Yao Qian, Director of the Central Bank Digital Currency Research Institute: Bitcoin is mostly speculative and will hardly become a real currency

As private digital currencies represented by Bitcoin are becoming popular all over the world, the development of legal digital currencies also needs to catch up. Central banks of major countries have gradually realized that only by issuing central bank digital currencies can the market position of legal currencies be effectively guaranteed fundamentally.

On October 12, Yao Qian, director of the Digital Currency Research Institute of the Central Bank, pointed out at the first ITU Legal Digital Currency Focus Group Working Meeting that legal digital currency is supported by national credit, has value anchoring, can effectively play the role of currency, and has the function of credit creation, thus having a substantial effect on the economy, which are advantages that private digital currencies cannot match. In addition, legal digital currency also has the function of stabilizing the value of currency.

What is legal digital currency? In essence, it is still a debt issued by the central bank to the public, with national credit as its value support. Yao Qian defined and analyzed the essential connotation of legal digital currency from four dimensions: first, legal digital currency is credit currency in terms of value, secondly, it is cryptocurrency in terms of technology, thirdly, it is algorithmic currency in terms of implementation, and finally, it is smart currency in terms of application scenarios.

"The legal digital currency we hope for should have completely new qualities and will definitely surpass existing electronic payment tools, whether private digital currency or electronic currency." Yao Qian said. (The following views only represent Yao Qian's personal academic views and do not represent the opinions of his institution.)

Private digital currency has two incomparable advantages

Yao Qian believes that legal digital currency is backed by national credit, which is an advantage that private digital currency cannot match. Legal digital currency has value anchoring, and in addition, legal digital currency has the function of credit creation, which has a substantial effect on the economy.

He pointed out that compared with the function of transaction medium, the function of standard currency as a means of pricing is primary. As a pricing function, the stability of currency value is crucial, and this is even more true for the value storage function of currency. Currency needs to have a value anchor to effectively play its role.

Looking back at history, all forms of currency have value anchors. The value anchor of commodity currency and metal currency comes from the intrinsic value of the item itself. Under the gold standard, the legal tender of various countries is anchored in gold. After the collapse of the Bretton Woods system, although the legal tender of various countries is no longer linked to gold, it is guaranteed by sovereign credit. In the era of legal digital currency, this highest value trust will continue to be passed on.

In addition, legal digital currency has the function of credit creation, which has a substantial impact on the economy. In the era of credit currency, currency itself is credit, which is essentially the securitization of the credit of the issuing entity and has financial attributes. The process of currency creation is also a process of credit creation.

Yao Qian believes that the credit creation function of currency is crucial to the modern economy, especially the liquidity rescue in times of financial crisis, which is of great significance to preventing the spread of crisis and promoting rapid economic recovery. On the other hand, the value of private currencies represented by Bitcoin is mostly derived from speculative factors. The valueless anchoring of Bitcoin will inevitably determine that it is difficult for it to become a real currency.

In addition to the two major advantages of legal digital currency, "value anchoring" and "credit creation function", Yao Qian also pointed out that legal digital currency has the function of stabilizing currency value.

"In a legal digital currency environment, an effective negative interest rate policy will become possible, and the central bank may no longer need to set an inflation rate buffer (usually 2%). In theory, the central bank's target inflation rate can be reduced to 0. From this perspective, legal digital currency may help improve the value stability of legal currency." Yao Qian said.

Technically it is a cryptocurrency, but in practice it is an algorithmic currency

Yao Qian believes that legal digital currency is technically a cryptocurrency. Specifically, in the design of legal digital currency itself, it is necessary to use cryptographic theory to support the specific expression form of legal digital currency and ensure the characteristics of digital currency such as circulation, storability, non-forgeability, non-repeatable transaction and non-repudiation.

During legal digital currency transactions, encryption technology, distributed ledger technology, trusted cloud technology, chip technology, etc. are required to ensure end-to-end security and prevent theft, tampering, and impersonation.

In terms of the user experience of legal digital currency, it is necessary to combine privacy protection technology with distributed ledger technology. While providing users with an experience different from the traditional point-to-point payment, it is necessary to ensure the security of user data through privacy protection, avoid the leakage of sensitive information, and not compromise usability.

In terms of legal digital currency supervision, we will utilize the characteristics of legal digital currency, "front-end resources, back-end real name", manage relevant data usage rights through security and privacy protection technologies, and ensure that regulatory technologies such as big data analysis are put to good use.

