Sheng Songcheng of the Central Bank: Why can only the central bank’s digital currency be called currency?

What will the digital currency of the People's Bank of China look like? There are various rumors.

At the first Big Data Finance Forum held on June 24, the director of the Survey and Statistics Department of the People's Bank of China gave a relatively comprehensive response: First, digital currency is issued by the central bank and is not decentralized; second, unlike the existing electronic form of the standard currency, the future central bank digital currency may be a standard currency based on blockchain technology and with the characteristics of a distributed ledger; third, the future central bank digital currency can realize "point-to-point" payment and settlement without the need for a third-party centralized institution.

Sheng Songcheng, Director of the Survey and Statistics Department of the People's Bank of China

The original title of the speech is " Why is the central bank's digital currency the real currency? " The following is the full text of the speech:

On January 20, 2016, the People's Bank of China Digital Currency Seminar was held in Beijing. Since the meeting, the central bank's digital currency has attracted widespread attention from domestic academic circles and related industries.

There are inevitably controversial and ambiguous views on the emerging digital currency of the central bank. Some commentators believe that the central bank's digital currency will adopt the same issuance and operation framework as digital currencies such as Bitcoin, and therefore believe that the central bank's attitude towards Bitcoin has changed. Other comments believe that digital currency technology will make it impossible and unnecessary for the state to control currency issuance, and monetary policy will no longer exist. In fact, these views are not in line with the true meaning of the central bank's research, design and future issuance of digital currency. Therefore, I would like to talk about several personal views from the perspectives of the nature of currency, the basis of modern currency issuance, and the relationship between monetary policy and modern countries.

1. From the nature of money, in the modern credit currency system, only the currency issued by the state is the real currency

In early 2014, when Bitcoin was being sought after and hyped, I published two articles in succession. One was "Virtual Currency is Not Currency in Essence - Taking Bitcoin as an Example", and the other was "The Concept of Denationalization of Currency and the Utopia of Bitcoin". I was the first to clearly point out that virtual currencies such as Bitcoin are not real currencies.

As we all know, serving as a medium of exchange for commodities is the essential attribute and most basic function of money. Among other functions of money, the function of value scale serves the functions of means of circulation and means of payment, while the function of value storage is a natural derivative of the function of medium of exchange.

In the era of physical currency, currency itself has intrinsic value, so it can perform these functions of currency. However, modern credit currency or paper money itself has no value, so why can it still perform the functions of currency? This is because credit currency is backed by national credit and has legal compensation and compulsory nature. National credit is the value basis for the standard currency to perform the functions of currency, and it is also the basis for the state to monopolize the right to issue currency.

At the same time, monetary policy is an important means for modern countries to regulate their economies. Changes in money supply have a wide impact on the economy. Central banks in contemporary countries all make full use of monetary policy to regulate economic operations.

Monetary policy, like taxation, police, courts and other state apparatuses, is the basis for the operation of modern states and an important part of the state apparatus. As long as the social organization form of the state does not undergo fundamental changes, the monetary system based on national credit will always exist, and Bitcoin and other virtual currencies will not become the standard currency of a country. Bitcoin is actually just an application of technology, at most an asset, not a real currency.

Of course, credit currency is prone to inflation. People's attention to Bitcoin, in a sense, reflects people's concerns about inflation under credit currency conditions. Therefore, central banks of various countries should strengthen liquidity management, reasonably regulate money supply, and maintain basic price stability.

2. The central bank’s digital currency is a technological innovation that digitizes paper money and surpasses electronic money, but its monetary nature has not changed

Paper money is the most widely used form of standard currency in various countries. However, paper money has low technical content. From the perspective of security and cost, it is an inevitable trend to be replaced by new technologies and new products. Especially with the development of the Internet and payment methods, standard currency is gradually developing into various forms of electronic currency.

