Let’s brainstorm together! Key points of the central bank digital currency topic

Rage Review : Recently, China Finance has launched a special topic on "Research and Discussion on Central Bank Digital Currency" in its latest issue. The special topic has 17 articles, which focus on the series of research results of the People's Bank of China's digital currency research team in recent years on the development of global digital currency, the issuance and operation of central bank digital currency. The editor actively responded and summarized several key points to share with you, popularize cognition, and subvert conventions.

Translated by: Lydia

Digital currency is an inevitable development of history

Digital currency, which is based on the Internet and digital encryption technology in the 21st century, establishes a trust system through distributed accounting methods, but it still has the same fundamental flaws as private currencies in history: unstable value, weak credibility, limited acceptance, and easy to generate large negative externalities. Therefore, it is inevitable for the central bank to promote the issuance of legal digital currency.

Technical Keys and Competitive Advantages of Legal Digital Currency Operation

The various types of digital currencies launched by the private sector mainly use blockchain technology and encryption technology to ensure the security of system operation through competitive accounting and public and private key signature verification methods. Legal digital currency is different from private sector digital currency: the latter is decentralized; while the former must be centralized or partially centralized to ensure efficiency and security. This feature determines that legal digital currency must continue to innovate and transform on the basis of learning from and absorbing private sector digital currency technology.

Another major technical pillar on which legal digital currency relies is cryptographic algorithms. Cryptographic algorithms must be used to ensure the security of digital currency users, and a controllable anonymity mechanism must be established through technical means (private sector digital currencies are not unique in that their anonymity leads to the theft of monetary assets due to private key leaks), so as to achieve traceability under certain conditions and further enhance the security of legal digital currency.

The impact of legal digital currency on the financial system

Legal digital currency may also bring an important change to the financial system, that is, it is more likely to cause financial disintermediation and affect money creation. In the future, we must assess the situation, actively and prudently carry out institutional arrangements and macro-control to ensure that the positive impact of legal digital currency on the financial system is maximized and the negative impact is minimized.

China's legal digital currency prototype concept

The core elements of the central bank's digital currency system are one currency, two vaults, and three centers.

Design Points

First, following the traditional currency management approach, the issuance and withdrawal of currency are based on the current dual system of "central bank-commercial bank";

Second, the design of the coin itself uses cryptographic theory knowledge and is highly secure;

Third, the whole process of currency generation, circulation, counting, verification and extinction can be registered by referring to blockchain technology to establish a centralized/distributed relatively balanced bookkeeping registration center;

Fourth, fully utilize trusted computing technology and security chip technology to ensure end-to-end security in the digital currency transaction process;

Fifth, making full use of big data analysis technology can not only further ensure transaction security, but also meet business needs such as anti-money laundering;

Sixth, the user identity authentication of digital currency adopts the principle of "voluntary at the front desk and real-name at the back desk", which not only guarantees user privacy but also avoids the risk of illegal transactions;

Seventh, the design of digital currency itself should be simple and efficient, and the commercial application of digital currency should be left to the market as much as possible, while the technical standards and application specifications should be well established;

Eighth, build a complete digital currency ecosystem involving the central bank, commercial banks, third-party institutions, and consumers to ensure that the entire life cycle of digital currency issuance, circulation, and recycling is closed-loop and controllable.

Digital currency core technology

To realize the main characteristics of digital currency, namely “four cans and three can’ts”, we can build the core technology system of digital currency based on 11 technologies in three aspects: security technology, transaction technology, and trusted assurance technology (see Figure 1).

Digital currency system implementation framework

In view of the above characteristics, the implementation architecture of the digital currency system should include five parts: secure and trusted infrastructure, issuance system and storage system, registration center, payment transaction communication module, and terminal application module (see Figure 2).

Digital currency payment methods. The more feasible payment carriers for digital currency include mobile terminals (such as smart phones, wearable devices) and physical cards. Through the comparative analysis of digital currencies based on mobile terminals and physical cards, it can be seen that digital currencies based on mobile terminals have richer application scenarios, higher convenience of use, wider audience groups, and lower promotion and application costs. They are more ideal payment methods for digital currencies (see Table 2).

Legal issues regarding the issuance of digital currency by the central bank

The issue of currency issuance

Article 4, Paragraph 1, Item 3 of the "People's Bank of China Law of the People's Republic of China" (hereinafter referred to as the "People's Bank of China Law") stipulates that the People's Bank of China "issues RMB and manages the circulation of RMB", which clearly authorizes the People's Bank of China to exercise the right to issue currency on behalf of the state.

The issue of currency legal tender

Currently, the RMB does not include digital currency, so digital currency is not subject to the aforementioned legal provisions that guarantee the legal tender of the RMB.

The problem of transferring currency ownership

In practice, there are two ways to transfer ownership of digital currency: one is "transfer by delivery"; the other is "transfer by registration".

The legal issues in the issuance and use of digital currency involve laws and regulations such as the "People's Bank of China Law", "Property Law", "Anti-Money Laundering Law", "RMB Management Regulations" and relevant regulations and normative documents of the People's Bank of China. They are complex and cover a wide range of issues. In the future, we may also consider formulating a special "Digital Currency Law".

The main tasks and principles of building a central bank digital currency usage environment

The issuance and withdrawal of physical currency by traditional central banks are based on the current binary system (see Figure 1). The issuance and withdrawal of digital currency are still based on this binary system, but the transportation and storage of currency have changed (see Figure 2).

