Central bank digital currency: a design concept different from Bitcoin

"Cash will most likely not exist in ten years." Not long ago, John Cryan, co-CEO of Deutsche Bank, predicted in Davos. However, ten years later, the financial blockbuster "Digital Currency" is likely to be "premiered" in China.

The central bank's digital currency seminar held on January 20 attracted attention. The meeting sent a clear signal: the central bank will strive to launch digital currency as soon as possible, and revealed that a special research team was established as early as 2014. The information released by this meeting immediately ignited the market, and related concept stocks of third-party payment were all in the red. Some economists even believe that the central bank may be the first to throw cash into the "trash can" of history.

Although more and more consumer payments are moving toward electronicization, the reality that the cash in your hands will soon become waste paper still confuses most ordinary people: What exactly is digital currency? Is there a timetable for its launch? Will it eventually replace paper money? Is the current monetary policy applicable to the regulation of digital currency? What will the digitization of global currency bring?

In this regard, Central Bank Governor Zhou Xiaochuan talked about the future of digital currency in an interview with the media.

Is the era of paper money coming to an end?

"From the perspective of historical development, currency has always evolved along with technological progress and the development of economic activities. From early physical currency and commodity currency to later credit currency, they are all natural choices to adapt to the development of human commercial society." Zhou Xiaochuan said that as the previous generation of currency, paper money has low technological content. From the perspective of security and cost, it is a general trend to be replaced by new technologies and new products.

"The digital currency issued by the central bank is currently mainly to replace physical cash, reduce the cost of issuing and circulating traditional paper currency, and improve convenience." Zhou Xiaochuan also introduced that digital currency must be issued by the central bank as legal tender. The issuance, circulation and trading of digital currency should follow the idea of ​​integrating traditional currency and digital currency and implement the same management principles.

In addition, the above-mentioned central bank digital currency seminar stated that the issuance of digital currency can improve the convenience and transparency of economic transaction activities, reduce illegal and criminal activities such as money laundering and tax evasion, enhance the central bank's control over money supply and money circulation, better support economic and social development, and help the full realization of inclusive finance.

In the future, the establishment of a digital currency issuance and circulation system will also help my country build a new financial infrastructure, further improve the payment system, improve payment and clearing efficiency, and promote economic quality improvement, efficiency enhancement and upgrading.

China is not the only country that is yearning for "digital currency". Various signs indicate that the era of paper currency seems to be coming to an end.

In October 2015, Andy Hadden, chief economist of the Bank of England, expressed his hope to abolish cash and replace it with digital currency that can charge people negative interest rates. Hadden believes that switching to digital currency will be a "great technological leap forward."

Norway's largest bank, DNB (De Nederlandsche Bank), recently called on the government to completely stop using cash. In fact, several banks in Norway have closed cash services in some of their branches. Statistics show that only 6% of Norwegians still use cash every day, most of whom are elderly people.

In August 2013, the German government recognized the legal status of Bitcoin, which can be used to pay taxes and for other legal purposes. In the United States, some states have also recognized Bitcoin as a legal currency.

In recent decades, with the rise of electronic finance, cash is used less and less. According to data from the Bank for International Settlements, the cash balance in circulation of the 19 largest economies was 7.9% of GDP in 2014, compared with 8.4% in 2010. There is also a view that using less cash is conducive to public security and the fight against terrorism.

Different design concept from Bitcoin

Although there is no precedent for a national monetary institution to issue digital currency, Bitcoin, designed by the mysterious figure Satoshi Nakamoto, has been circulating around the world since 2009.

As a popular digital currency, Bitcoin does not have a centralized issuer. Instead, it is generated by calculations of network nodes. Anyone can participate in the creation of Bitcoin, and it can circulate throughout the world and can be bought and sold on any computer connected to the Internet. No matter where they are, anyone can mine, buy, sell or receive Bitcoin, and outsiders cannot identify user identity information during the transaction.

