Babbitt Exclusive | The central bank's digital currency is under internal testing, and four major demands are accelerating the implementation of DC/EP

On the evening of April 14, a photo of the internal testing of the central bank's digital currency DC/EP wallet went viral on social platforms. The test page shows that the digital currency wallet has DC exchange (management of directional funds), DC query (real-time recording of each transaction), wallet management, wallet affiliation (linked accounts) modules, and supports scan code payment, remittance, payment and collection, "touch and pay" and other functions. It is reported that the test version of the wallet is limited to whitelisted customers, and the download QR code exposed by the media can no longer be opened.

The beta version of the wallet APP includes four outlets in Shenzhen, Xiong'an, Chengdu, and Suzhou. Screenshots show that some merchants in Chengdu Taikoo Li have taken the lead in piloting DC/EP. According to Caijing, the first batch of DC/EP pilot institutions will include the four state-owned commercial banks of Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, and China Construction Bank, and the three major operators of China Mobile, China Telecom, and China Unicom.

These are all rumors circulating on social media, and the authorities are keeping silent about it. But on the 10th of this month, Zhou Xuedong, director of the General Office of the Central Bank, also pointed out at the first quarter financial statistics conference that the central bank's digital currency is being promoted in an orderly manner according to the original plan.

Historical Nodes

The central bank's digital currency DC/EP (Digital Currency Electronic Payment) is issued and endorsed by the People's Bank of China. It is essentially the central bank's debt to the public and has unlimited legal compensation. DC/EP aims to replace the paper money in circulation, namely M0, which is essentially different from third-party payment platforms such as Alipay and WeChat Pay. From a time perspective, the birth and development of the central bank's digital currency has a clear historical context.

DC/EP research originates from Bitcoin

In 2014, under the advocacy of Zhou Xiaochuan, then governor of the People's Bank of China, the central bank established a digital currency research group and started the research and development of the central bank's digital currency. The initial reason for the research was undoubtedly Bitcoin, because in August 2013, the German government officially recognized Bitcoin's legal "currency" status, becoming the first country in the world to recognize Bitcoin. The Chinese government immediately expressed different opinions and issued the "Notice on Preventing Bitcoin Risks" in December of the same year, clarifying that Bitcoin does not have the same legal status as currency and cannot and should not be circulated and used as currency in the market.

However, the central bank has since begun to pay attention to the possible impact of blockchain technology on the financial and monetary system. In 2015, the People's Bank of China's series of research reports on the issuance of digital currency showed that the prototype plan for the central bank to issue legal digital currency had completed two rounds of revisions. Zhou Xiaochuan also revealed in an exclusive interview with Caixin Weekly in 2016 that the People's Bank of China has conducted in-depth research on other related technologies involved in digital currency, such as blockchain technology, mobile payment, trusted and controllable cloud computing, cryptographic algorithms, security chips, etc. He also pointed out that digital currency must be issued by the central bank as legal currency, and blockchain is an optional technology.

After stagnation, it restarted to counter Libra

The research speed in the first phase was relatively slow. It was not until the end of 2016 that the Digital Currency Research Institute directly under the central bank was officially established, with Yao Qian as the director. The core period of the central bank's digital currency research began from 2016 to 2018, and a total of 74 patents were applied for. Subsequently, research on digital currency seemed to stagnate. After Yao Qian took up the position of general manager of China Securities Depository and Clearing Co., Ltd. in October 2018, the position of director of the Central Bank Digital Currency Research Institute remained vacant for 11 months, and the Central Bank Digital Currency Research Institute did not apply for patents again.

Unexpectedly, the Libra white paper came out in June 2019, and Mu Changchun, deputy director of the central bank's payment department, took office immediately and became the second director. Since then, we have heard officials frequently mention the central bank's digital currency. Zhou Xiaochuan, Yao Qian, Mu Changchun, Huang Qifan, and Zhou Xuedong have all shared the latest progress of the central bank's digital currency in their public speeches, and many substantive implementation measures have also emerged. It can be inferred that the direct cause of the central bank's digital currency from being neglected to accelerating is the potential threat of Libra.

Less than a month after the Libra white paper was released, Zhou Xiaochuan expressed his views on Libra and the internationalization of the RMB at the "SAIF-CAFR Experts Lecture Hall": "Libra is a challenge to the RMB. At present, China still has a certain degree of foreign exchange control. To cope with the challenge of Libra, it is still necessary to speed up the convertibility of capital items, so that the RMB can become a part of the strong currency and avoid erosion and substitution; with the development of RMB internationalization and the gradual increase of its proportion in the SDR basket, it will involve very important policy choices."

Current Motivation

The above is the historical cause and development context of the birth of the central bank's digital currency. We have noticed that the implementation of the central bank's digital currency has accelerated significantly recently. The global financial crisis and challenges in the context of anti-epidemic efforts may be a booster. The central bank's digital currency has at least four real needs at present.

1. Improving the accuracy of monetary policy operations

In order to restore market confidence, the Federal Reserve previously cut interest rates on a large scale and launched an unlimited quantitative easing program and other "money-releasing packages", and other countries have also responded one after another. China's State Council Joint Prevention and Control Mechanism held a press conference on April 3, and relevant officials from the Ministry of Finance, the People's Bank of China, and the China Banking and Insurance Regulatory Commission responded: "We will never allow the market to have a 'money shortage', and of course we don't want the money to be 'devalued', so that the growth rate of M2 and social financing scale basically matches the growth rate of nominal GDP and is slightly higher."

