Cai Weide: The layout and direction of digital currencies of central banks in the UK, US and Germany

Frontier experts explain the origin and development of central bank digital currencies.

Cai Weide: The layout and direction of digital currencies of central banks in the UK, US and Germany

As many central banks speed up the layout of digital currency, the origin and development of digital currency has also received wide attention. In the “Central Bank Digital Currency Research” lecture series of NPC Chongyang on June 7, Professor Cai Weide, Senior Researcher of the Chongyang Institute of Finance of Renmin University of China, Professor of Beijing University of Aeronautics and Astronautics, Tsinghua Changjiang Chair Professor, Director of Digital Society and Blockchain Laboratory of Beihang University, and Professor Zhang Yanling, former Vice President of Bank of China and Senior Researcher of Chongyang Institute of Finance of Renmin University of China, shared their views on the origin and development of digital currency. Zhang Yanling, Senior Research Fellow of the Institute of Financial Studies, Renmin University of China, shared some of their knowledge and views on the development of the central bank’s digital currency.

In his lecture, Prof. Cai Weide introduced the history and important points of the development of the central bank’s digital currency. He said that the origin of central bank digital currency was a paper published by the Bank of England in 2014, which mentioned the innovation of payment technology and also argued that crypto digital coins such as Bitcoin had no credit risk and no liquidity risk. Immediately after, in 2015, the Bank of England proposed the digital pound initiative, which started the history of the central bank digital currency (CBDC).

The purpose of the Bank of England’s proposed digital pound initiative has never been clearly articulated before. Only in July 2019, the Bank of England publicly said the reason for issuing CBDC, to take back the regulation of third-party payments and establish a big data platform to track and analyze transactions. Also the use of blockchain boosts the economy as back-office operations change, freeing up a lot of money that was locked up by previous processes. And since the digital pound can be used on cross-border trade, it can improve the status of the pound in the world.

The British side at the time also suggested that if the central bank issued CBDCs, it would compete with commercial banks for deposits, creating an impact on commercial banks. Especially during the financial crisis, people would transfer their bank deposits to CBDCs, so that bank deposits would be reduced to the extent that money could not be generated in the form of loans. In the following years, the Bank of England, the Federal Reserve and related scholars have done a lot of research and designed several schemes to solve this problem.

Next, Professor Cai Weide introduced the classification of central bank digital currencies. He said that there are three traditional classifications of central bank digital currencies, one is retail type, which is the type that can be used by both individuals and institutions. The second is the wholesale type, which is the type that can only be used by banks or licensed institutions. The third type is the synthetic type, which is when institutions or banks issue and manage digital currencies, but the funds are kept inside the central bank, which is the synthetic type of central bank digital currency.

He stressed that in fact, central banks do not have the same view on central bank digital currency. For example, the Bank of England proposes a synthetic central bank digital currency; the European Central Bank opposes a wholesale currency; the Federal Reserve has not yet made a choice; and the Bank for International Settlements has the most conservative view, and is skeptical of synthetic central bank digital currencies.

Professor Cai Weide went on to describe that the event that really caught the attention of central banks was on August 23, 2019, when the Governor of the Bank of England, Ma Carney, gave a speech in the United States. He proposed to use a “synthetic hegemonic digital currency” to replace the U.S. dollar as the world’s reserve currency. He expressed three views, the first is that cross-border trade is becoming more and more important, and cross-border trade is an important factor in determining the world reserve currency; the second is that the currency used for cross-border trade is important because of the network effect; and the last is that the proportion of the U.S. GDP in the world is getting lower and lower, in this situation, it is not appropriate to continue to use the U.S. dollar as the world reserve currency. So he proposed the need to use a synthetic hegemonic digital currency based on a basket of fiat currencies as the world’s reserve currency. Before this, the U.S. had not considered that this could become a reality, and that still digital currencies would replace the dollar, not other fiat currencies. The concept was too new and too shocking.

Next, Professor Cai Weide also introduced an article published by the Federal Reserve on its official website back in December 2020, which mainly expressed the distinction between token-based or ledger-based digital currencies is not significant for central bank digital currencies, because token is also a type of ledger. What really has an impact is how the backend platform runs the central bank digital currency, so technology is what really determines the characteristics of the central bank digital currency.

It’s worth noting that Professor Cai Weide mentioned that digital tokens skyrocket by the end of 2020. And according to research data, if you compare it to the circulation of fiat currencies, bitcoin has been the third most circulated in the world for a while. So that’s why many central banks are starting to “block” bitcoin and other crypto-digital coins.

Lastly, Prof. Wade Choi presented an open letter from the German Banking Council. The German bank believes that the ECB’s digital euro initiative is a big one, as all companies in the EU will participate and the impact will be very large. At the same time, if the ECB deploys the digital euro, it will definitely change the monetary system, the relationship between central banks and commercial banks, and the payment system. The final arena of monetary competition is in the smart contract system.

Next, Zhang Yanling added that the biggest attribute of digital currency is that its circulation is borderless, so the wider its circulation, the higher its value becomes. According to Zhang Yanling, the economic era of digital currency has to capture the collaboration, openness and consensus in the global financial sector as the primary task. Given that the currency must be circulated, the opening up in the financial system, the opening up in the virtual level of digital assets, and finally the opening up in the commercialization level of bulk trade or retail transactions will help form a kind of circle progressive ecosystem.

As for the future development direction of digital RMB, Zhang Yanling suggested that we should take advantage of “One Belt, One Road” and cross-border e-commerce to start the discussion on the rules of use of digital currency and the construction of infrastructure and platform with the countries along the route as soon as possible. At the same time, China is a big trading country and a big investment country, which is our advantage. Therefore, we should adapt to the acceleration of digital transformation and look at global settlement.

Our trainee reporter Yu Junyi


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