Interestingly, Bitcoin was once popular in China, with the transaction volume accounting for 70% to 80% of the global transaction volume. In 2013, a restaurant in Beijing opened Bitcoin payment. The restaurant, located in Chaoyang Joy City, said that at the end of the meal, consumers only need to transfer a certain amount of Bitcoin to the store account to complete the payment. The whole process is similar to bank transfer. According to public reports in the media that year, the restaurant once settled a meal fee of 650 yuan with 0.13 Bitcoins.

In December 2013, the central bank and five other ministries issued a notice on preventing bitcoin risks, stating that bitcoin is a specific virtual commodity that does not have the same legal status as currency and cannot and should not be used as currency in the market. Bitcoin transactions are a commodity trading activity on the Internet, and ordinary people have the freedom to participate at their own risk.

"For the digital currency controlled by the central bank, a series of technical means, mechanism design 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." Zhou Xiaochuan said that the central bank will use a variety of information technology means, including cryptographic algorithms, to ensure the unforgeability of digital currency. In the future, technology will also be upgraded, and we will take technology upgrades into consideration in advance and introduce the concept of long-term evolution from the beginning.

Zhou Xiaochuan's speech also sent a clear signal: there is no timetable for the launch of digital currency. "China has a large population and a large size. For example, a small country can complete a new version of the RMB in a few months, but China needs about ten years. Therefore, digital currency and cash will be parallel and gradually replace each other for a long time." Zhou Xiaochuan said.

A large number of technical problems need to be solved

With the digitization of currency, is the current monetary policy applicable to the regulation of digital currency? This is a question that worries industry insiders. Some experts have proposed that the important function of establishing an Internet central bank is to issue and manage virtual currency based on Internet technology. In addition, the entire financial industry will also be digitized.

At present, the issuance and withdrawal of cash is based on the current binary system of "central bank-commercial banking institutions". The issuance and operation of digital currency should still be based on this binary system, but the transportation and custody of currency have changed: the transportation method has changed from physical transportation to electronic transmission; the storage method has changed from the issuance library of the central bank and the business library of banking institutions to the cloud computing space for storing digital currency. Ultimately, the security and efficiency of the issuance and withdrawal of digital currency will be greatly improved.

Industry insiders pointed out that it will take a long time for digital currency to be implemented, and a pilot program may be carried out as soon as possible. Banks will not only improve service quality but also reduce operating costs after using blockchain technology. For example, the cost of inter-bank transfers is very high now, but if blockchain technology is used, it can be achieved at low or even zero cost. Blockchain refers to a technical solution for collectively maintaining a reliable database in a decentralized and trustless manner. Blockchain technology is the technology that supports Bitcoin.

In fact, it is not easy to realize digital currency. How to solve the functional carrier required for value exchange in terms of security, convenience and other aspects requires many technical problems to be solved; after the technical problems are solved, how to use digital currency to replace the circulation and issuance of paper currency in the future requires a gradual process.

Zhou Xiaochuan introduced that the technical routes of digital currency can be divided into two types: account-based and non-account-based. They can also be used in layers and try to coexist. Blockchain technology is an optional technology, which is characterized by distributed bookkeeping, non-account-based, and cannot be tampered with. If digital currency emphasizes the protection of personal privacy, blockchain technology can be used. The People's Bank of China has deployed important forces to study and explore blockchain application technology, but so far blockchain still occupies 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 addition to responding to the challenges of existing digital currencies, some central bankers have proposed that promoting the digitalization of SDR (Special Drawing Rights) based on distributed rules should also be an attempt to reform the existing monetary system.

Yao Yudong, director of the Financial Research Institute of the People's Bank of China, wrote that it might be possible to break out of the existing issuance mechanism that is stuck in a dilemma. With the joint efforts of the IMF and member countries, we can explore the prototype of the mechanism of a "global central bank" and try innovations based on digital currency rules, namely eSDR.

Author: Li Deshangyu