a Securities Times reporter, Huang Yiping said, "I think the future financial competition may be in the field of digital finance, and the most important thing is digital currency. Why have various countries suddenly become interested in central bank digital currencies recently? I think a digital currency issued by a central bank is likely to be a monopoly and a winner-takes-all. Of course, it is not ruled out that there will be many central bank digital currencies on the market at the same time in the future. But in short, if you fall behind others, if you cannot compete with others, maybe your chance is gone, so I guess it is very likely that central bank digital currency will be the ultimate place for our future financial competition."

"In the end, it may be a winner-takes-all situation. The reason is that once a platform with a long-tail effect is established, the marginal cost of this kind of digital technology will be very low. In the process of currency evolution, there may be multiple digital currencies competing together, but in short, we cannot be absent. Whether a new international currency will be formed to dominate the international financial system in the future, or among the current currencies, sovereign currencies will tilt towards the euro, US dollar, yen, including the renminbi and other currencies, or a new currency will be triggered in the middle, it is really unpredictable. I just say that from a technical point of view, it is unlikely that so many currencies will coexist for a long time." Huang Yiping said.

Sky Guo said that the current research and development routes of central bank digital currencies in various countries are very different. For example, China's digital currency is directly led and developed by the People's Bank of China, while France's central bank digital currency experiment invited several private companies to submit technical solutions. Digital currency will replace cash, which is a historical inevitability. The convenience brought by digital currency will also greatly affect the liquidity and development of the financial market. In particular, new technologies represented by smart contracts are generating new financial service model innovations at an unprecedented rate. For central bank digital currencies, how to adapt to new changes and challenges in supervision, network security, etc. will surely become the top priority of central banks in various countries. Behind the central bank's digital currency are competitions in various aspects such as technology, monetary policy, and supervision, and it is a must-fight place for future major powers. (Securities Times)