Li Lihui: To build the digital renminbi into the world’s best central bank digital currency to safeguard monetary sovereignty

“Building the world’s best central bank digital currency is not only conducive to promoting inclusive finance, but also conducive to promoting the balance and coordination of the global monetary and financial system in the digital economy era, safeguarding China’s monetary sovereignty, and protecting China’s financial security.” October On the 23rd, Li Lihui, the leader of the blockchain research group of the China Internet Finance Association and the former president of the Bank of China, said this at the “2021 Global Wealth Management Forum” hosted by Caijing Magazine and Caijing Think Tank. This forum focused on “creating an open and innovative wealth management new highland”.

Li Lihui: To build the digital renminbi into the world's best central bank digital currency to safeguard monetary sovereignty

Li Lihui, Head of the Blockchain Research Group of China Internet Finance Association and Former President of Bank of China

Li Lihui believes that from the perspective of wealth management, digital currency innovation is both a market and a tool; there are both opportunities and risks.

He introduced that China’s legal digital currency or central bank digital currency is called “digital renminbi” and has five characteristics. The first is to adopt centralized management and a two-tier operation model to ensure the reliability of the monetary policy transmission mechanism and ensure the efficiency of monetary regulation. The second is to have both account and value characteristics, compatible with three methods: account-based, quasi-account-based, and value-based. The third is to adopt the method of “account loose coupling” and digital wallet, which can realize payment and settlement, and realize “controllable anonymous payment” according to the principle of “small amount anonymous, large amount traceable according to law”. The fourth is to apply centralized and distributed hybrid technology architecture, apply trusted computing, software and hardware integration dedicated encryption and other technologies, and adopt a multi-level security system. Fifth, loadable smart contracts realize programmability, execute conditional automatic payments, and support business model innovation.

But it reminds that the virtual currency market is full of speculation, fraud and Ponzi schemes. Virtual currency accounts are relatively concentrated, and the key few are at the top of the food chain. They have the ability to manipulate the market, and retail investors are often “cut leeks.” For example, in the application of decentralized financial protocols, open networks have no access restrictions, partially transparent capital flows are convenient for transaction parties to track, and non-centrally controlled transactions can be rejected by regulators. Decentralized financial transactions can be anonymous, cross-border, difficult to control, and can become a tool for illegal capital flow and speculative transactions.

Speaking of super-sovereign digital currency, Li Lihui believes that Diem , streamlined by Libra , has a founding member of more than 2 billion global user bases. Once approved, it is likely to quickly develop into a global super-sovereign digital currency, and it is possible to reconstruct the global Monetary system and financial system.

Li Lihui said that Diem’s ​​influence mainly has three levels. The first is to form a “currency substitution” that transcends national sovereignty. Digital currencies that adopt a distributed peer-to-peer architecture may penetrate the barriers of legal sovereignty and traditional financial infrastructure, and weak countries can easily become targets for currency substitution. The second is to form a financial unicorn that surpasses commercial banks. Starting from payment and clearing, it gradually enters the fields of savings, financing, investment, insurance, asset transactions, etc., competes for traditional financial services in an all-round way, and becomes a multinational financial unicorn. Third, it may strengthen the currency hegemony of the US dollar.

“The basic support of the Diem digital currency system is the U.S. dollar, which may become a tool for the U.S. to continue to promote U.S. dollar currency hegemony in the digital economy era, and may exclude the digital renminbi from entering the international market.” Li Lihui said.

How to seize the opportunity of innovative development of digital currency? Li Lihui made three suggestions.

First of all, we must build the digital renminbi into the world’s best central bank digital currency. Li Lihui pointed out that building the world’s best central bank digital currency is not only conducive to promoting inclusive finance, but also conducive to promoting the balance and coordination of the global monetary and financial system in the digital economy era, safeguarding China’s monetary sovereignty, and protecting China’s financial security.

Li Lihui reminded that it is necessary to plan the internationalization of the digital renminbi. “The central bank’s digital currency has the conditions to become the main tool for improving the global payment environment. In the process of central bank digital currency globalization, we should strive for a dominant position and pay close attention to the research and development of the wholesale function of digital renminbi to meet the needs of payment and settlement between financial institutions.” Li Lihui Said like this.

However, it also mentioned that the technical architecture of the digital renminbi itself can meet the basic requirements for cross-border use, but to achieve barrier-free, high-flow cross-border payments between relevant countries and economies, which involves both technical standards and technical platforms. Coordination also involves many institutional and policy issues such as currency sovereignty, foreign exchange management, exchange arrangements, and regulatory cooperation.

Second, we must establish a security barrier to control decentralized finance. Li Lihui said that decentralized finance may penetrate a country’s financial infrastructure barriers, monetary sovereignty, and regional financial regulatory boundaries. Decentralized finance is not only a hot spot for international financial competition in the future, but also a hot spot for global financial supervision in the future.

