Why does the People's Bank of China issue digital currency? Analysis from three aspects

When you are still fantasizing about "counting money until your hands cramp", in the future you may only need to take a look at your digital account, because there may no longer be paper money in the future.

If digital currency is issued, will the cash in hand still be useful? In recent years, the research of digital currency by the People's Bank of China is accelerating:

In 2014, the central bank established a special research group to issue legal digital currency to demonstrate the feasibility of the central bank issuing legal digital currency.

In 2015, further in-depth research was conducted on the digital currency issuance and business operation framework, key technologies of digital currency, etc., which resulted in a series of research reports on the issuance of digital currency by the People's Bank of China. The prototype plan for the central bank to issue legal digital currency has completed two rounds of revisions.

On January 20, 2016, at the digital currency seminar held by the central bank, the strategic goal of the central bank's issuance of digital currency was further clarified, pointing out that the central bank's digital currency research team will actively tackle key technologies of digital currency, study multi-scenario applications of digital currency, and strive to launch the digital currency issued by the central bank as soon as possible.

In November 2016, the central bank established the Digital Currency Research Institute.

So why did the central bank take this series of measures? It can be seen from the following three aspects:

1. Strategy

Regarding strategy, the future game between the RMB and sovereign credit currencies such as the US dollar involves the final distribution of global financial dividends. China is certainly not satisfied with just staying at the stage of sharing the population trade dividend, and financial dividends require a strong monetary credit and financial settlement network to support it.

Even if the U.S. dollar reaches its end, it will be difficult for the RMB settlement system to replace the U.S. dollar system in terms of settlement and payment, because trading habits are very difficult to change unless the original trading model is completely overturned.

However, the world is so wonderful, and at this moment, the great digital currency experiment began. Based on encryption, decentralization, blockchain distribution and other digital currency technologies, it completely subverts the logic of the original settlement system such as the SWIFT system. It is the only technology that can completely replace the existing global dollar settlement system and operate independently.

Bitcoin is just an experiment. At present, the capacity and efficiency of the blockchain under Bitcoin cannot support global financial trade settlement. However, the security and stability of its operation, as well as the enthusiasm for participation, far exceed the imagination of currency researchers. Therefore, strategically investing in the research of digital currency and conducting experiments in China as soon as possible will help to apply it to the international market in the future, and it has a very important strategic significance for the rise of the RMB and even the Chinese financial sector.

2. Trends

The digitalization of currency has become a trend. Three years ago, no one could have imagined that nowadays, with a mobile phone and WeChat or Alipay downloaded, one can receive and pay money anytime and anywhere. The need to hold cash has become less and less.

Paperless currency is a trend, which has two meanings: one is to digitize the existing currency, and the other is to completely change the system and issue new digital currency to replace the existing currency. The former does not require much technical content and is just a change in the way of use, while the latter directly changes the money supply and management method, which is also the biggest challenge of issuing digital currency.

For China, the mere electronicization of currency is unlikely to meet future needs. Whether from the perspective of security or the internationalization of the RMB, mere electronicization still cannot get rid of the central settlement system, and cannot generate competitive advantages and higher levels of trust than the US dollar in the international market. The latter is the direction and end point.

3. Reality

At the beginning of this year, the Agricultural Bank of China broke out a "bill case" involving an amount of up to 4 billion yuan. Its employees were suspected of illegally withdrawing 3.8 billion yuan in bills, and at the same time used the illegally withdrawn bills to repurchase funds without establishing a ledger. A considerable part of the repurchase funds illegally flowed into the stock market, and due to the decline in stock prices, a huge funding gap could not be redeemed. Soon after, similar situations broke out in CITIC Bank, Tianjin Bank, Qilu Bank, etc. Later, the central bank planned to establish a bill trading platform to solve this problem, and all paper bills will be withdrawn from the market in the next two to three years. But from the current situation, the bill trading platform cannot solve the problem of information asymmetry, its efficiency may not be improved too much, and it is difficult to have a significant improvement in supervision.

At present, China's digital currency, especially the digital currency that the central bank is preparing to issue, is likely to be tried in the bill market first. This distributed blockchain payment technology can fully record all transactions and all destinations, does not rely on a single trading platform, and cannot be tampered with. You know, if digital currency can be realized in the bill trading market first, it will not be far from the real social digital currency, because the annual bill trading volume of ICBC alone exceeds 10 trillion. If it can meet this order of magnitude of transactions, digital currency will be half successful. This is a great breakthrough for blockchain technology like Bitcoin. Bitcoin's order of magnitude cannot meet this transaction demand for the time being.

From this we can believe that digital currency is not far away from us.

However, we still have some questions about digital currency. For example, will my country be the first to issue digital currency? Is digital currency an online payment? What benefits can it bring? Is it safe? What about paper money? Perhaps we can find the answers from some experts.

