Wang Yonghong, Director of the Central Bank: The technical framework for the realization of digital currency as legal tender

With the rapid development of Internet technology, digital currency has received more and more attention and has gradually entered the vision of the central bank. On January 20, 2016, the People's Bank of China held a digital currency seminar in Beijing, and officially stated that it would actively absorb the important results and practical experience of digital currency research at home and abroad, do a good job in key technology research, and strive to launch the digital currency issued by the central bank as soon as possible. The author of this article is Wang Yonghong, Director of the Science and Technology Department of the People's Bank of China. He believes that digital currency, as legal tender, must be a "managed currency" and its launch and use will be a milestone in the history of currency development.

Driven by venture capital, Internet institutions have reaped the benefits of payment technology innovation and have begun to explore the next "Internet-level" disruptive innovation technology. The blockchain technology that supports Bitcoin has the characteristics of "decentralization" such as peer-to-peer transactions, full-network accounting, anti-counterfeiting and anti-duplicate, and rule-driven. It is very different from the traditional technical implementation mechanism of "centralized control" and has become the focus of research and investment by domestic and foreign institutions. This article uses blockchain technology as a reference to study its feasibility as a supporting technology for digital currency, and attempts to establish a technical implementation framework for digital currency.

Definition of digital currency

Traditionally, we assume that currency is legal tender, and define its functions as a measure of value, a means of circulation, a means of storage, a means of payment, and a world currency. We also divide it into different means of payment, such as cash, bills, card-based payments, and mobile payments, according to how it is used. In the Internet era, cyberspace has gradually taken shape and coexists with physical space. The public's understanding of currency has become broad, and it is believed that "currency is a means of payment that can be used by law or secular agreement." This article first clarifies the definitions of three similar concepts: digital currency is "legal electronic cash", that is, a value carrier with cash characteristics issued by monetary authorities and stored in electronic devices; electronic currency is a bookkeeping currency associated with a bank account, such as card-based payments and mobile payments; virtual currency does not belong to legal tender, including two types of cryptocurrency (such as Bitcoin) and commercial currency (such as Q coins and points), and its value is completely determined by the market.

One of the important missions of digital currency is to partially replace cash and reduce the huge costs of cash printing, issuance, clearing and destruction. According to statistics, at the end of 2014, the cash in circulation (M0) and the cash inventory of banking financial institutions in my country reached 6.7 trillion yuan, including 58.25 billion 100-yuan notes, 6.46 billion 50-yuan notes and 58.16 billion 1-yuan notes. It is also reported that the value of cash in the euro zone exceeded 1 trillion euros in 2015.

To become a widely used means of payment, digital currency must have distinct characteristics that distinguish it from electronic currency and virtual currency, including security, controllable anonymity, periodicity, non-repeatability, system independence, and it must achieve high transaction performance (high concurrent transaction volume and massive data processing efficiency) in an open interconnected environment.

Demands for building a digital currency system

When trying to establish a technical implementation framework for digital currency, we must first conduct in-depth research on the main characteristics and boundary constraints of digital currency, and gradually form a digital currency demand that meets the requirements of modernizing the country's governance capabilities and becomes a social consensus. Only then can we determine how to improve blockchain technology and "use it for our own benefit."

Security

In order to deal with organized, large-scale cyber attacks, the digital currency system can adopt a decentralized or multi-center model. In order to ensure the correctness, consistency and integrity of digital currency, sufficiently secure and controllable cryptographic algorithms and key distribution and storage mechanisms should be adopted. A report in Science magazine on March 4, 2016 pointed out that quantum computing will challenge the security of the currently widely used asymmetric algorithm RSA. In order to improve application security and prevent viruses, Trojans and backdoor threats, digital currency carriers (such as mobile phones) need a trusted, controllable and manageable usage environment, and store the minimum set of information about digital currency and currency holders.

Controllable anonymity

In order to distinguish it from electronic money and be favored by holders, and to take into account the requirements of anti-money laundering and anti-terrorist financing, digital currency cannot be real-name or completely anonymous, and monetary authorities cannot directly or indirectly establish accounts for holders through commercial banks. "Controllable anonymity" is manifested in two aspects: first, registering the information of holders changing digital currency during the use link (transferring digital currency ownership), similar to the current "mining" operation of collecting banknote serial numbers and Bitcoin; second, maintaining clues to track the identity of holders.

Although there is no need to establish digital currency accounts for currency holders, commercial banks can participate in building channels for the issuance and circulation of digital currencies.

Non-repeatability

First, digital currency must be identifiable, with an unchanging identification number (ID) and series parameters to ensure its uniqueness, and can be confirmed by technical means. Second, the normal payment process of digital currency is irreversible. Third, the history of digital currency use cannot be tampered with or denied.

Periodicity

Digital currency has no cleanliness requirements, and there are no problems such as damage and dilapidated returns. However, in special cases such as algorithm decryption, leakage of personal keys of currency holders, and hijacking of key network nodes, digital currency needs to be fully "replaced" or reported lost, and the timeliness and effectiveness of the "replacement" or loss reporting operation must be ensured, and the use records of the new and old versions of the same digital currency must be connected. Secondly, the problem of "large and small ticket exchange" of digital currency needs to be considered and solved.

System dependencies

Digital currency should minimize network and system dependence, enable offline small-value payments, and be freely convertible between cash and electronic currency. It should be suitable for various complex environments including natural disasters.

