China has been developing central bank digital currency for five years

"When Facebook launched Libra, our digital finance research platform was also established. I think this may not be a coincidence..." Over the past five years, several important stages have outlined the context of China's in-depth promotion of central bank digital currency research. At present, the central bank is organizing market institutions to conduct research and development of central bank digital currency with the formal approval of the State Council.

Central bank digital currency (CBDC) has become the focus of global attention in recent years, and many countries have clearly proposed the idea of ​​developing their own digital currencies. Some people believe that the issuance of digital currencies by central banks will become the biggest change in the global financial system since the abandonment of the gold standard.

The general manager of the Bank for International Settlements (BIS) recently said that global central banks may have to issue their own digital currencies earlier than expected, and the BIS also supports the efforts of central banks around the world to create digital versions of national currencies. According to the report "Act with Caution - Central Bank Digital Currency Survey" released by the BIS in January 2019, 70% of the central banks participating in the survey are currently involved in or will be involved in the work or research of issuing central bank digital currencies. Yi Gang, governor of the People's Bank of China, once said at the Boao Forum for Asia 2018 Annual Meeting Forum that "China is currently at the forefront of global research on digital currencies."

Research and development, in progress

Since 2014, the People's Bank of China has started the research and development of digital currency and central bank digital currency under the advocacy of then-Governor Zhou Xiaochuan. At present, the central bank is organizing market institutions to carry out the research and development of central bank digital currency with the formal approval of the State Council.

Wang Xin, director of the Research Bureau and the Monetary Gold and Silver Bureau of the People's Bank of China, said at the launch ceremony of the Digital Finance Open Research Program held on July 8, 2019, "When Facebook issued Libra, our digital finance research platform was also established. I think this may not be a coincidence. At least it shows that both China and the United States attach great importance to digital finance and financial technology, and have raised very urgent topics in terms of academic research and practical applications."

Wang Xin's speech of more than 5,500 words that day became the focus of public opinion and topped the Sina Weibo hot search list, which echoes people's current enthusiasm for digital currency, especially central bank digital currency.

Over the past five years, several important stages have outlined the context of China's in-depth research on central bank digital currency.

Public information shows that in early 2014, the People's Bank of China established a special research group on legal digital currency to demonstrate the feasibility of the central bank issuing legal digital currency.

On January 20, 2016, the central bank proposed for the first time the goal of publicly issuing digital currency; on June 15 of the same year, the China Internet Finance Association established a blockchain research working group.

On January 29, 2017, the central bank officially established the Digital Currency Research Institute. After successfully developing the legal digital currency prototype, the institute has set up locations in Nanjing, Shenzhen and other places, and has combined with R&D institutions and industries to realize the implementation of financial technology research results. The research and development of the central bank's digital currency is currently managed by the central bank's Monetary Gold and Silver Bureau.

On February 21, 2019, Fan Yifei, deputy governor of the People's Bank of China, pointed out at the People's Bank of China's 2019 National Monetary, Gold and Silver Work Conference that we must increase reform and innovation efforts and deepen the research and development of the central bank's digital currency.

At the end of May, at the 2019 China International Big Data Industry Expo held in Guiyang, the PBCTFP trade finance blockchain platform developed by the Central Bank Digital Currency Research Institute was unveiled. It serves the trade finance of the Guangdong-Hong Kong-Macao Greater Bay Area and has been implemented. As of the time of the Expo, 4 blockchain applications have been built on the PBCTFP platform, with 26 banks participating, achieving 17,000 transactions and a business volume of more than 4 billion yuan.

Some analysts pointed out that PBCTFP is an attempt by the Digital Currency Research Institute of the Central Bank to implement blockchain applications. Its successful operation can provide experience for the industry's use of digital currency based on blockchain, which shows China's caution in developing digital currency.

Issue, with its own advantages

It is worth noting that the "China Finance" magazine, which is under the supervision of the central bank, launched a cover project in 2016 with the theme of "Research and Discussion on Central Bank Digital Currency". The 17 articles analyzed and discussed key issues such as the development direction of digital currency, prototype conception, technical path selection, legal basis and impact on monetary policy.

Among them, the article "Discussion on the Theory of Central Bank Digital Currency" signed by Xu Zhong, Inspector of the Financial Market Department of the People's Bank of China and Head of the Bill Trading Platform Preparatory Group, pointed out that "digital currency, as legal tender, must be issued by the central bank. Its issuance, circulation and trading should follow the idea of ​​integrating traditional currency and digital currency, implement the same principles of management, and especially obey the needs of the central bank's macro-control. In the actual operation of the central bank's issuance of digital currency, it is not only to use blockchain technology, but also to learn from and absorb innovative technologies in the fields of big data analysis system, account system, cloud computing and security authentication that have emerged in recent years. In addition, it is also worth discussing whether to adopt a completely centralized issuance by the central bank or a semi-centralized issuance method of the 'central bank-commercial bank' binary system."