Therefore, it should be necessary to deeply analyze the already possessed and potential “disruptive” performance of digital technologies such as distributed peer-to-peer architecture and decentralized architecture, and focus on the possibility of decentralized financial tools based on new digital technologies that cross the barriers of financial infrastructure Path, research technical countermeasures and policy plans.

Finally, it is necessary to establish penetrating digital financial supervision. Li Lihui pointed out that the digital financial supervision system should be jointly built and shared by financial supervision departments, can quickly decouple and combine data from multiple parties, can share supervision data from multiple parties, can implement consistent compliance standards, and should cover all financial institutions. Penetrate different financial markets and financial businesses.

The following is the full text of the speech:

The currency form that adopts digital technology is called digital currency. People generally distinguish digital currency into legal digital currency and non-statutory encrypted digital currency Digital currencies that have legal status and public attributes, have national sovereignty endorsements and aresuance responsibilities constitute legal digital currencies, also known as central bank digital currencies. Commercialization of digital money issued by market players, known as non-statutory encrypted digital currency, also known as personal digital currencies, including Bitcoin virtual currency represented, with USDT as the representative of “stable currency.”

From the perspective of wealth management, digital currency innovation is both a market and a tool; there are both opportunities and risks.

First, the central bank’s digital currency payment inclusive and clearing upgrade.

According to a survey by the Bank for International Settlements, in 65 countries or economies, 60% of central banks are already conducting digital currency experiments or proof-of-concepts. The retail central bank digital currency is mainly positioned as a popular payment tool, which can supplement or replace cash in circulation, and has the willingness to promote digital inclusive finance. The wholesale central bank digital currency is mainly positioned as an upgraded version of the clearing tool, which can be used in the scenario of direct clearing between financial institutions, and has the willingness to build a digital financial center.

China’s legal digital currency or central bank digital currency is called “digital renminbi”. First, the use of centralized management and double operational mode , in order to ensure the reliability of the transmission mechanism of monetary policy, to ensure the efficiency of monetary control. The second is to have both account and value characteristics, compatible with three methods: account-based, quasi-account-based, and value-based. The third is to adopt the method of “account loose coupling” and digital wallet , which can realize payment and settlement, can realize end-to-end value transfer without bank account, and realize ” controllable anonymity according to the principle of “small amount anonymous, large amount traceable according to law” Pay  . The fourth is the application of centralized and distributed hybrid technology architecture, the use of stable and sensitive dual-mode coexistence, the development of centralized and distributed hybrid technology architecture, the application of trusted computing, software and hardware integration dedicated encryption and other technologies, the use of multiple Hierarchical security system. Fifth, loadable smart contracts realize programmability , execute conditional automatic payments, and support business model innovation.

Second, the virtual currency market: speculation and disintermediation.

The virtual currency market has attracted many investors and speculators. For example, according to the statistics of the 4 largest virtual currency exchanges in South Korea, the number of virtual currency investors in the country is as high as 5.81 million. If there is no double counting, they account for more than 11% of the total population. The problem is that the virtual currency market is full of speculation, fraud and Ponzi schemes. Virtual currency accounts are relatively concentrated, and the key few are at the top of the food chain. They have the ability to manipulate the market, and retail investors are often “cut leeks.” From January to May 2021, after the Bitcoin price broke through the high of 65,000 US dollars, it collapsed again and again, with the lowest falling below 30,000 US dollars. Many leveraged transactions were forced to liquidate during the skyrocketing and plummeting, and liquidation funds totaled more than 10 billion US dollars.

Decentralized finance with virtual currency as the main body adopts technologies such as peer-to-peer networks, smart contracts, and distributed ledgers. Different decentralized financial tools can establish automatic market making and automatic clearing mechanisms to form a de-intermediary chain financial system. Can be separated from financial intermediaries such as banks.

In the application of decentralized financial protocols, open networks have no access restrictions, local and transparent capital flows are easy for transaction parties to track, and non-centrally controlled transactions can be rejected by regulators. Decentralized financial transactions can be anonymous, cross-border, difficult to control, and can become a tool for illegal capital flow and speculative transactions.

Third, super-sovereign digital currency : currency substitution and financial unicorns.

Facebook launched the research and development of global digital currency Libra in 2019. In 2021, it is clear that Libra will be streamlined to Diem. The basic structure is: 1) A single anchored dollar, a blockchain-based payment system in the United States, which is included in the scope of U.S. supervision, and the central bank Complementary digital currency; 2) Establish a public chain + alliance chain hybrid network to achieve cross-system compatibility and operability; 3) Apply programmable smart contracts to provide high value-added services, including conditional payments; 4) Allow merchants The terminal is free to switch to other payment services and encourage innovation through competition; 5) 27 founding members include Visa, Master, Uber, etc.

