Reposted from: Sina Finance Opinion Leaders In April 2020, news of the internal testing of the central bank's digital currency in the four major banks of Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China and China Construction Bank spread like wildfire on the Internet. During the two sessions, Yi Gang, governor of the People's Bank of China, once again revealed in an interview with the media that the legal digital currency has been tested in Shenzhen, Suzhou, Xiong'an, Chengdu and the future Winter Olympics. The accelerated progress of digital currency testing means that digital currency may officially enter commercial use in the near future. While changing the monetary system, digital currency may have a certain impact on the banking industry. In this regard, Li Feng, professor of accounting at the Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University, vice president of the China Financial Research Institute, and co-president of the Shanghai Advanced Institute of Finance , and Hu Hao, a researcher at the China Financial Research Institute of Shanghai Jiao Tong University , were invited to write an article, first introducing the basic overview of the central bank's digital currency, and then exploring its potential impact on the macro policy mechanism and commercial banks. Overview of Central Bank Digital Currency 1. Definition of Central Bank Digital Currency Central bank digital currency is a legal digital currency issued by the People's Bank of China. Its full name is "Digital Currency Electronic Payment", and its corresponding English abbreviation is DC/EP (Digital Currency/Electronic Payment). DCEP is actually a kind of electronic cash, which is a digital form of paper money. Its functional attributes are exactly the same as paper money and it has value characteristics. 2. Characteristics of central bank digital currency 1. DCEP is cash in circulation, not bank deposits The existing monetary system can be mainly divided into M0, M1 and M2. M0 refers to cash in circulation, M1 includes M0 and unit demand deposits, and M2 includes M1, residents' savings deposits and unit time deposits. The positioning of DCEP is the same as that of paper money, corresponding to M0, that is, cash in circulation. 2. Commercial banks do not need to pay interest on DCEP Since DCEP belongs to M0 and is not a bank deposit, it does not accrue interest, and DCEP holders cannot earn interest. 3. DCEP has unlimited legal compensation, and no institution or individual may refuse to accept it. DCEP is issued by the central bank, and the national credit endorsement gives it the official value characteristics, so it has stability and unlimited legal compensation. 4. DCEP does not require a bank account or network to realize payment DCEP payment does not require binding to a bank account. Existing bank card payment services must be completed through traditional bank accounts, which adopts a tightly coupled account approach. DCEP payment adopts a loosely coupled account approach, that is, it is separated from the bank account and realizes the transfer of funds between the two digital wallets. DCEP relies on a public ledger to record the holding relationship. This relationship is manifested as the correspondence between the public key address and the digital currency DCEP. The digital wallet operates the transfer in the public ledger through its stored private key. DCEP can realize terminal-to-terminal payment without the network. As long as the mobile phone has power, it can pay. It can also rely on the network to complete the payment from the terminal to the remote end in the scenario of a third-party service provider. It is worth noting that the direct DCEP conversion between two digital wallets is essentially just recording the operation instructions, and it still needs to be uploaded to the ledger after touching the network to be completed. 5. DCEP has controllable anonymity Banks and merchants need the customer's permission to view the user's transaction records and information. This controllable anonymity protects data security and user privacy on the one hand, and on the other hand, it allows the central bank to clearly and efficiently capture the flow information of each currency transaction, and combat money laundering, anonymous manipulation and other illegal and criminal activities. 3. Why issue digital currency? 1. Reduce the cost of issuing banknotes Since digital currency is just a string of digital codes, it does not incur any costs in production or circulation, and has strong anti-counterfeiting capabilities. 2. Mobile payment is becoming more popular, and the frequency of cash use has been greatly reduced At present, most domestic transaction scenarios have realized mobile payment, squeezing out the use of traditional cash. DCEP is not essentially different from other mobile payment methods, and limited anonymity is its main differentiating feature. 3. It is conducive to anti-money laundering and anti-terrorist financing supervision The anonymity of traditional cash transactions has brought many troubles to anti-money laundering and anti-terrorist financing supervision, while the unique identification of digital currency makes it easier for regulatory authorities to trace the entire financing chain for more effective monitoring. 