Dong Ximiao, a visiting researcher at the Chongyang Institute for Financial Studies at Renmin University of China, believes that although the national level is working on digital currency, it will still take a long time to actually launch digital currency. First of all, many international monetary authorities are studying digital currency, but no central bank has yet issued digital currency. As a developing country, China has a big gap with developed countries in terms of technology and national quality. Dong Ximiao believes that it will not be the first country to issue digital currency. Secondly, about half of the population in my country still lives in rural areas, with low cultural level and poor acceptance of emerging electronic things. At the same time, the financial infrastructure in rural areas is poor, and the conditions for promoting digital currency have not been met in recent years. Third, digital currency is related to a country's monetary system, and it cannot tolerate any mistakes or loopholes. Its launch is destined to be a cautious process.

Regarding whether online payment can be realized, Li Lin, founder and CEO of Huobi.com, said that digital currency is not virtual currency. It is essentially the digitization of RMB. It is a piece of data generated by complex algorithms, but it is unique based on blockchain and encryption technology. Bitcoin is a kind of digital currency. Alipay, WeChat payment and bank card swiping used by daily residents are only online payments and not digital currencies; online virtual currencies such as game coins and Q coins cannot be compared with it.

He also emphasized that the digital currency that the central bank may launch is a national sovereign currency, a legal tender, and a digital currency based on the RMB. Bitcoin is a private digital currency and does not have national sovereign attributes; similarly, online virtual currencies such as Q coins cannot be called digital currencies.

Yao Qian, head of the preparatory group of the Digital Currency Research Institute of the People's Bank of China, said that payments based on electronic accounts are already very common in my country, and their essence is still the informationization process of existing legal tender, and cannot be called digital currency in the strict sense. As legal tender, digital currency must be issued by the central bank, and it is itself a currency rather than just a payment tool.

Economist Yu Fenghui believes that the issuance of digital currency can make every penny traceable. Industry insiders said that digital currency has the main characteristics of network data packets. This type of data packet consists of a data code and an identification code. The data code is the content we need to transmit, and the identification code indicates where the data packet comes from and where it is going.

Based on the characteristics of digital currency, the direct benefit that digital currency brings to the central bank is not only to save the cost of issuing, circulating and settling paper currency, but also to enhance the central bank's ability to control funds. Yesterday, Li Lin, founder and CEO of Huobi.com, told the Beijing News that compared with paper currency, digital currency has the advantages of lower issuance cost, lower transaction cost, traceability, and higher counterfeiting cost. Therefore, digital currency is a trend in the future.

The "traceability" and "trackability" of digital currency can improve the convenience and transparency of economic transactions. Economist Yu Fenghui said that illegal and criminal activities such as money laundering and tax evasion are expected to decrease. At the same time, with the application of blockchain technology, a unified national and even global account book will be established, so that every penny can be traced, tax evasion and money laundering will be within the scope of supervision, and it may even be possible to achieve automatic tax deduction on the credit card machine.

However, everything has two sides. Li Lin believes that while paper money still needs to be cracked, the security of digital currency cannot be ignored. At present, there is no technology that cannot be cracked, but the difficulty of cracking is different. Therefore, digital currency also has risks. The key is whether it can be controlled within a certain range. Digital currency is based on advanced digital technologies such as blockchain technology and encryption technology. There may be newer technologies in the future. Generally speaking, it is relatively safe and reliable.

In fact, although the technical factors of digital currency make it highly secure, there are still great security risks. In August this year, the Bitcoin exchange Bitfinex was hacked, resulting in the theft of 110,000 Bitcoins, worth about 75 million US dollars. In response, the governor of the central bank, Zhou Xiaochuan, said that for the digital currency controlled by the central bank, a series of technical means, mechanism design and laws and regulations will be adopted to ensure the security of the digital currency operation system, which is different from the design concept of Bitcoin from the beginning.

Zhou Xiaochuan said: "The People's Bank of China has deployed important forces to study and explore blockchain application technology, but so far blockchain still takes up too many resources, whether it is computing resources or storage resources, and cannot cope with the current transaction scale. Whether it can be solved in the future remains to be seen."

In short, digital currency also has risks. The key is whether it can be controlled within a certain range. However, the emergence of digital currency has the greatest impact on paper money in the hands of residents. So, in the era of digital currency, are paper money useless? Dong Ximiao, a visiting researcher at the Chongyang Institute for Financial Studies at Renmin University of China, said that paper money will not be affected in the short term, nor will it be invalidated out of thin air.

He said that at present, it will take a long time for the country to launch digital currency, and the paper money in our hands will not be affected in the short term. Even if the digital currency is really implemented, the currency in the hands of residents will not be invalidated out of thin air. Digital currency is just a change in form, and the issuance scale is still controlled by the central bank. Therefore, the purchasing power of paper money will not be affected in the short term. Just like when India announced the cancellation of large-denomination banknotes of 500 rupees and 1,000 rupees some time ago, it still provided people with a way to exchange for small-denomination banknotes, and residents' wealth would not shrink out of thin air.

Regarding the existing circulation system, Fan Yifei, deputy governor of the central bank, revealed that the issuance of digital currency still depends on the dual model of "central bank-commercial bank", which makes it easier to gradually replace paper currency with legal digital currency under the existing currency operation framework without subverting the existing currency issuance and circulation system. (Comprehensive report from China Business News)