The use of digital currency may help the central bank improve the accuracy of monetary policy operations and make more accurate calculations of factors such as money supply, structure, circulation speed, money multiplier, and time and space distribution. Yu Bo, co-founder of Dream Chaser Fund, pointed out: "For legal tender, the slogan of 'cashless' private payment tools and the rise of 'decentralized' digital currency are more like a morning call, reminding the central bank to pay attention to the stability of legal tender value, to not ignore the unavoidable technological wave of digital cryptocurrency, and to pay attention to the integration and innovation of central bank currency and digital technology."

2. Become a "special fund" that can be controlled throughout the process

At the ninth meeting of the National Development and Reform Commission on the research of new infrastructure for the digital economy, more than 10 experts and scholars judged: "In the later stage of the fight against the epidemic, the central bank's digital currency may be launched more quickly and become a special special fund whose flow can be controlled throughout the process." Trust CEO Ma Chenyun also said: "The programmable properties of digital currency can be defined, directed, and dedicated in advance to prevent funds from flowing to places such as real estate that the country does not want to go." From this perspective, DC/EP can also be used as special funds for new infrastructure.

3. A powerful tool for RMB internationalization

DC/EP is not only used as a special fund in China, but also conducive to the internationalization of the RMB. The central bank's digital currency adopts a loosely coupled account form, which reduces the dependence of the transaction link on the account, thereby bringing the same liquidity and controllable anonymity as cash. OKEx CEO Jay posted on Weibo: "The two-tier operating system can play a good supervisory role to deal with possible financial crimes, and the data security and financial security of the general public can be assured. What is more meaningful at present is that with the spread of the epidemic, globalization has stagnated or even retreated. DC/EP will be able to bypass the restrictions of other institutions or financial infrastructure construction and become a powerful tool to help the internationalization of the RMB."

4. Meeting the needs of “contactless finance”

"In addition to the above benefits, DC/EP, as a substitute for paper money, can also meet the needs of 'contactless finance' at present," said Zhu Youping, a researcher at the National Information Research Center. Paper money often needs to go through a whole set of processes such as papermaking, printing, cutting, storage, and transportation, while digital currency converts all the links such as issuance, circulation, management, collection, investment and financing, and inter-bank settlement into mathematical operations silently executed in the server, which is not only much cheaper, but also conducive to meeting the needs of contactless payment during the global epidemic outbreak.

Key Points

DC/EP has already started internal testing, and this time it is really "on the verge of being released". What benefits will it bring to us? The director of the blockchain laboratory of Beijing University of Posts and Telecommunications briefly pointed out the five major advantages: legal compensation, traceability, sovereign credit, dual offline payment, and directional circulation. If you want to truly understand these five words, you may have to understand the most basic elements of DC/EP.

1. Is it related to blockchain?

First of all, some people in the industry believe that DC/EP is based on blockchain technology, while others believe that it has nothing to do with blockchain and that we don’t need to be overly excited. This may be related to the official euphemism in the early days. In August 2019, Mu Changchun said in a course on Get that the high concurrency required by retail cannot be achieved with a pure blockchain architecture, so the central bank decided to maintain technology neutrality and not preset a technology route. However, in October 2019, Huang Qifan, vice chairman of the China Center for International Economic Exchanges, said at the "2019 Bund Financial Summit" that the digital currency DCEP currently launched by my country's central bank is a new encrypted electronic currency system based on blockchain technology.

2. Adhere to centralized management

Secondly, although it is also based on blockchain technology, unlike decentralized digital currencies such as Bitcoin, DC/EP adopts a centralized management system. The central bank maintains its authoritative status and has the highest authority. There are three main reasons why DC/EP insists on centralization: first, it is backed by a strong guarantee of national credit and has unlimited legal compensation; second, centralized management is conducive to the central bank's macro-prudential and monetary regulation functions. Third, the two-tier operating system is conducive to maintaining the stability of the financial system and maintaining the original monetary transmission method.

3. Two-tier operating framework

Furthermore, DC/EP is not only not "decentralized" but also not "intermediary-free". Instead, it follows the two-tier operating framework of the traditional financial system. The so-called single-tier operating system refers to the People's Bank of China issuing digital currency directly to the public. DC/EP, on the other hand, is exchanged by the People's Bank of China to banks or other operating institutions, and then exchanged by these institutions to the public, which belongs to a two-tier operating system. The People's Bank of China cooperates with other commercial banks and institutions to make full use of resources and disperse the risks borne by the central bank, and can also avoid the crowding-out effect on commercial deposits and lead to financial disintermediation.

4. Three Centers Collaboration

For the central bank, the biggest change of DC/EP may be the operating framework, which includes three centers: the authentication center, the registration center and the big data analysis center. According to the research report "Exploration of Legal Digital Currency of the People's Bank of China" released by Huatai Securities Research Institute: "Authentication Center" is responsible for the centralized management of legal digital currency institutions and user identity information, is the basic component of system security, and plays an important role in controllable anonymity. Authentication can be carried out by means of public key infrastructure (PKI) or identity-based cryptography (IBC); "Registration Center" is responsible for ownership registration and flow records, including the central bank's digital currency and the corresponding user identity, the entire process of legal digital currency generation, circulation, counting and verification, and extinction; "Big Data Analysis Center" relies on big data, cloud computing and other technologies to process massive transaction data. Through payment behavior analysis and regulatory control indicator analysis, the circulation process of currency is mastered, the security of digital currency transactions is guaranteed, and illegal activities such as money laundering are prevented, providing data support for the implementation of macro policies.

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