4. Maintaining monetary sovereignty and legal tender status Some financial intermediaries at home and abroad have actively used blockchain technology to issue private digital currencies, which has seriously affected the use of China's sovereign currency and is infiltrating and diverting China's existing financial system. The issuance of DCEP can form a unified digital currency based on national credit at the central bank level, which not only realizes the continuation of national credit in the paper currency era, but also conforms to the trend of currency digitalization. 5. Optimize the current monetary payment system and improve the effectiveness of monetary policy By issuing digital currency, the dependence on payment functions provided by third-party payment institutions can be reduced; at the same time, the central bank can monitor the circulation information and investment areas of currency throughout the process, improve the efficiency of currency circulation market monitoring-statistics-evaluation-policy formulation, and reduce the lag in monetary policy transmission. 4. Differences between central bank digital currency and traditional payment methods Compared with traditional paper cash, DCEP has the advantages of no need for change, easy to store, easy to calculate, and not easy to lose. Compared with third-party payment, DCEP also has the following characteristics: | | | | | | | Central Bank Digital Currency | | | | Central bank currency settlement | | | | | | Commercial bank deposit currency settlement | |
Scanning QR codes when taking a bus, scanning QR codes when taking a subway, scanning QR codes when paying... People's lives have entered the era of electronic payment, but these software are not universal. This will be greatly changed after the implementation of digital currency in the future. In addition, the current mobile payment will leave some "traces" for merchants. After purchasing the goods, the merchants will intelligently recommend related products to consumers based on big data. The controllable anonymity of DCEP makes it difficult for merchants, banks, and third-party platforms to track their consumption records after consumers pay, except for authorization by the monetary authorities. This can not only ensure the security of customer information, but also reduce the improper marketing of merchants to customers. In essence, payment tools such as WeChat and Alipay are merely electronic improvements to the current RMB settlement method, while the central bank's digital currency is a substitute for RMB cash. Digital wallets are "containers" for digital currencies. Although the central bank has given very little explanation about digital wallets, from the screenshots currently circulating online, the APP includes several functions such as "scan code payment", "remittance", "collection and payment", and "touch and pay" (similar to NFC's near-field payment function). Users can easily convert bank funds into digital RMB, and the converted digital currency will also display the source bank, so that users can manage the flow of funds. The macro impact of central bank digital currencies 1. Impact on the currency derivative mechanism The release of DCEP is similar to the release of paper money, and adopts a two-tier operating system of "central bank-commercial bank", that is, the central bank releases it to commercial banks, and commercial banks release it to the public. The central bank does not directly face the public and enterprises, and does not participate in the competition between commercial banks. The two-tier operating system adopted by DCEP means that the monetary system under DCEP conforms to the traditional credit currency derivative mechanism. The main body of currency creation is still banks and the real sector, and the central bank only plays a regulatory role. In addition, there is no essential difference between the DCEP release model and the traditional base currency release for cash, legal reserves and excess reserves. While DCEP continues the traditional currency derivation mechanism, it may have an impact on it in terms of base currency and money multiplier: DCEP will reconstruct the basic currency structure (1) The central bank may open a new sub-item to record the central bank's digital currency. In the traditional model, the central bank's base currency structure is divided into two parts: one is currency issuance, that is, the cash printed by the central bank; the other is the deposit reserve of financial institutions in the central bank. After the third-party payment institution deposits the reserve, the central bank will open a sub-item for the base currency, that is, the deposit of non-financial institutions. As M0, the central bank's digital currency can be used as cash, as a deposit reserve or as a reserve deposited by a third-party payment institution. According to its payment purpose, it is speculated that in the future, the central bank's base currency account may open a new sub-item to specifically record DCEP, such as setting up DCEP sub-items under M0, deposit reserve, and non-financial institution deposit accounts. (2) It may have a certain impact on the currency circulation model. First, for the interbank market, the payment convenience of DCEP means that financial institutions are less inclined to choose to use traditional payment methods for interbank settlement, and are more inclined to use DCEP for interbank clearing/settlement. Secondly, for enterprises and retail businesses, due to the convenient