Key points of the technical implementation framework concept

Digital currency is used in an open network environment. With the endorsement of national credit, the number of currency holders and transaction volume will gradually increase. At the same time, the digital currency system may often encounter large-scale, organized network attacks. Therefore, the core of its technical implementation framework is cloud computing and encryption algorithms (including symmetric encryption algorithms, asymmetric encryption algorithms, hash algorithms and their combinations).

Establish a two-level system structure

The driving force for maintaining the stable operation of the entire Bitcoin system is that participants use "mining" operations (packaging transactions within a period of time to generate blockchains) to grab Bitcoin as spoils. In order to control the amount of currency issued, the digital currency system cannot adopt a similar reward mechanism. The monetary authorities need to establish several registration center systems to complete various operations such as currency issuance, use registration, and "version change", which will form a two-level system structure of "control center (issuance library) - registration center (business library)". The control center will control and monitor the operation of the entire digital currency system online.

In order to provide rapidly expanding computing and storage capabilities, the two-level digital currency system adopts cloud computing technology architecture, and secure and controllable quantum communication technology is used between systems. The cloud computing technology architecture has good robustness, but it is necessary to pay attention to and solve the "cloud security" problem in an open environment.

Encryption technology

Use an encryption algorithm system. A single encryption algorithm will face greater security risks, and multiple encryption algorithms must be used to form a combined encryption algorithm, which is used to identify and protect currency holders, network nodes, digital currencies, digital currency transactions, etc. The combined encryption algorithm is the core and foundation of the digital currency system and must be customized and designed by the national cryptography management agency. In addition to encryption, the idea of ​​blockchain technology to resist attacks is to "combine algorithm encryption with information disclosure", replacing "information is difficult to change" with "information cannot be changed", which is very creative and worth learning from.

A permanent identification code is established for each digital currency. To ensure the uniqueness of each digital currency and prevent it from being stolen, misused, or reused, the identification code of each digital currency (similar to the serial number of a paper currency) is digitally signed and combined with the public key of the holder and the recent payment history information to form digital currency information that can be identified by technical means.

The holder uses the registered name. In order to improve the anonymity and protect the privacy of the holder, the network real-name system and limited real-name system (nickname in the front desk, real name in the back desk) are not used, nor are multiple related information used for cross-identity authentication when the holder registers. However, the network address and geographic location information of each operation of the holder will be recorded as a clue to track transactions and check the identity of the holder in specific circumstances, so as to achieve the requirement of controllable anonymity.

Ledger technology

Adopt "distributed accounting". The transaction hash value (HASH) is combined into a block (transaction record set) with links before and after and distributed quickly. Each network node has a consistent and traceable copy of the ledger, which greatly reduces the risk of ledger tampering. This is an important reason why blockchain technology has a high ability to resist network attacks. However, digital currency is a high-frequency payment method in an open environment. If the "distributed accounting" approach is used, the amount of data synchronization is large and is subject to the network, requiring sophisticated process reengineering and application design.

Adopt partitioned accounting. Compared with microcomputers and wired networks, the computing, storage and exchange capabilities of smartphones are always weak. The size of the ledger and its copy cannot be too large. The accounting area is divided on the basis of the whole network transaction, and the accounting is recorded separately. At the same time, a distributed data storage mechanism and a regular verification mechanism are designed to balance security and efficiency in the construction of the digital currency system.

Digitally sign the transaction results. Blockchain technology records the usage history (hash value) of each Bitcoin from its birth to the present, and reduces the risk of ledger tampering by comparing the consistency of copies across the entire network. In the digital currency system, the "size" of the ledger is reduced and copies are not necessarily distributed across the entire network. Transaction information can be digitally signed, making it more difficult to tamper with the ledger.

Digital currency wallet technology

In the era of mobile Internet, smartphones, which are known as "human organs", are obviously superior to other methods such as chip cards as digital currency carriers. In addition to using wireless networks, data exchange between smartphones also includes face-to-face methods such as Bluetooth and near-field communication (NFC), reducing dependence on acceptance terminals such as POS machines and ATMs. Smartphones must have a trusted execution environment and hardware security module that are relatively independent of the mobile phone operating system to store and process key sensitive information. The wallet software automatically detects the security of the operating environment and confirms whether key sensitive information has been tampered with.

Conclusion

As legal tender, digital currency must be a "managed currency", and its introduction and use will be a milestone in the history of currency development. Bitcoin, a typical representative of virtual currency, can be regarded as a "laboratory product" of digital currency at the current stage.

Blockchain technology, which is characterized by "decentralization and trustlessness", is currently applicable to non-real-time information registration scenarios and low-frequency transaction scenarios, such as securities issuance and intangible asset registration. Its applicability to real-time and high-frequency transaction scenarios needs to be verified and improved. At present, the financial information infrastructure generally adopts the "centralized control" transaction mechanism, which is generally in line with relevant legal provisions and institutional design. Problems such as high cross-border transaction costs and long delivery time are not caused by defects in existing technologies. However, blockchain technology is a reflection of the Internet spirit of "freedom, openness, cooperation, and sharing" in the field of technology. Its advantages are not entirely due to advanced technology, but are more in line with the values ​​of the new generation of netizens and the support of the capital market. Therefore, blockchain and its derivative technologies will gradually penetrate and affect the development direction of financial information technology.