Wang Yongli: DC/EP has limited impact in the short term, and the "dual offline payment and collection" function is prone to "overspending" risks

On the evening of April 14, a picture of the central bank's digital currency DC/EP in the internal testing of the "wallet" APP of the Agricultural Bank of China was widely circulated online, triggering a new round of discussion about the central bank's digital currency. Based on the relevant information disclosed by central bank officials and the basic logic of currency and payment settlement, I would like to share some views on the central bank's DC/EP for your reference.

Someone published an article saying: Say goodbye to paper money, the RMB will usher in an epic transformation; the central bank's digital currency will reconstruct the traditional financial industry; the RMB will be significantly upgraded, and China will lead the world of digital currency; China's digital currency is aimed at the hegemony of the US dollar, and will bypass the SWIFT controlled by the United States, establish its own global clearing system, and vigorously promote the internationalization of the RMB.

Many friends asked me what I thought about this.

I believe that the central bank's DC/EP involves many aspects such as currency form, issuance method, account management, limit control, banking functions, privacy protection, payment carriers, settlement methods, etc. Its specific applications involve extremely wide areas, and the requirements for clearing speed and security management are very high. The central bank needs to formally issue management regulations and implementation details, and amend relevant laws and regulations such as the People's Bank of China Law and the RMB Management Regulations accordingly. There will be a trial period and an official activation date, which will give various banks, payment companies and other operating institutions and digital currency payment participants in various application scenarios a preparation process. People don't have to be too nervous about this now, and there is no need to worry too much about various unrealistic speculations and interpretations.

Here, based on the relevant information disclosed by central bank officials and the basic logic of currency and payment settlement, I would like to share some views on the central bank's DC/EP for your reference.

Now, the central bank has made it clear that the central bank's digital currency is the digitalized RMB. It is the RMB, not equivalent to the RMB, nor is it a new currency outside the RMB; it is not the same as network encrypted digital currency, network stable currency, network comprehensive currency, etc.; the central bank's digital currency mainly changes the currency form, issuance method and payment settlement method, and there is no subversive change in the currency itself. The biggest change is the payment and settlement method of the currency. For this reason, the central bank officially named it "DC/EP", where "DC" is the English abbreviation of "Digital Currency"; "EP" is the English abbreviation of "Electronic Payment", which means that the digital currency launched by the central bank is more about the digitization of currency and electronic payment.

As a digital RMB, DC/EP has no investment or collection value.

It should be noted that DC/EP is a digital cash that replaces physical cash. It has many cash characteristics in terms of function and use, but it should not be completely equivalent to physical cash. For example, physical cash has a physical carrier and different denominations, patterns, and issuance years, and each banknote has its own serial number, etc., while digital currency does not need these things at all. It only needs to record the amount of money (to two decimal places, that is, from "yuan" to "jiao" and "fen").

What is surprising is that the image of the Agricultural Bank of China testing the central bank's digital currency wallet APP that was circulated online recently showed a pattern marked with "People's Bank of China", the face value of "¥1.00", the number "20200414191111" and Mao Zedong's head (see the picture below). It seems that the central bank's digital cash must be completely similar to physical cash, with different face values, patterns, numbers, etc. This is far beyond my imagination. I think this is the biggest misunderstanding of digital currency, which is completely superfluous. Digital currency should only be digital, and should not be deliberately designed to imitate the specific form of cash!

This means that the DC/EP wallet of the operating institution can only be a "shadow account", which is just a channel connecting the central bank and the DC/EP owner. It can only handle the recharge and use deduction of the DC/EP wallet, the receipt of funds, the transfer of deposits, etc., and cannot know the specific circumstances of its use, especially the information of the counterparty and the transaction itself. The account of the DC/EP owner in the central bank is the "real account". Only the central bank can request the complete real-name information and transaction information of the account owner, and use it for anti-money laundering and other monetary supervision work.

In this way, when DC/EP payment and receipt occurs, the relevant information needs to be sent to the operating institution that manages the payment and receipt wallets and the central bank at the same time. The operating institution that manages the payment wallet will deduct the wallet balance and increase the payables to the central bank; the operating institution that manages the collection wallet will increase the wallet balance and increase the receivables from the central bank. The operating institution can summarize and reconcile and settle DC/EP with the central bank on a daily basis, and the central bank will adjust the records of the operating institution's DC/EP transactions and the relevant accounts of DC/EP owners accordingly.

Therefore, the operating institution can only grasp the changes in the wallet balance through the payment and receipt of its own DC/EP wallet, but cannot know the situation of the counterparty. Only the central bank can grasp the complete situation of all transactions.

In this way, the central bank will break the traditional constraints of not opening accounts or handling specific business for entities and individuals other than financial institutions and financial departments, which may require corresponding amendments to the "People's Bank of China Law".