storage of DCEP, a large amount of DCEP will be kept in the hands of enterprises and individuals in the form of cash. Therefore, the cash in circulation will increase, while commercial bank deposits and funds in third-party payment institutions will decrease. DCEP will affect the money multiplier in both positive and negative ways (1) The motivation of banks to hold excess reserves decreases, leading to an increase in the money multiplier. Since DCEP is convenient for payment and has a fast clearing speed, it reduces the amount of funds in transit. Using DCEP for clearing can reduce the reliance on clearing account funds, thereby increasing the money multiplier. (2) The cash leakage rate increases, leading to a decrease in the money multiplier. Cash leakage refers to customers withdrawing cash from banks, causing part of the cash to flow out of the banking system. The ratio of cash leakage to total deposits is called the cash leakage rate. Cash leakage will reduce the ability of banks to create derivative deposits. The easy-to-store feature of DCEP may increase the possibility of enterprises and individuals holding cash, thereby increasing the cash leakage rate and reducing the money multiplier. After the large-scale promotion of DCEP, whether the money multiplier will increase or decrease depends on the comparison of the above two forces. 2. Potential impact on monetary policy 1. DCEP can provide new pricing tools In theory, commercial banks do not need to pay interest on DCEP held by users, but if the central bank charges interest on DCEP held by users, the DCEP interest rate can be used as a new price tool, especially if the central bank charges negative interest on DCEP, it can even be used to break the zero interest rate floor. At present, the central bank pays an interest rate of 1.62% on the statutory deposit reserves of commercial banks and an interest rate of 0.72% on excess reserves, but cannot pay interest on cash held by individuals. After the launch of DCEP, interest can be calculated on the "cash" held in personal mobile phones. For example, interest is paid on the inventory DCEP held by commercial banks, which is analogous to the excess reserve interest rate; interest can also be paid on the circulating DCEP held by individuals. Because DCEP records the "cash" of currency holders in detail, the central bank can logically price differentiated interest rates for different currency holders, which provides a new type of pricing tool similar to targeted interest rate cuts and targeted reserve requirement cuts. An important reason why the zero interest rate lower bound exists is that cash is always an alternative in asset allocation, and the nominal interest rate of cash is zero in the traditional monetary system. Therefore, under the current monetary system, even if the monetary authorities have formulated a negative interest rate monetary policy, people can always avoid the impact of the negative interest rate policy by holding cash. Once the nominal interest rate of cash such as digital currency is negative, people will not be able to avoid the impact of the negative interest rate policy by holding such cash, which will increase the effectiveness of the negative interest rate policy. After the large-scale application of DCEP, if the central bank negatively charges interest on the DCEP held by users, people will have to hold DCEP, which makes negative interest rates possible, thereby achieving the central bank's goal of stimulating the economy through a negative interest rate policy. It is worth noting that this only explains the possibility of DCEP as a tool for implementing negative interest rates. In actual operation, whether to implement negative interest rates depends on the structure of my country's financial system and the economic status it is in. 2. DCEP helps improve regulatory efficiency DCEP can conveniently track and control the flow of funds, which will help the central bank to carry out more effective structural regulation. Under the traditional cash system, monetary policy focuses on aggregate regulation, and the structural regulation function is relatively weak. The central bank's loose monetary policy is transmitted to loose credit, and banks and other financial institutions are required as transmission intermediaries. The central bank's structural regulation of credit supply is often inefficient. If the market pricing mechanism fails, the credit structure often deviates from the optimal state, that is, credit cannot be effectively transmitted to enterprises and individuals in need. DCEP can effectively capture the flow of funds. Based on this feature of DCEP, the central bank and commercial banks can reach a more flexible funding pricing, thereby encouraging banks to return to the optimal state in credit structure. For example, the central bank can set different liquidity prices for different bank credit flows according to their risk conditions, thereby avoiding the risk assessment incentive problem caused by the bank's inability to track the flow of funds, and improving the measurability and efficiency of policies such as targeted reserve requirement ratio cuts and targeted interest rate cuts. 3. DCEP can reduce regulatory costs The controllable anonymity of DCEP makes it easier for the central bank to record customer transaction information, thereby reducing the central bank's regulatory costs. In the traditional