What kind of digital currency will the People's Bank of China issue? - Reasoning after reading "Fan Yifei: Theoretical Basis and Architecture Choice of China's Legal Digital Currency"

Chapter 0 Introduction

The People's Bank of China has been clamoring for digital currency for a few years. Yesterday, Fan Yifei, deputy governor of the People's Bank of China, published an article titled "Fan Yifei: Theoretical Basis and Architecture Choice of China's Legal Digital Currency" (hereinafter referred to as "Fan"), which seems to indicate that the project of issuing the Chinese government's version of digital currency has reached the stage of establishing very accurate goals.

I have read this article and found that compared with previous similar articles, the text is mainly stuck in some conceptual and imaginative descriptions, without much substantive content. However, this article does provide some descriptions that can infer what the central bank's version of digital currency is.

Chapter 1 The relationship between the central bank’s digital currency, the RMB system, and Bitcoin

Since the central bank governor Zhou Xiaochuan began to clamor for a central bank version of digital currency, no report has ever given a definition to distinguish it from the existing RMB system. The first three heavyweights, central bank governor Zhou Xiaochuan, central bank director Wang Yonghong and central bank director Sheng Songcheng, all used the concepts of "central bank-led digital currency" and "central bank digital currency", etc., all of which added a subject "central bank" in front of the digital currency.

Our government has always followed the style of having a name for everything it does, but the "Central Bank Digital Currency" has not yet had a unified name, not even a project name. This is a very strange thing.

In addition, all the government officials who have spoken positively about digital currency have attached the words "central bank" to "digital currency" instead of "RMB". This is also a very strange thing. Because the government cannot issue a currency that is different from the current RMB in terms of usage by Chinese citizens, this "central bank digital currency" should not impose more concepts on the people, such as "cryptocurrency", "public and private keys" and other concepts that are not in the current RMB, which should not be required for the people to master.

The article "Fan" also clearly raises conceptual issues about the use of "central bank digital currency". The author uses the term "legal digital currency" to distinguish it from the existing RMB system.

The article "Fan" positions the "legal digital currency" and the current RMB system as a relationship of competition and inheritance , and positions non-sovereign currencies represented by Bitcoin as a relationship of competition and opposition .

The author of the article "Fan" made a clear statement at the beginning about the competitive relationship between " legal digital currency" and non-sovereign currencies such as Bitcoin :

As a central bank, it should gradually realize the issuance and circulation of legal digital currency and effective supervision of private sector digital currency based on comprehensive considerations such as maintaining the stability of the financial system, promoting financial innovation, and conforming to the path of technological evolution.

The "private sector digital currency" mentioned by the author here refers to non-sovereign currencies represented by Bitcoin. However, the author did not further point out how the central bank's issuance of "legal digital currency" can effectively regulate "private sector digital currency". I think the author is just talking about it casually.

In addition, the author expressed the competitive inheritance relationship between "legal digital currency" and "existing RMB system" in the article:

Legal digital currency will inevitably be affected by the existing payment system and information technology, but it also needs to be properly distinguished from the existing payment system so as to focus on its own service areas and play its role in replacing traditional currency.

And the following description:

First, it is easier to allow legal digital currency to gradually replace paper currency within the existing currency operation framework without subverting the existing currency issuance and circulation system;

The "legal digital currency" in the author's mind is to be different from the "existing RMB payment system" and to replace it. Let's first focus on how to distinguish it, which has the greatest impact on ordinary people.

Chapter 2: What is the difference between "legal digital currency" and the current RMB in terms of general use?

The article "Fan" vaguely states that "legal digital currency" will be a combination of the following two forms of currency: one is "ordinary numbers with digital wallets"; the other is pure digital currency. The article states as follows:

If it is just ordinary numbers with digital wallets, it is still just electronic money; if it is encrypted numbers stored in digital wallets and running in a specific digital currency network, it is pure digital currency. ... The above two forms are complementary to a certain extent, and can be used in different application scenarios to meet different needs.

The so-called "ordinary digital currency with a digital wallet" is similar to the Alipay wallet we use now. This payment method is familiar to us. Pure digital currency, such as Bitcoin, requires users to have more professional knowledge to use. Since the article "Fan" emphasizes the advantages and disadvantages of electronic currency and digital currency, and claims to choose the best one in different scenarios. It can be inferred that if the central bank wants to promote "legal digital currency" nationwide, it is unlikely to break away from the current operating habits of mobile banking and Alipay payment at the user level. This does not require too much learning cost for the general public.

The article "Fan" clearly states that the anonymity of digital currency is something that "legal digital currency" needs to eliminate. Given that digital currency can easily make every transaction public and transparent, if the central bank successfully launches and widely promotes "legal digital currency", our economic life and capital flow will be completely open and transparent to the government, and more importantly, corporate behavior will be subject to strict supervision.

Establish a controllable anonymity mechanism through technical means to achieve traceability under certain conditions, so as to further enhance the security of legal digital currency.