It needs to be emphasized that the central bank's DCEP account and the operating institution's DCEP wallet, as cash accounts, can only handle payments and receipts, not borrowing, overdrafts, or interest calculations. Therefore, DC/EP should not have an impact on monetary policy.

At the same time, it should be pointed out that the statement that "DC/EP is issued by the central bank, is the liability of the central bank, and its credit is higher than bank deposit currency and payment institution's wallet currency" is actually inappropriate. This is because: under the metal standard, paper money is indeed a debt certificate issued by the issuer and can be unconditionally exchanged for metal currency from the issuer at any time, so it is okay to say that currency is the liability of the issuer (central bank). However, under the credit currency system, currency is released through indirect financing methods such as purchasing reserves or lending. For the currency release institution, currency is no longer its liability, because the release institution no longer promises that people can use the currency it issues to exchange for anything, and there is no longer a debt attribute in the legal sense. The bank's release of currency, such as lending, is itself a bank's claim rather than a liability.

In fact, credit money is a currency that is based on the value of tradable wealth within the national sovereignty and protected by law, and is protected by sovereignty and law for its circulation and use, so it is also called "sovereign currency" or "legal tender". The "credit" of credit money refers to the overall credit of the country, not the credit of the central bank or the finance (government) itself. It is inaccurate to say that currency is the liability of the central bank or that it is guaranteed by national taxation.

Some people call the currency (cash) issued by the central bank "central bank currency", the deposits converted from bank loans "bank currency", and the money in the electronic wallets of payment institutions "wallet currency", etc. In fact, these names are also not accurate. Cash, deposits, wallets, etc. are all forms of currency, not currency itself. From the perspective of currency, they are all unified legal tender. It is only after the currency is deposited in the central bank, commercial banks, and payment institutions that it constitutes the liabilities of the central bank, commercial banks, and payment institutions. From the perspective of liabilities, there are differences.

It must be emphasized that, except for physical cash, all other forms of currency are based on accounts, and the continuity and accuracy of account payment records must be guaranteed. Even as digital cash, DC/EP is no longer physical cash and must also be based on accounts. It is impossible to directly handle payments without accounts.

Second, as digital cash, DC/EP may account for a very low proportion of the total currency (currently, cash in circulation accounts for less than 4% of the total currency, and the scale of DCEP, which partially replaces cash, will be even more limited). Therefore, even if DC/EP is launched, it will be impossible to reconstruct the traditional financial system at least in the short term. In fact, the design of the central bank's DCEP is very important to avoid bringing a big impact to the existing financial system and thus increase risks and costs. Therefore, it is not appropriate to exaggerate its impact on the financial system, including payment companies.

Third, DC/EP is not a completely permissionless, borderless blockchain operating system like Bitcoin, and it is impossible for it to become a cross-border international payment and clearing system soon. Therefore, it is an overestimation of its function to think that it can establish its own global clearing system, vigorously promote the internationalization of the RMB, or even target the hegemony of the US dollar.

Fourth, even if China takes the lead in launching digital currency, whether it can establish its leading position in the field of digital currency and its voice in rule-making, and whether it can make China's digital currency the world's digital central currency, depends entirely on whether the technical solutions used by China are leading and whether China's international influence is leading in the world. In fact, if the RMB cannot become an international central currency, it will also be difficult for the digital RMB DC/EP to become the central currency of international digital currency.

Fifth, in order to achieve the limited anonymity requirement of DC/EP, a transaction may need to transmit information to both the operating institution and the central bank, and the content of the information transmitted is different. This will be very complicated in design and the operation cost may be higher than the current bank online banking or mobile payment of payment institutions. Whether it has comparative advantages and is easy to be welcomed by all parties involved is worth paying attention to. If there is no comparative advantage, whether it needs to be enforced by administrative means needs to be carefully considered.

Of course, if the central bank's DC/EP only starts with replacing cash, and after the information of the same transaction is transmitted to the operating institution and the central bank at the same time and the operation is relatively stable, it will further promote DC/EP to replace bank deposits, thus forming a financial operation system of "collection and payment operations in operating institutions, complete customer and transaction information in the central bank", and all information on currency collection and payment transfers can be concentrated in the central bank at the first time, which will provide great support for the central bank's monetary supervision and monetary policy decision-making and effective implementation, and the launch of the central bank's DC/EP will be truly of great significance. This may be the real development direction of DC/EP.

The above are just some opinions based on the relevant information currently available, which may differ from the actual situation of DC/EP. Therefore, we still hope that the central bank can publish the design white paper of DCEP as soon as possible, use official authoritative explanations to eliminate unnecessary speculation and random interpretations in society, and consider the revision of relevant laws and regulations in advance. We also believe that the central bank will definitely retain a certain transition period after issuing the DC/EP management measures and implementation rules, and strengthen publicity, explanation and usage training.