Text: Chen Yongwei (Head of Research Department of Comparative Magazine)

Source: Beijing Think Tank

Starting from this month, the salaries and subsidies of some government agencies and public institutions in Shenzhen, Xiongan, Chengdu and Suzhou will be distributed in the form of digital currency.

▲Image source: Beijing News

On April 14, a screenshot of the internal test of the central bank's digital currency DC/EP (Digital Currency Electronic Payment) began to flood the WeChat Moments. Along with the screenshot, there was also a piece of news: DC/EP will first be tested in four pilot cities, Shenzhen, Xiong'an, Chengdu, and Suzhou. Starting this month, the salaries and subsidies of some government agencies and public institutions in the above cities will be paid through DC/EP.

The much-anticipated DC/EP seems to be one step closer to us.

To make up for the shortcomings of existing currencies, the central bank launched DC/EP

As early as 2014, a special digital currency research project team was established. On March 9, 2018, Zhou Xiaochuan, then governor of the central bank, officially revealed at a press conference of the first session of the 13th National People's Congress that the central bank was developing a legal digital currency, and the name of this legal digital currency was DC/EP.

So, why does the central bank spend so much energy on developing DC/EP? The most important reason is to make up for the various defects of existing currencies. What are the defects of existing currencies? In summary, there are the following aspects:

First, the high cost. The existing currency in circulation not only requires huge investment in production, transportation, storage and other links, but also requires huge investment of manpower and material resources for anti-counterfeiting during circulation, and the cost is very huge.

The second is "weak traceability". Once the existing currency enters circulation, it is difficult to track. This makes it difficult for the central bank to formulate corresponding monetary policies in a targeted manner and adjust the circulation of currency in a timely manner.

The third is “homogeneity”, which means that the central bank’s monetary policy can only control the total amount, and it is difficult to establish a clear relationship between monetary policy and money supply.

The fourth is "real-time". The so-called real-time means that the transactions and payments of traditional currencies are all carried out in real time. The consequence is that the central bank can only control the currency in real time. Once the currency supply process ends, the central bank loses control over the currency.

Legal digital currency can effectively overcome the above-mentioned shortcomings, and this is exactly the original intention of the central bank to vigorously develop DC/EP.

It should be pointed out that in addition to addressing the fundamental motivations of traditional currency defects, the central bank's decision to accelerate the testing of DC/EP at this stage actually has profound implications.

On the one hand, with the maturity of blockchain technology, digital currencies such as Bitcoin and Libra have emerged, which will have a certain impact on my country's financial system, and DC/EP can cope with this impact to a considerable extent.

On the other hand, in order to cope with the impact of the COVID-19 epidemic, precise and targeted subsidies to enterprises and residents will become a major demand of the government. If traditional currency is used, it will be very difficult to complete this task. Since DC/EP can overcome problems such as "weak traceability", "homogeneity" and "real-time", relevant policies can become more precise and effective.

Two roles of DC/EP: digital currency and means of payment

Zhou Xiaochuan, former governor of the People's Bank of China, once said in a speech that DC/EP has two roles: one is digital currency, and the other is a means of payment, and the two roles complement each other.

From the user experience point of view, DC/EP as a "payment method" is actually very similar to the third-party payment methods we are familiar with, such as Alipay. However, DC/EP will add some new features, such as contactless payment such as "touch and pay", which can help people complete payments without the Internet.

Of course, behind this superficial similarity, DC/EP and Alipay are very different.

DC/EP is M0 in monetary economics, which is cash in circulation. In terms of status, it is exactly the same as paper money. The money in third-party payment tools is M2. When we use this kind of third-party payment software, we actually transfer the money to the account of the third-party payment company first, and then complete the payment through their account.

The difference in nature determines that there are some differences between DC/EP and third-party payment in the process of use: First, DC/EP is legal tender and the transaction parties must accept it. Second, during the payment process of third-party payment, all information is transparent to the transaction platform, while DC/EP can achieve anonymous payment under certain conditions.

According to the existing information, at least at the central bank level, blockchain technology will not be used. The main reason is that DC/EP is different from other digital currencies in terms of characterization and issuance purpose. A big reason why digital currencies such as Bitcoin use blockchain technology is to ensure consensus under distributed accounting and thereby guarantee their own currency credit.

As a legal tender, DC/EP is backed by the state, so there is no need to do this. At the same time, the efficiency of blockchain technology is still low. Taking Bitcoin as an example, every transaction must be verified by the entire network, which takes a lot of time. This is obviously not suitable for large-scale transactions.

In terms of operating mode, DC/EP is likely to make appropriate adjustments based on the existing currency operating structure to form a structure of "one currency, two banks, and three centers."

The so-called "one currency" is an encrypted digital string representing a specific amount of money that is guaranteed and signed by the central bank. The "two vaults" are the central bank's issuance vault and the commercial bank's bank vault, in addition to the digital currency wallets of individual or unit users in the circulation market. The "three centers" are the certification center, registration center, and big data analysis center.

Under this structure, DC/EP will mainly change the transportation and storage of currency, and other operations will not change much from existing currencies.

DC/EP will have four levels of impact

What kind of impact will the issuance of DC/EP bring? This probably needs to be viewed from four levels: user level, market level, macro level, and international level.

From the user's perspective, I personally think that the impact of DC/EP should not be too great. Although we pointed out earlier that DC/EP is very different in nature from the money in Alipay and WeChat, in actual application, the experience of the two should be similar.

Of course, it may also bring some differences in some details, such as overcoming the rejection of certain merchants, realizing offline payment, and better ensuring anonymity.

From a market perspective, the launch of DC/EP may have a certain impact on the existing payment system and financial institutions. In this process, it is likely to trigger a certain degree of industry reshuffle, and the structure of the entire industry may be restructured as a result.

From a macro perspective, the application of DC/EP will help the central bank to better formulate relevant policies. With the help of big data analysis, the central bank can better track the flow and supply and demand of money, so that it can formulate and implement monetary policy more accurately and effectively. It can be foreseen that under the epidemic, this will help better implement various anti-epidemic policies.

From an international perspective, the launch of DC/EP will also help my country better counter the impact of other digital currencies such as Libra on China, and will also have a certain role in promoting the internationalization of the RMB. However, from the existing information, DC/EP should be used domestically first, so this effect may be difficult to reflect in the short term.