Unlike the existing electronic form of the standard currency, the future central bank digital currency may be a standard currency based on blockchain technology and with the characteristics of a distributed ledger, and may involve other related technologies including mobile payments, trusted and controllable cloud computing, cryptographic algorithms, security chips, etc.

The central bank's digital currency in the future can realize "point-to-point" payment and settlement without the need for a third-party centralized institution. This will help my country build a new financial infrastructure, further improve my country's payment system, and improve payment and settlement efficiency. In addition, the central bank's digital currency can eventually form an open and transparent big data system, improve the convenience and transparency of economic transaction activities, and reduce illegal and criminal activities such as money laundering and tax evasion.

Since the central bank’s digital currency is essentially different from private digital currency, the two will certainly not adopt the same issuance and circulation framework. Governor Zhou Xiaochuan once pointed out that for the digital currency controlled by the central bank, a series of technical means, mechanism designs, and laws and regulations will be used to ensure the security of the digital currency operating system, which is different from the design concept of Bitcoin from the beginning.

3. Technological innovation of digital currency cannot replace the central bank’s currency issuance and monetary policy

The technological innovation of digital currency is mainly reflected in "decentralization", so some people predict that digital currency technology will replace currency issuance and monetary policy. Practice will prove that this view is wrong, because the central bank's currency issuance and monetary policy play an irreplaceable role in the modern economy.

First, changes in money supply have a wide impact on the economy, and monetary policy is one of the main means of regulation in the modern economy. If digital currency is widely used but not regulated by monetary authorities, the modern economy will lose an important means of regulation and the economy will not be able to operate normally.

Secondly, the monetary authorities can maintain currency stability through the central regulatory mechanism. Relative stability of value is a prerequisite for a currency to serve as a measure of value and a means of circulation. If digital currency is widely accepted by the whole society, and the monetary authorities are unable to stabilize the currency value through the central regulatory mechanism, this will not only cause economic fluctuations, but also shake the monetary system based on national credit.

Finally, although fiscal policy is also a means of aggregate regulation, the fine-tuning function of monetary policy is more obvious. Fiscal policy tools such as taxation, national debt, and budget revenue and expenditure are quite rigid once determined within a certain period of time and cannot be easily changed, while monetary policy is relatively flexible.

Therefore, monetary policy is one of the most important means for the country to regulate the economy. Governor Zhou Xiaochuan also pointed out that the currency generation mechanism and money supply need to be adjusted. Overall, when designing digital currency, the central bank will give full consideration to the existing monetary policy regulation, money supply and creation mechanism, and monetary policy transmission channels.

4. Central bank digital currency will enhance the effectiveness of money supply and monetary policy

Judging from the current technological development, the central bank's digital currency may improve the effectiveness of money supply and monetary policy in the following aspects.

First, the central bank’s digital currency can provide a huge data foundation for monetary policy and macro-prudential policy, enabling regulatory authorities to collect real-time transaction books of different frequencies and institutions as needed, and they are complete and authentic. Such information advantages can help the central bank use policy tools more accurately and flexibly.

Secondly, the central bank's digital currency technology can track the flow of funds and help regulators comprehensively monitor and assess financial risks.

Finally, the central bank's digital currency technology is conducive to the interest rate transmission of monetary policy. Digital currency technology supports "point-to-point" payment and settlement, which can improve the liquidity of market participants. Only the central bank's digital currency that is generally accepted by the whole society can radiate this advantage to participants in different financial markets, thereby improving the liquidity of financial markets. This will make the interest rate term structure smoother and the interest rate transmission mechanism smoother.

In short, the nature of central bank digital currency is completely different from that of private digital currency. Only central bank digital currency has national credit support and can become a real currency. Although central bank digital currency may use similar underlying technology as private digital currency, the difference in nature determines that the two will adopt different issuance and circulation frameworks. Digital currency technology will enhance the central bank's control over currency issuance and circulation, make the operation and transmission of monetary policy more effective, and enable monetary policy to better serve economic stability and development.