Ten questions and answers about the central bank's digital currency DCEP

Text/Li Lianxuan

1. What is the difference between the central bank’s digital currency and the currency we use in our daily lives?

Answer: The simplest way to understand the central bank's digital currency is electronic cash, which changes the carrier of legal currency from paper form to electronic form; and the currency we commonly use in daily life is mostly paper money or coins.

2. What are the differences between the central bank’s digital currency and the balance in Alipay/WeChat?

A: The biggest difference between the two is that, from the perspective of currency statistics, the central bank's digital currency belongs to M0, that is, the category of cash; the funds in Yu'ebao and WeChat are essentially deposits of non-deposit financial institutions, belonging to the category of M2. In addition, the legal status and security of the central bank's digital currency are higher than those of Yu'ebao and WeChat: like commercial banks, if a third-party payment company goes bankrupt one day, people's funds in it will also face risks, but the central bank's digital currency does not have these problems.

3. What is the difference between central bank digital currency and Bitcoin?

Answer: The central bank’s digital currency is completely different from Bitcoin. The main differences are as follows:

(1) The central bank’s digital currency uses 100% reserve payment, is a liability of the central bank, is guaranteed by the central bank’s credit, and is a national sovereign currency. Bitcoin is not backed by any credit, so we can see that the price of Bitcoin fluctuates greatly.

(2) From the perspective of design details, the central bank's digital currency adopts a two-tier operating system, that is, the central bank first exchanges the digital currency to banks or other operating institutions, and then these institutions exchange it to the public; Bitcoin, on the other hand, is issued using a decentralized mining method. The issuance process does not involve the central bank or commercial banks, and is directly available to the public.

4. What is the difference between central bank digital currency and stablecoins such as Libra and USDT?

A: The central bank's digital currency is issued by the government, while Libra and USDT are issued by private institutions and are collateralized by the U.S. dollar or other currencies. From a legal point of view, DCEP has unlimited legal compensation, that is, when we use DCEP for payment, merchants cannot refuse to accept it; Libra and USDT do not have unlimited legal compensation, and merchants can refuse to accept it.

5. What are the advantages of central bank digital currency?

A: The main advantages are as follows:

(1) Currently, the costs of issuing, collecting and storing paper money are relatively high, and it is inconvenient for people to carry and use it. The central bank’s digital currency can solve these problems.

(2) The problem with the current central bank’s monetary policy is that it is impossible to observe the circulation and use of money after it is released. The use of digital currency can collect money accounting and circulation information at any time, thus providing a reference for the formulation and implementation of monetary policy.

(3) It is conducive to promoting anti-money laundering, anti-tax evasion, anti-corruption, and anti-terrorist financing. From the information currently disclosed by the central bank, although the central bank's digital currency adopts controllable anonymity, the central bank can use big data and other technologies to identify transaction features and conduct anti-money laundering and anti-terrorist financing supervision.

(4) It is conducive to promoting the development of the domestic digital economy. The digitization of the central bank's currency can drive the development of the domestic digital economy industry. For example, the central bank's digital currency can bring a large amount of information. Can this information drive the development of my country's credit reporting industry and thus reduce the bad debt rate and risk of financial institutions?

(5) It will help improve financial services in our poor and remote areas. At present, people in poor and remote areas cannot enjoy convenient financial services. Whether it is remittances, deposits or loans, it is rather troublesome. The central bank's digital currency will change the phenomenon of poor financial services and high costs in these areas, making people's lives more convenient.

6. Does the launch of the central bank’s digital currency mean that China is truly entering a cashless society?

A: From the social convention, "cashless" is equivalent to "no physical currency". Credit cards were already used in the United States in the last century, and third-party mobile payments appeared in my country ten years ago, which is itself a cashless transaction. Therefore, the world has already begun the process of "cashless society". Of course, from a financial perspective, cash belongs to the category of M0 in currency statistics. Credit cards, Yu'ebao, etc. actually belong to the category of M1 and M2, but the central bank's digital currency belongs to the category of M0. From this perspective, China has really started the process of "cashless society". But it should be emphasized that moving towards a "cashless society" is a long process and cannot be achieved overnight. It may take decades or even hundreds of years to truly achieve it.

7. What benefits does the central bank’s digital currency bring to the internationalization of the RMB?

A: The digitization of the RMB improves the convenience of transactions, facilitates cross-border payments and transactions, and increases the overseas circulation of the RMB. However, it should be emphasized that the internationalization of the RMB will not depend entirely on the digitization of the RMB, because the overseas circulation of the RMB is only one aspect of the internationalization of the RMB. If the RMB is to truly become a world currency, it must become an international reserve currency and a settlement currency. For example, assets denominated in RMB become the main foreign exchange reserves of central banks of various countries, and transactions settled in RMB in international trade need to reach a certain proportion, which cannot be achieved simply by digitizing the RMB.

8. Does the central bank’s digital currency apply blockchain technology?

A: It is difficult for the central bank's digital currency to fully adopt blockchain technology, because the existing blockchain technology cannot meet the high concurrency requirements of DCEP. From the current situation, the central bank's digital currency is more about borrowing some technical concepts from blockchain technology. Because blockchain itself is a new technology formed by cleverly combining many existing mature technologies, such as asymmetric encryption, proof of work, and timestamps. According to the latest disclosed patents, the central bank's digital currency refers to blockchain's asymmetric encryption, UTXO mode, and smart contracts, but the core consensus mechanism in the public chain cannot be used.

9. What changes will the central bank’s digital currency bring to people’s payment methods?

A: From the perspective of people's experience, DCEP and third-party payment tools such as Alipay/WeChat are similar in usage, and there is not much difference. However, DCEP can break down the barriers of the payment industry to a certain extent. For example, Alipay and WeChat cannot transfer money to each other, but DCEP can be deposited in banks and put into Alipay and WeChat wallets.

10. How to understand DCEP’s offline payment?

Answer: From the patent of "Transaction and Method for Offline Payment Using Digital Currency Chip" released by the Digital Currency Research Institute of the Central Bank, DCEP can already realize single offline payment. As for the dual offline payment that everyone is concerned about, the current technical patents have not yet explained how to solve the "double-spending problem" in the dual offline situation, so we need to wait for more technical patents to be disclosed in the future. However, the "double-spending problem" is not only solvable by technology. At present, the central bank has stipulated that DCEP can only be used for small retail scenarios, which to a certain extent avoids the huge losses caused by the "double-spending problem"; on the other hand, the assumption of the traditional "double-spending problem" is that users have the motivation and ability to do evil, but in reality we can rely on legal systems and regulatory measures to ensure that users dare not do evil, or that they can pursue payment after "double-spending" occurs.