How to understand the central bank’s digital currency?

Source: Wang Jian's Perspective

Text | Wang Jian

In order to avoid mistaking a horse for a zebra in subsequent discussions, it is necessary to clarify a few concepts at the outset.

First, there are electronic currency and electronic cash . These are two very old terms that have almost disappeared in recent years. My undergraduate thesis was about financial electronicization. Later, I revised and improved the part of the thesis involving electronic currency and published it in the Journal of Shanghai Finance University (Issue 3, 2006), entitled "Research on the Issuing Entity and Regulatory Strategy of Electronic Currency". Interested friends can find it in the journal.

Research on the Issuing Entity and Regulatory Strategy of Electronic Currency Journal of Shanghai Finance University, No. 3, 2006

From the mainstream point of view at the time, electronic money had not yet achieved a generally accepted definition and had a broad connotation. The broadest definition (Kobrin, 1997) included three categories: (1) electronic debit and credit systems; (2) smart cards; and (3) true digital cash.

The first category is the electronic payment based on various bank and non-bank account systems that we are now accustomed to, such as swiping a bank card directly on the merchant's POS machine, quick payment by a payment company that has bound a bank card, and payment from a payment company account. This type of payment is essentially still a transfer of deposits, not a new type of currency. It is just a new means of accessing deposit accounts and completing payments. It is the electronicization of account access and transfer methods.

Therefore, the narrow definition of electronic money (European Central Bank, 1998; Bank for International Settlements, 2004) excludes this type of account-based electronic payment and refers only to the latter two categories: smart cards and digital cash .

The latter two categories are commonly defined electronic money. First of all, it should be made clear that it is not a deposit account in a bank or non-bank institution, but "cash", which is of the same nature as paper money and is classified as M0. Since it is stored in electronic signals, this kind of cash cannot be held in hand, but must be stored in electronic storage devices. Storage devices are roughly divided into two categories, one is a dedicated smart card, and the other is directly stored in a computer or other electronic device (mainly a smartphone now).

Smart cards for storing electronic money are not widely used in my country. UnionPay and banks have launched similar card products, but they have not been popularized. This product involves the action of "depositing", that is, taking money out of a bank account and depositing it into this smart card. In this way, cash is stored in a bearer form in the smart card, and the card can be inserted for offline transactions.

It can be seen that smart cards and bank cards are completely different things . Bank cards do not store money. Bank cards are just a technical means for us to access bank accounts online. Our money is stored in the bank's vault, not in the card (so it's okay if you lose your bank card, just apply for a new one). Smart card electronic cash, the money is stored in this card (the technical principle is similar to that of transportation cards, but transportation cards are not considered smart card currency because they are single-purpose and are therefore prepaid by the subway company), so don't lose your smart card, because if you lose the card, you lose the money. There are many reasons why this transaction method is not popular, including complex equipment and troublesome deposits. In the case of highly developed Internet, it is not as convenient as an online bank card.

Electronic money directly stored in computer devices is the real digital cash. For example, when buying something online, you can directly send digital cash to the seller to complete the payment. This is the same as bank deposit transfer, which is completely electronic and electronic payment, which sounds very convenient.

But obviously, electronic cash, whether it is a smart card or real digital cash stored in a computer, has some risks, such as the possibility of being copied. If the encryption algorithm is cracked, the criminals can copy the electronic cash stored in the form of electronic signals several times, and their wealth can be doubled, or the risk of "double payment" (also known as "double spending"), that is, a cash copy can be used to pay twice.

This is worse than counterfeit banknotes. Counterfeit banknotes are fake, but the copied digital cash is all real. Therefore, considering the potential risk of double payment and the convenience of online electronic payment, digital cash has not become popular in all countries. Account-based electronic payment has developed rapidly under the promotion of third-party payment companies, and people have almost forgotten the attempt of digital cash.

At this point, you may notice that all the efforts mentioned above have not broken through the current monetary system, that is, the central bank issues currency uniformly, the central bank releases base currency to banks, and banks release broad currency to the public. Base currency and broad currency are actually the same currency, which is the sovereign currency of the country, such as the RMB in my country. The electronic currency in the smart card and the digital cash in the electronic device mentioned above are all sovereign currencies of various countries, but they have changed their form of existence. They are the electronicization of sovereign currencies, not a new currency.

Just a few years ago, the emergence of Bitcoin brought about the emergence of a new currency that is different from the sovereign currencies of various countries. Bitcoin is based on blockchain technology. There is no single issuer. All transactions are recorded in all nodes of the entire network, making it difficult to tamper with. Bitcoin also hopes to control its issuance and maintain its value by limiting the total issuance in the future. But it is precisely this well-intentioned wish that has deviated from the essence of currency. The essence of currency is an "IOU" and an "account", not a "thing". The total amount of currency increases and decreases with the rise and fall of human economic activities, and it should not be a fixed total amount. Therefore, Bitcoin has deviated from the essence of currency by definition and is more like a precious metal, so it is more appropriate to call it "digital gold".

Remember, under the modern credit currency system, gold is not currency, which is different from the old situation.

This new type of digital currency, which is completely different from the original sovereign currency, is called digital currency. Obviously, the central banks of various countries that have the right to issue currency will not welcome this new thing that aims to deprive them of the right to issue currency. Therefore, it is natural to infer that what the central banks are preparing to study and launch is not digital currency, but the digital cash mentioned above, although it caters to the public and is also called digital currency.

Digital cash is not new. As mentioned above, people have been studying it for a long time. However, it has not been well implemented for various reasons. One of the main reasons is security. Cash that exists entirely in the form of digital signals has the risk of being copied and resulting in double payments. If this risk breaks out, serious inflation will occur and the currency will be scrapped. Therefore, the risk of double payments is too great and requires strong technical security guarantees.

However, although Bitcoin itself has deviated from the essence of currency, the introduction of regional chain technology has made it possible to control the risk of double spending. The application of blockchain enables the entire network to identify unique transactions, thus basically eliminating the risk of digital cash being illegally copied, and greatly improving the security of circulation. Then, adding smart contract functions and adding some personalized functions to transactions can also help reduce currency circulation and transaction costs, and improve the service level of payment links.

Therefore, we believe that what the central bank is developing is a type of digital cash that uses new circulation technology, rather than a digital currency independent of the RMB.