regulatory framework, if the central bank and other financial regulatory authorities need to obtain statistical indicators and financial statement data, they usually use on-site or off-site inspections, which are costly and time-sensitive. In particular, to track the specific flow of a specific fund, it is necessary to obtain all the ledgers of the fund flow path. DCEP comprehensively records transaction information, which means that the central bank's DCEP system records detailed information such as digital currency ownership and transaction flow, and no additional ledgers are required to understand the flow of funds, thereby greatly reducing regulatory costs. Potential impact of central bank digital currency on commercial banks 1. DCEP will affect the scale of bank demand deposits and increase the cost of attracting deposits For residents, whether it is a time deposit, a wealth management product, or a money fund, redemption and withdrawal always face certain restrictions, which is not as convenient as a demand deposit. Therefore, enterprises and individuals are always willing to hold a certain amount of low-interest demand deposits. After the large-scale promotion of DCEP, enterprises and individuals may exchange bank demand deposits for DCEP and deposit part of the funds in digital wallets. In other words, it is possible that DCEP will replace demand deposits rather than just cash. Since DCEP is a liability of the central bank, not a bank liability, the promotion of DCEP may lead to the "disintermediation" of bank demand deposits. In addition, the conversion between bank deposits and DCEP is relatively convenient, which may lead to a reduction in the stability of deposits. In order to stabilize the source of demand deposits, banks may raise the deposit interest rate on the liability side. 2. DCEP will affect the scale of payment and settlement business Compared with third-party payment institutions that focus on small-value retail payment services, the large-value payment and clearing business provided to interbanks and enterprises in the clearing and settlement business operated by banks may be an area where they have certain advantages. If DCEP only replaces small-value retail payments in the future, the scale of large-value payment clearing and settlement of commercial banks will not be greatly affected. However, according to the information currently released by the Digital Currency Research Institute of the People's Bank of China, the central bank's digital currency can also be applied to large-value payment and clearing scenarios. For example, banks can transfer funds between DCEP business libraries, and the business library plays the role of an interbank clearing account. Therefore, the promotion of DCEP will reduce the scale of commercial banks' payment and settlement business to a certain extent. 3. DCEP digital wallet will increase customer stickiness In the era of third-party payment, bank apps have fewer application scenarios and are used less frequently. The promotion of DCEP may change this situation. Under the two-tier operating system, the promotion of DCEP digital wallets will increase the frequency of bank customers using bank apps, thereby increasing customer stickiness. At the same time, banks can build open platforms and gather partners so that end users can use digital wallet services in their daily lives and consumption through different media and channels. Commercial banks can seize this opportunity to obtain active traffic, increase the number of customers, and develop open banking services. 4. DCEP will help improve bank operating efficiency Digital currency reduces the circulation cost of paper currency and improves the operating efficiency of banks. On the one hand, DCEP, as an electronic transaction method, will significantly reduce the cash management costs of commercial banks; on the other hand, DCEP, as an electronic storage method, will significantly reduce the manpower and material expenditures and security requirements of commercial banks in the cash transfer and custody links. DCEP has no depreciation, does not require physical space for storage, and does not require space for transportation. It will significantly reduce the daily operating costs of commercial banks and improve their operating efficiency. In general, the potential impact of the central bank's issuance of DCEP is reflected at both the macro and micro levels: From a macro perspective, DCEP may change the structure of the central bank's balance sheet. On the one hand, the central bank may open a new sub-account in the "base currency" account on the liability side to record the central bank's digital currency; on the other hand, after the large-scale promotion of DCEP, it may have an impact on the traditional M0, excess reserves, and the scale of third-party institution reserves. At the same time, DCEP can be used as a new price tool to improve the efficiency of macroeconomic regulation and reduce regulatory costs. From a micro perspective, DCEP has both advantages and disadvantages for banking operations. The positive side is that it may increase customer stickiness through digital wallets and improve operational efficiency with the help of DCEP's electronic storage methods; the negative side is that it may increase liability costs and reduce the scale of payment and settlement business.
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