It must be vigilant that the founding members of Diem have a global user base of more than 2 billion. Once approved, it is likely to quickly develop into a global super-sovereign digital currency, and it is possible to reconstruct the global monetary system and financial system. The first is to form a ” currency substitution” that transcends national sovereignty Digital currencies that adopt a distributed peer-to-peer architecture may penetrate the barriers of legal sovereignty and traditional financial infrastructure, and weak countries are likely to become targets of currency substitution. The second is to form a financial unicorn that surpasses commercial banks. Starting from payment and clearing, it gradually enters the fields of savings, financing, investment, insurance, asset trading, etc., competes for traditional financial services in an all-round way, and becomes a multinational financial unicorn. Third, it may strengthen the currency hegemony of the US dollar. The national strength of the United States leads the world. The basic support of the Diem digital currency system is the U.S. dollar, which may become a tool for the United States to continue to promote U.S. dollar currency hegemony in the digital economy era, which may exclude the digital renminbi from entering the international market.

How to seize the opportunity of innovative development of digital currency and open a new pattern of wealth management? Here are some understandings.

First, the digital yuan to build into the world’s best central bank digital currency .

The central bank’s digital currency will occupy a core position in the global digital economy competition. Building the world’s best central bank digital currency is not only conducive to promoting inclusive finance, but also conducive to promoting the balance and coordination of the global monetary and financial system in the digital economy era, safeguarding China’s monetary sovereignty, protecting China’s financial security, and further enhancing China’s financial security. National power. It is necessary to further improve the underlying technical architecture, improve the design of application scenarios, and improve the system and mechanism of the central bank’s digital currency operation and management to ensure the large-scale and reliable application of digital renminbi in the high-concurrency market.

At the same time, it should be necessary to plan the internationalization of the digital renminbi. Improving the cross-border payment environment is an active proposition of the G20. The central bank’s digital currency has the conditions to become the main tool to improve the global payment environment. China’s central bank digital currency experiment leads the world. In the process of central bank digital currency globalization, we should strive to become a dominant player. We should pay close attention to the research and development of the wholesale function of digital renminbi, adapt to the needs of payment and settlement between financial institutions, and plan to build a digital international financial center and digitalization. International Wealth Management Center.

The digital RMB’s own technical architecture can meet the basic requirements for cross-border use, but to achieve barrier-free, high-flow cross-border payments between relevant countries and economies involves not only the coordination of technical standards and technical platforms, but also monetary sovereignty, Many institutional and policy issues such as foreign exchange management, exchange arrangements, and supervisory cooperation. The People’s Bank of China has made it clear that it will explore cross-border payment pilots under the premise of fully respecting the monetary sovereignty of both parties and complying with laws and regulations, and follow the three requirements of “lossless”, “compliance” and “interoperability” to establish legal digital currency with relevant monetary authorities Exchange arrangements and supervisory cooperation mechanisms.

In the construction of a global system for global digital finance, China should actively participate in and actively fight for the right to speak, strengthen international regulatory coordination, promote regulatory consensus, and strive to establish a unified international regulatory standard for digital finance.

Second, establish a security barrier to control decentralized finance.

Decentralized finance may penetrate a country’s financial infrastructure barriers and monetary sovereignty and regional financial regulatory boundaries. Decentralized finance is not only a hot spot for international financial competition in the future, but also a hot spot for global financial supervision in the future.

As a major economic country, China implements a higher level of economic opening and financial opening, including capital market opening, which is the basic national policy; maintaining the overall economic and financial stability and proactively preventing systemic financial risks are the bottom line of the financial sector.

Therefore, it should be necessary to deeply analyze the already possessed and potential “disruptive” performance of digital technologies such as distributed peer-to-peer architecture and decentralized architecture, and focus on the possibility of decentralized financial tools based on new digital technologies crossing the barriers of financial infrastructure Path, research technical countermeasures and policy plans, and build a digital financial security barrier.

Third establish penetrating digital financial supervision.

Digital technology innovation is changing the mode of financial services, gradually forming a new financial format that is interactive, intersecting and intersecting. For example, the digital asset market will be the main body of the wealth management market, including both digital financial assets, as well as assetized patent data and author data; both ownership transactions and income rights transactions. It will form a complex structure that includes asset owners, investors, property rights registration, property rights certification, financial intermediaries, regulatory agencies, tax agencies, arbitration agencies, and so on.

Financial innovation calls for regulatory innovation. The digital financial supervision system should be jointly built and shared by financial supervision departments, can quickly decouple and combine data from multiple parties, can share supervision data from multiple parties, can implement consistent compliance standards, should cover all financial institutions, and should penetrate different The financial market and financial business realize the whole process of financial supervision and all-round intelligence, go beyond the complicated process and resource-consuming on-site supervision, and reduce the supervision cost and the cost of being supervised.

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