The impact of central bank digital currency on the current payment system

The goals of enriching the public's retail payment options, forming a strong alternative retail payment option, and promoting the application of non-cash payment tools will be repositioned.

What is illegal digital currency?

In fact, the term "currency" is not limited to digital currencies issued by monetary authorities. While legal digital currencies are still being explored, various digital forms of "currencies" represented by Bitcoin, Q coins, and Carat coins have entered real life. Here, we will refer to the above-mentioned "currencies" as "illegal digital currencies". At present, there are constant disputes over the characterization of illegal digital currencies. The real hype has obscured the true connotation, hidden certain inherent risks, and even buried the hidden dangers of crisis. In essence, illegal digital currencies are not currencies, and there are significant differences between them and currencies.

How to regulate

We should pay close attention to its transaction risks, and keep monitoring various so-called "currencies" that are purely closed and circulated in the network or can be purchased with legal currency but cannot be exchanged back to legal currency to prevent them from leaving the virtual environment and flowing into the real economy, thereby causing financial risks. In short, we should fully learn from the technology of non-legal digital currencies with practical value, actively explore the various mechanisms of central bank digital currency, and accelerate the launch of digital currency issued by the central bank.

The attitudes of major central banks around the world towards digital currencies

Eurozone countries, represented by Germany, are not positive about the central bank issuing legal digital currencies. The German central bank advocates letting market players (such as users and merchants) decide which payment method is more convenient, allowing the competition mechanism to play a role, and does not directly intervene in the market, nor promote or support a certain payment method.

The Federal Reserve is very concerned about the impact of digital currencies, such as Bitcoin, on banking, economic activities and financial stability. At present, there are still different opinions within the Federal Reserve on the regulatory model of digital currencies.

The Bank of England pointed out that the main innovation of digital currency lies in distributed ledger technology. At present, the Bank of England has begun to study how to effectively use digital currency technology and has begun to discuss the feasibility of issuing legal digital currency by the central bank.

Application scenarios of blockchain technology in bill transactions

In order to explore the technical and business feasibility of combining blockchain technology with financial services, China Banknote Credit Card Industry Development Co., Ltd. (hereinafter referred to as "China Banknote") designed and developed a proof-of-concept prototype of the smart digital draft system SDDS (Smart Digital Draft System) based on blockchain technology based on the set bill business scenario.

SDDS uses blockchain as the record carrier of the underlying ledger and applies smart contracts to formulate rules for bill circulation and transactions.

The proof-of-concept prototype of SDDS uses blockchain technology to relatively completely implement the main business that conforms to the existing bank bill product operation process, and adopts the deployment solution of traditional servers on the server side. From programming technology, database design to deployment solution, common products and forms of current bank IT systems are used. This solution has better solved the problem of combining blockchain technology with traditional financial services. At the same time, based on the alliance chain consensus mechanism, we proposed a technical evolution plan for the future alliance chain, and provided a alliance chain solution that adopts the PBFT consensus algorithm and sharding processing mechanism. This solution has better solved the problem of combining blockchain technology with traditional financial services. At the same time, based on the alliance chain consensus mechanism, we proposed a technical evolution plan for the future alliance chain, and provided a alliance chain solution that adopts the PBFT consensus algorithm and sharding processing mechanism.

Future Trends

A new species or new phenomenon often greatly promotes the expansion of theoretical boundaries. The emergence of Bitcoin has created a new dimension of software systems. It is foreseeable that in the future, there will be a new field between the two poles of centralization and decentralization, and various blockchain systems will have different degrees of decentralization to meet the specific needs of different scenarios.

Outlook on Mobile Payment Security Technology

The convenience inherent in mobile payment will make it the mainstream payment method in the future. The central bank's issuance of digital currency also needs to combine this trend and explore the integration model of digital currency circulation and mobile payment. However, we must also realize that the current security issues of mobile Internet are endless, which objectively has a serious impact on the security of mobile payment. Therefore, in terms of the mobile payment security of legal digital currency in the future, it is necessary to establish a security system covering the underlying hardware security, terminal application security, communication security, scenario security and platform security, and build a financial security protection network in an all-round, multi-level and three-dimensional manner.

A look at financial network security from the SWIFT hacking incident

The attackers took advantage of various network security vulnerabilities in the SWIFT system deployment of the Bangladesh Central Bank (including network topology design vulnerabilities, network intrusion detection capability vulnerabilities, local software security vulnerabilities, etc.), implemented the entire attack process through Trojan programs, and caused huge losses.

The SWIFT incident exposed two core issues. The first is how to ensure the credibility of the information source. In the case of a Trojan horse attack, the source of data transmission may be completely controlled, so that subsequent network transmission will be useless even if it is safe. The second is the problem of excessive trust in the center. The party that received the instruction made the transfer because they believed that the SWIFT system was safe and reliable.

In response to the network security issues brought about by new applications, my country should quickly form a joint research force led by the government and across industries and academia to continuously promote innovative research in security technologies, update standards, and upgrade third-party testing capabilities.

The gradual advancement of legal tender may begin to be applied to bills first

In summary, the introduction of legal digital currency should be steadily promoted in accordance with the principle of gradual progress. One or two closed application scenarios (such as the bill market, etc.) can be selected to promote it first, observe its use effect, gradually accumulate experience, improve and perfect it at any time, and then promote it nationwide after it matures. In addition, we must realize that legal digital currency and cash will be in a parallel and gradually replace each other for a long time. The transaction cost of cash will gradually increase in the later stage. For example, it may be charged to withdraw cash from the bank in the future. With the incentive mechanism, people will naturally use legal digital currency more.