Big news! Zhou Xiaochuan revealed that the central bank is promoting digital currency and disclosed five major design ideas for the first time

China Finance, a financial and economic journal under the supervision of the People's Bank of China, recently published a speech by Zhou Xiaochuan, former governor of the People's Bank of China and president of the China Society of Finance. According to China Finance, the speech was compiled from Zhou Xiaochuan's special lecture at Tsinghua University's PBC School of Finance, and some of the analysis is also applicable to the discussion of Libra.
In his speech, Zhou Xiaochuan introduced how to conduct financial supervision, including the supervision of digital currencies, in the face of ever-changing IT technologies. He said that when formulating financial policies, one must be very sensitive to new technologies, be highly supportive of new technologies, and be tolerant of the failure of new technologies.
At present, digital currency is still developing, and the blockchain technology behind it has not achieved the expected high TPS performance. Regarding this situation, Zhou Xiaochuan revealed that the central bank is promoting the application of blockchain in two low TPS transaction markets: one is bill trading, and the other is letter of credit financing transactions.
How to maintain the stability of digital currency? Zhou Xiaochuan mentioned the "100% cash reserve" system and introduced the case of 100% reserve funds of Hong Kong's note-issuing banks. Zhou Xiaochuan said that before each of the three note-issuing banks in Hong Kong issues HK$7.8, they must pay US$1 to the Hong Kong Monetary Authority as reserve funds. The Hong Kong Monetary Authority issues a certificate of reserve funds to the note-issuing bank, which can then print currency. As a result, the Hong Kong dollar has achieved price stability.
This leads to a discussion on stablecoins. Zhou Xiaochuan pointed out that currency issuance should not "make money so easily" and "reflect its value through payment services". Bitcoin and some cryptocurrencies have been out of the conventional payment business because of their large price fluctuations. But now stablecoins are beginning to be widely advocated by the industry, which is worth paying attention to.
Zhou Xiaochuan said that the central bank is currently promoting digital currency/electronic payment (DC/EP). He also revealed the five design ideas of the central bank's digital currency:
First, we must support the development of science and technology while preventing problems. In the design of DC/EP, we should not pre-select a certain technology, but rely on distributed research and development, market competition, and respect the market's choice. This includes improvements in account-based electronic payment channels, mobile payments such as scanning code payments, and encrypted digital currency systems such as blockchain and distributed ledger (DLT).
Second, some technologies of different systems may develop in parallel, and we can encourage multiple companies to develop in coordination and switch quickly, but the main thing is to give play to the enthusiasm of the market. It is not easy to know in advance which one is the best. The central bank of a big country can also have its own system, but it is not in a hurry to enter the retail payment link, and do not think that it can do better than others.
Third, the central bank needs to accurately measure and establish custody rules to achieve 100% reserve requirements to maintain stability, while correcting the incentive mechanism.
Fourth, the scope of the pilot should be limited as much as possible. The pre-exit design is like writing a "living will". If something goes wrong, how to exit? It should 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.
Fifth, we must prevent the use of burning money and disguised subsidies (including direct subsidies and cross subsidies) to grab market share and distort the competitive order.
The following is the full text of Zhou Xiaochuan's speech:

Source: Mars Finance