Fan Yifei, deputy governor of the central bank, pointed out in his article that some existing digital currencies are running decentralized mechanisms behind them, mainly establishing a trust system through distributed accounting methods. However, these digital currencies still have the same fundamental defects as private currencies in history: unstable value, weak credibility, limited acceptance range, and easy to generate large negative externalities. Therefore, it is imperative for the central bank to promote the issuance of legal digital currency. The central bank's digital currency is guaranteed by national credit, and can achieve simultaneous online and offline applications to the greatest extent, maximizing transaction convenience and security.

The article signed by the Digital Currency Research Project Team of the People's Bank of China pointed out that China has obvious advantages in issuing legal digital currency. First, the construction of financial infrastructure has the advantage of latecomers, with a small historical burden and a high degree of digitization; second, China has become the most active economy in the global e-commerce economy, and the potential demand for digital currency by end users is strong and the application scenarios are rich. Therefore, the establishment of China's legal digital currency issuance and circulation system is of great significance to the construction of financial infrastructure, the implementation of monetary policy, the maintenance of financial stability, the internationalization strategy of the RMB, and even the promotion of economic quality improvement and efficiency upgrade. This is also the most important source of motivation and basic support for China to launch legal digital currency research.

Challenges and the future

As a new thing, the development of digital currency also faces risks and challenges. For example, on the issues of digital currency security and privacy protection that are of general concern to the public, the People's Bank of China has also shown special attention and caution.

In March 2018, Zhou Xiaochuan, then governor of the People's Bank of China (currently president of the China Society of Finance), pointed out that studying digital currency is not about allowing currency to implement a certain technical solution, but is essentially about pursuing the convenience, speed and low cost of the retail payment system, while also having to consider security and privacy protection.

At the launch ceremony of the Digital Finance Open Research Program on July 8, 2019, Wang Xin said that the digitization of central bank currency will help optimize the payment function of central bank currency, improve the central bank currency status and the effectiveness of monetary policy. Central bank digital currency can become an interest-bearing asset to meet the holder's reserve demand for safe assets, and can also become the lower limit of bank deposit interest rates. In addition, the central bank digital currency interest rate can become a new monetary policy tool. The central bank can affect the bank loan interest rate by adjusting the central bank digital currency interest rate, which will help break the zero interest rate lower limit.

Since the birth of Bitcoin, regulation has always been regarded as a major problem in the field of digital currency. Wang Xin pointed out that the increased risk of financial disintermediation (i.e., financial non-intermediation) brings the risk of regulatory arbitrage. Many institutions engaged in digital finance are not fully under financial supervision, and the relevant supervision of different regulatory departments and different countries is also different. These will cause regulatory arbitrage or bring about regulatory gaps, which may lead to the generation and spread of risks.

As for how to avoid such risks, Fan Yifei once wrote in 2018 that "the issuance of central bank digital currency by a large country is a complex system project. my country has a vast territory and a large population, and the economic development, resource endowment and education level of the population vary greatly among regions. In the process of designing, issuing and circulating central bank digital currency, we must fully consider the diversity and complexity faced by system and institutional design... We can consider adopting a two-tier issuance to deal with the above difficulties."

According to reports, the central bank's digital currency adopts a two-tier issuance system, which is a further deepening of the traditional "central bank-commercial bank" dual model. "Whether it is a dual model or a two-tier issuance system, Vice Governor Fan Yifei's thinking is consistent. That is, the issuance of the central bank's digital currency must choose a method that has the least impact on the existing monetary system, business structure and infrastructure." Yao Qian, then director of the Central Bank's Digital Currency Research Institute, wrote in a signed article last year.

According to Hong Kong's South China Morning Post, Zhou Xiaochuan recently said that China may issue central bank digital currency in a new way. This method can allow the central bank digital currency to avoid volatility risks as much as possible.

International coordination and cooperation in the field of digital finance are also worthy of attention. Wang Xin pointed out, "In this regard, our industry and academia have played a very good role, such as high-level dialogues with the International Monetary Fund (IMF). In fact, there are more and more discussions on international financial policy platforms such as BIS and IMF. On these platforms, we especially need to make China's voice heard as soon as possible. China's voice does not necessarily represent the voice of the government. There should also be many important market voices and civil voices. Only in this way can we better safeguard China's interests and promote the development of our digital finance in international policy discussions, rule and standard formulation, and even real product and service competition. Ultimately, we can better support the real economy and better prevent financial risks."

Source: Global Magazine Issue 15

Wu Meina, a reporter from Global Magazine