Bitcoin is a deflationary currency, but "legal digital currency" using similar technology will continue to have the same inflationary properties as the current RMB . In addition, considering that the issuance of digital currency can be very easily implemented for the precise delivery to end users, of course the reverse is also true . Those who control the entire "legal digital currency" system can accurately freeze or even delete the funds of end users. This gives the government supreme control over financial policies. This point is explained in the article "Fan", but of course it is beautified:

However, how to scientifically determine and regulate the issuance of digital currency to ensure currency stability should be the most important consideration for the central bank when issuing legal digital currency.

The so-called "scientific" regulation varies according to who is in power.

In general , it can be seen from the article "Fan" that for ordinary people, "legal digital currency" should not require a high learning cost; it will eliminate the anonymity of the existing RMB system; it will also face more complex and flexible financial instruments; there is no doubt that inflation is inevitable.

Chapter 3 What is the difference between "legal digital currency" and the current RMB in terms of current commercial bank usage?

Anyone who has used Bitcoin knows that the Bitcoin payment system is peer-to-peer, meaning that settlement is achieved directly between users, just like when we exchange money for goods, without the need for third-party coordination. However, electronic RMB, such as online banking and Alipay, requires banks or third-party payment to help us settle the bill.

The central bank can use digital currency technology to issue "legal digital currency", which can technically completely wipe out the entire commercial banking system. This is theoretically feasible. But the article "Fan" clearly stated that it would not do so. Even though it is known that doing so will greatly reduce the cost of currency operation and greatly improve operation efficiency. The original text says:

The reason is simple: first, it is 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; second, it can mobilize the enthusiasm of commercial banks to jointly participate in the issuance and circulation of legal digital currency, appropriately disperse risks, and accelerate service innovation to better serve the real economy and social livelihood.

Therefore, for commercial banks, the launch of "legal digital currency" is not a fatal blow. But compared with the current RMB system, commercial banks can do much less. One of the most important tasks of commercial banks is reconciliation and settlement. In order to ensure the accuracy of interbank accounts, banks must check and reconcile accounts every day, and at the end of the year, there is a nationwide centralized accounting office time. But in the face of digital currency, all these tasks have disappeared. We have never heard of Bitcoin settlement day. If the central bank adopts such technology, legal digital currency will no longer need to be reconciled.

Unfortunately, the article "Fan" does not provide specific information about what kind of work commercial banks will undertake in the "legal digital currency" system. It will definitely not be miners, and it is estimated that this thing is unlikely to require mining. Is it a wallet operator? But at least in terms of realizing the exchange function with paper money, commercial banks are needed. In addition, the article "Fan" does make it clear that commercial banks are involved in the promotion of "legal digital currency":

Second, it can mobilize the enthusiasm of commercial banks to jointly participate in the issuance and circulation of legal digital currency

Chapter 4 Overview of Legal Digital Currency Technology

We cannot get much technical information about "legal digital currency" from the article "Fan". Although the author uses a chapter to describe it, it is all very macro information.

It is clear that "legal digital currency" will adopt a centralized strategy . We can roughly speculate that including protocol development, currency issuance and the operation of currency networks will adopt a centralized strategy.

Legal digital currencies are different from private sector digital currencies: the latter are decentralized; the former must be centralized or partially centralized to ensure efficiency and security.

"Legal digital currency" may be a consortium chain, which means that multiple entities have the power to keep accounts for the currency. For example, the accounting power of Alipay must be done by Alipay alone, which is a private "chain". Of course, Alipay is not a "chain", this is just an analogy. Bitcoin is a public chain, and anyone can participate in accounting, as long as you are willing to spend money to buy mining machines. The consortium chain means setting up an accounting access system, and the central bank may approve some institutions or certain government departments to jointly participate in accounting. But for the "legal digital currency" that claims to be centralized, this is not a reasonable choice. It is unclear why "Fan" describes it like this:

For example, change the flat network into a hierarchical architecture, change the public chain into a consortium chain, change the competitive accounting into cooperative accounting, and allow some key nodes to participate in the accounting system.

There are more technical issues that are closely related to us that are not mentioned in the article, such as how the initial coin of "legal digital currency" will be issued, will it be a burning system? Will it be exchanged with RMB at a 1:1 ratio, and will the RMB be destroyed after the successful exchange? Is there a transaction fee? ...

Chapter 5 When can we use legal digital currency

Judging from the article, the research on "legal digital currency" is still in a very early stage. It is still unknown when we can actually use it. The author claims in the article that "the People's Bank of China's digital currency research and development work is entering a new stage", but what is this "new stage" for:

The content includes strengthening internal and external exchanges and cooperation, setting up specialized research institutions, further improving the issuance and circulation system of legal digital currency, accelerating the construction of legal digital currency prototypes, in-depth research and trial application of various information technologies involved in legal digital currency, etc.

This includes "accelerating the construction of the prototype of legal digital currency", which means that there is not even a prototype yet and it is still a long way to go before starting to write code.

So wait, this is a good thing for us.

Chapter 6 Conclusion

It is quite radical that the central bank noticed the advantages of Bitcoin and announced the development of sovereign digital currency before most governments in the world did.

If governments successfully launch sovereign digital currencies, Bitcoin could be the option for ordinary people to escape the need for complete transparency in economic activity, a freedom-protecting choice.