Central bank officials "portray" legal digital currency

"The central bank's digital currency is about to be released." At the third China Finance 40 (CF40) Yichun Forum held on the 10th, CF40 special member and deputy director of the Payment and Settlement Department of the People's Bank of China Mu Changchun said that from 2014 to the present, the research on the central bank's digital currency (DC/EP) has been going on for five years. "Since last year, relevant personnel from the Digital Currency Research Institute have been working 996 hours to develop related systems."

Mu Changchun revealed that the central bank will not issue digital currency directly to the public, and will adopt a two-tier operating system, that is, the People's Bank of China will first exchange digital currency to banks or other operating institutions, and then these institutions will exchange it to the public, and adhere to a centralized management model in this process. The central bank does not preset a technical route, and does not necessarily rely on blockchain. It will fully mobilize market forces and achieve system optimization through competition. According to the Economic Information Daily reporter, the central bank's legal digital currency may be piloted in some scenarios in the early stage, and will be further promoted after it is relatively mature. For prudent considerations, a pilot exit mechanism will be designed.

Five years of hard work is about to come to fruition

The central bank held a video conference on August 2 to deploy key tasks for the second half of 2019. The meeting required that eight key tasks be completed in the second half of the year, one of which is to develop financial technology in line with the trend, strengthen follow-up research, and actively meet new challenges. Accelerate the pace of research and development of my country's legal digital currency, track and study the development trends of virtual currencies at home and abroad, and continue to strengthen the rectification of Internet financial risks.

It is understood that the central bank's research on legal digital currency can be traced back to five years ago, and it currently has a certain scale of patent reserves. In 2017, the Digital Currency Research Institute of the People's Bank of China was officially established. The Economic Information Daily reporter learned through the patent search system of the State Intellectual Property Office that as of now, the Digital Currency Research Institute of the People's Bank of China has applied for a total of 74 patents involving digital currency.

In the context of highly developed electronic payment, what is the significance of the central bank issuing legal digital currency? Mu Changchun said that for ordinary people, the boundary between basic payment functions in electronic payment and central bank digital currency is relatively vague, but the central bank digital currency to be launched by the central bank in the future will be very different from electronic payment in terms of some functional implementations.

According to him, from a macroeconomic perspective, the transfer of funds through electronic payment tools must be completed through traditional bank accounts, which adopts the method of "tight account coupling". The central bank's digital currency is "loosely coupled with accounts", which means that it can realize value transfer without traditional bank accounts, greatly reducing the dependence of transactions on accounts. The central bank's digital currency can be as easy to circulate as cash, which is conducive to the circulation and internationalization of the RMB, and can also achieve controllable anonymity.

The industry has been paying close attention to the actions of technology giants in the development of cryptocurrency. Not long ago, Facebook's plan to launch the cryptocurrency Libra has attracted great attention from the market and regulators. Participants said that while commercial digital currencies are gradually heating up, the future trend of digital currency development is still based on national credit and legal digital currencies issued by the central bank.

Shao Fujun, Chairman of China UnionPay Co., Ltd., said that the central bank's legal digital currency will have a great positive impact, improve the efficiency of currency operation monitoring, and enrich monetary policy tools. The issuance of the central bank's legal digital currency will make it possible to collect data on currency creation, accounting, and flow in real time, and after desensitizing the data, conduct in-depth analysis through technical means such as big data, provide useful references for currency issuance, the formulation and implementation of monetary policy, and provide useful means for economic regulation. In addition, the central bank's digital currency can provide assistance in anti-money laundering and anti-terrorist financing.

The technical route will be "market competition"

In the public's perception, encrypted digital currency and blockchain technology are often tied together. People related to the central bank have stated many times before that digital currency is not equivalent to blockchain, and blockchain is only one of the underlying technologies for the central bank's digital currency. At the forum on the 10th, Mu Changchun made it clear that the central bank does not preset a technical route in the process of promoting legal digital currency, which means that it does not necessarily rely on a certain technical route.

Mu Changchun said that the central bank's digital currency research team initially made a prototype that fully adopted the blockchain architecture, but later found that the pure blockchain architecture could not achieve the high concurrency performance required by retail. He explained that Bitcoin processes 7 transactions per second, Ethereum 10 to 20 transactions per second, and according to data released by Facebook, Libra is 1,000 transactions per second. "In contrast, the peak transaction of China UnionPay during last year's 'Double Eleven' was 92,771 transactions per second."

Mu Changchun said that the central bank has never preset a technical route, "any technical route is acceptable, not necessarily blockchain". He said that the central bank is currently in a state of "horse racing" and market competition in the selection of technical routes. Several designated operating institutions take different technical routes to develop digital currencies. Whoever has a good route will eventually be accepted by the people and the market, and whoever will eventually win the competition. "The central bank can adapt to any technical route, provided that your technical route meets certain thresholds, such as at least meeting high concurrency requirements and reaching at least 300,000 transactions per second." He said.

Zhou Xiaochuan, former governor of the People's Bank of China, also wrote an article recently saying that one of the most important tasks of the central bank is to help establish a competitive environment so that the best technology can be successfully highlighted and developed, and better technology applications can be achieved through competition and selection. Competition is a dynamic process. Because technology advances very quickly, there will be a technology that occupies a large market share at a certain stage, but there will be another new technology, forming a situation where one wave after another advances forward. "This is a common phenomenon in science and technology, and it is possible to produce a coordinated, universal, and switchable method in the middle." Zhou Xiaochuan pointed out.

Adopting a two-tier operating system

Previously, some industry insiders were concerned that if the central bank directly issued digital currency to the public, it might have a fundamental impact on the existing commercial banking system. This time, Mu Changchun made it clear that the central bank's legal digital currency adopts a two-tier operating system, that is, the People's Bank of China first exchanges digital currency to banks or other operating institutions, and then these institutions exchange it to the public. He emphasized that the natural attribute of encrypted assets is decentralization, but under the two-tier operating system arrangement, the central bank must adhere to a centralized management model.

Mu Changchun said that China is a complex economy with a vast territory and a large population. The economic development, resource endowment, education level of the population and the acceptance of smart terminals in various regions are all different. Issuing legal digital currency in such an economy is a complex systematic project. If a single-layer operating structure is adopted, that is, the central bank directly issues digital currency to the public, it means that the central bank has to face all the public alone, which will bring great challenges to the central bank. From the perspective of improving availability and enhancing the public's willingness to use, a two-layer operating structure should be adopted to deal with this difficulty. He said that the People's Bank of China decided to adopt a two-layer structure in order to give full play to the resources, talents and technological advantages of commercial institutions, promote innovation, and compete for excellence.

According to the Economic Information Daily reporter, the central bank's legal digital currency may be piloted in some scenarios in the early stage, and will be further promoted after it is relatively mature. From a prudent perspective, the pilot exit mechanism will be designed. Zhou Xiaochuan recently wrote that the central bank's digital currency pilot should limit the scope as much as possible and design a good exit mechanism. He said that the ex ante design of the exit is like writing a "living will". How to exit if something goes wrong? It must be designed in advance. Technology inventors and innovators may not be keen on this design, and the central bank should require them to make a full design.

Shao Fujun said that in the dual-introduction system, the digital currency issued by the agent issuing agency has its own logo. For example, the ICBC issues the ICBC logo, and the ABC issues the ABC logo. The payment and clearing institutions can support the transfer and clearing of digital currencies by transforming the existing network.

This article is from "Economic Information Daily".