In recent years, the experimental results of cryptocurrency theory in practice have become increasingly abundant. Since the advent of Bitcoin, various alternative cryptocurrencies have emerged one after another. At present, the central banks of some countries are also conducting central bank digital currency experiments based on distributed ledger (DLT) technology.

However, in Yao Qian's opinion, it is too early to see DLT technology replace the real-time gross settlement system (RTGS). The legal digital currency cannot blindly borrow from blockchain technology. Not to mention that the technology itself still has maturity issues. Choosing applications based on transformation according to actual business needs should be a more important consideration.

He believes that the design concept of the UK RSCoin is worthy of reference. The system stands from the perspective of the central bank, is not limited to blockchain technology, and strives to achieve a scalable encrypted digital currency controlled by the central bank.

As for how to understand that legal digital currency is algorithmic currency in implementation, Yao Qian believes that it contains three levels of meaning: First, in the design of legal digital currency, various encryption algorithms are used to ensure security and reliability, while some special fields are reserved for future new algorithms. Second, in the issuance of currency, the design of legal digital currency has executable scripts in mind, and in the future, it can be issued using preset reliable algorithmic rules. The algorithmic rules for the issuance of legal digital currency should be a set of intelligent rules that can fully adapt the money supply to the changes in the macroeconomic multivariable environment while maintaining the stability of the currency value. At the current level of technology, it may be a set of sophisticated artificial intelligence (AI) models based on machine learning algorithms. Third, big data can be used to conduct in-depth analysis of the issuance, circulation, and storage of currency, understand the laws of currency operation, and provide data support for intervention needs such as monetary policy, macro-prudential supervision, and financial stability analysis.

Yao Qian pointed out that it is expected that in the future, under the legal digital currency environment, by pre-setting reliable procedures and algorithmic rules, and under the premise of ensuring currency stability, the economic system will spontaneously and endogenously decide the money supply, and automatic issuance and recovery of currency will become possible. The role of the central bank may not only be a decision maker of currency issuance, but also a designer of currency issuance algorithmic rules.

Legal digital currency will be more intelligent

With the rapid development of science and technology, artificial intelligence technology is rapidly integrating into people's lives and is constantly subverting traditional financial industries.

Currency is no exception. Yao Qian pointed out that legal digital currency is not just a simple digitization and networking of currency, but more importantly, it can make currency more intelligent. Compared with traditional electronic payment tools such as credit cards, bank savings cards, and electronic payments, legal digital currency will present new and better quality, and the currency user experience will become smarter.

In China, due to the high development of private payment tools such as electronic payment, the terms such as cashless society and cashless city appear frequently. Yao Qian pointed out that commercial banks must think deeply about the possibility of narrow banks and retreating to fund wholesalers and system backends. According to common sense, retail payment tools should be mainly realized by central bank digital currency, but the private sector has taken the lead. On the one hand, the payment ability of the private sector is commendable, and on the other hand, the central bank should catch up. In the world of digital assets, how can there be no digital legal currency? In any case, the issuance of retail digital currency by the central bank is of great and far-reaching significance for improving the social payment system, maintaining financial stability, and strengthening the monetary status of the central bank.

Yao Qian pointed out that scholars have already keenly realized that the digitization of currency forms can play an effective role in improving the effectiveness of monetary policy. For example, Nobel Prize winner in Economics Joseph Stiglitz studied the macroeconomic management of electronic currency systems in a working paper this year. Following his line of thought, it can be found that the traceability and programmability of legal digital currency will make monetary policy implementation smarter and more effective.

"'If you aim for the best, you will only get average results; if you aim for the average results, you will only get below average results.' We have envisioned the four dimensions of legal digital currency, with the goal of aiming for the best and establishing a lofty ideal and goal. But one thing must be stated, that is, this big goal needs to be implemented in steps. Objectively speaking, the realization of the above four dimensions cannot be achieved overnight. From the perspective of the difficulty of implementation, it seems that each one is greater than the other. In fact, the so-called digital currencies currently explored by various countries are still working hard to improve payment efficiency. China has been at the forefront in this regard because of electronic payment. At this stage, our challenge does not seem to be a problem with efficiency, but the need to balance efficiency and security, to promote innovation while paying attention to risk prevention, and to do a good job in supervising private payment tools while making up for the lack of digital legal currency on the retail side. Therefore, optimizing the current electronic payment tools and then gradually exploring the further improvement of the quality of legal digital currency should be a relatively safe path to choose. This is also in line with the current progress of technological development. For example, although there is a lot of room for imagination in the programmability of digital currency at present, and exploration in this direction is also very important, it is likely to be the next stage of work." Yao Qian said.