This year, with the expansion of the pilot scope of digital RMB, more and more people in China have experienced the test version of digital RMB; digital RMB is also a hot topic that cannot be ignored in major financial forums. However, in the process of promoting the digital RMB as a sovereign digital fiat currency, domestic and foreign political enterprises and people have different levels of knowledge about the digital RMB. The People’s Bank of China as well as experts and scholars from all walks of life will continue to discuss the digital RMB that people are most concerned about.
Yao Qian, director of the Technology Supervision Bureau of the China Securities Regulatory Commission, said at the recent International Finance Forum (IFF) 2021 Spring Conference that the birth of the digital renminbi is the need for central banks to take the initiative to innovate the issuance and circulation of legal tender and explore central bank digital currency against the backdrop of the digital wave, in order to optimize the legal tender payment function, mitigate the impact of private digital payment instruments, and improve the status of legal tender and the effectiveness of monetary policy.
Improving the status of legal tender
Federal Reserve Chairman Jerome Powell commented on the digital yuan on April 28, “Its real use is to help the government see all the real-time transactions. It’s a little more relevant to what’s happening within their own financial system than dealing with international competition.”
According to Yao, “helping the government see all the real-time transactions” is not the motivation for the Chinese central bank’s digital currency experiment. Third-party non-cash payment methods such as Alipay and WeChat, which the Chinese have long been accustomed to using, have technically made all real-time transactions transparent, raising issues of data privacy protection, anonymity, monopoly, regulatory transparency and other issues for which the digital renminbi has been optimized.
Overall, the Digital RMB offers the highest level of privacy and anonymity protection among current payment instruments. Digital RMB adopts the design of “anonymous for small amounts and traceable for large amounts”, and “controlled anonymity” is an important feature of digital RMB, which on the one hand reflects its M0 positioning and protects the public’s need for reasonable anonymous transactions and personal information protection. On the other hand, it is also an objective need to prevent, control and combat money laundering, terrorist financing, tax evasion and other illegal and criminal acts, and to maintain financial security.
As to whether the central bank’s digital currency will challenge the status of the U.S. dollar as a global currency, Powell believes that overall there is not much to worry about. Yao Qian believes that the international currency status of the U.S. dollar is historically formed, and international trade and cross-border payments are mostly based on the U.S. dollar at present. Although some global stablecoins, such as Libra, aim to solve the pain points of cross-border payments, weakening the dollar’s international currency status is not necessarily the goal of CBDC, and the digitization of sovereign currencies has its own intrinsic logic.
“In the long run, the emergence of digital currencies or digital payment instruments certainly has the potential to change the existing pattern, but that is the result of the natural evolution of the digitization process and market selection.” Yao Qian said.
As to whether the digital yuan as a digital fiat currency has better management and control over China’s economy, Qian Jun, executive director of Fudan University’s Pan China School of International Finance and professor of finance, told this reporter that the digital yuan will not completely replace cash in the short term, the potential changes are relatively large, and in the short term there will be two sets of monetary systems in parallel in China, on the one hand the efficient settlement of the digital yuan and on the other hand the current circulation In the short term, there will be two parallel monetary systems in China: the efficient settlement of digital RMB and the current circulation of paper money. In the medium to long term, the introduction and innovation of the technology itself will also require the transformation and upgrading of the system and the coordination of different systems; the impact on monetary policy will also be seen in the medium to long term.
Digital RMB R&D focus
At the conference, Yao pointed out seven key points to consider in the development of the central bank’s digital currency.
First, is the technical route account-based or token-based?
From public reports, the digital RMB has adopted the account-based route, while some countries have chosen the cryptocurrency technology route represented by blockchain technology. It is not an either/or relationship between account-based and token-based technology routes. In essence, token is also an account, but a new type of account – crypto account. Compared with traditional accounts, users have more autonomous control over crypto accounts.
Yao Qian said, “In 2014, we had an in-depth study of centralized and decentralized cryptocurrencies including E-Cash and Bitcoin, and in a sense, the early digital currency experiments of China’s central bank are in line with the idea of cryptocurrencies, and we look forward to controlling the keys to cryptocurrencies instead of going around. “
Previously, the central bank had developed a quasi-production-level prototype central bank digital currency system based on the “central bank-commercial bank” binary system. But in the repeated trade-offs for implementation, it finally chose to start with a traditional account-based technology.
Yao emphasized, “We need to look at the development of the central bank’s digital currency with a dynamic perspective, and as the technology continues to develop and mature, the central bank’s digital currency will also absorb various advanced technologies and continuously improve its technical architecture system.”
Secondly, for the determination of the value attribute of digital RMB, is the central bank directly indebted, or the operating institution indebted? The essential difference between the two lies in the liabilities column of the central bank’s balance sheet, which records whether it is the end-user’s central bank digital currency or the reserve of the agency operator.
If the operating agency deposits 100% of its reserve with the central bank as a reserve for issuing digital currency, then the central bank digital currency is internationally known as a synthetic CBDC, similar to the note-issuing bank system in Hong Kong, and this model has attracted the research attention of many institutions, including the Chinese central bank and the International Monetary Fund. There are also some countries that still use the traditional central bank direct liability model.
Third, is the operating structure two-tier or single-tier?
At present, a two-tier structure is gradually forming a consensus among countries. The digital RMB also adopts a two-tier operating system. According to Yao, the two-tier operation and single-tier operation are not an either/or relationship, and both are compatible for users to choose.
If the central bank digital currency runs directly on blockchain networks such as Ether and Diem, then the central bank can use their BaaS services to provide the central bank digital currency directly to users without the need for intermediaries. The single layer operation can make the central bank digital currency better reach the unbanked group and achieve financial inclusion.
Fourth, does digital RMB bear interest? Interest-bearing may lead to the transfer of deposits from commercial banks to the central bank, resulting in the shrinking credit capacity of the entire banking system and becoming a “narrow bank”.
Yao Qian analysis, in recent years, central banks for the CBDC’s narrow banking impact seems to have been less afraid. For example, the European Central Bank’s digital euro report proposed a so-called graded interest-bearing system, with variable interest rates on different digital euro holdings to mitigate the potential impact of the digital euro on the banking sector, financial stability and monetary policy transmission. Interest-bearing is not currently being considered for the digital RMB.
Fifth, is the issuance model going to be direct issuance or exchange?
The difference between currency issuance and exchange is that the former is initiated by the central bank and is an active supply, while the latter is initiated by currency users and is an on-demand exchange.
Will the central bank digital currency be generated by issuance or exchange? Depends on its positioning and the needs of monetary policy. If it is only an M0 replacement, then it is an on-demand exchange, just like cash; if the central bank initiates the issuance of digital currency to the market through asset purchases in order to achieve monetary policy objectives, it is an extended form issuance. Expanded table issuance is subject to defining eligible asset types and operating at appropriate quantities and prices.
Sixth, do smart contracts affect the forensic function?
The central bank digital currency research projects conducted by Canada, Singapore, the European Central Bank and the Bank of Japan have experimented with smart contracts.
Yao Qian said that digital currency cannot be just a simple simulation of physical currency, and if it is to take advantage of “digital”, the future digital currency will definitely go to smart money. Previous cases of system disasters caused by security flaws in smart contracts show that the maturity of the technology still needs to be improved. Therefore, the central bank’s digital currency should start with simple smart contracts and gradually expand its potential, with full consideration of security.
Seventh, regulatory considerations need to strike a balance between privacy protection and regulatory compliance.
On the one hand, KYC, anti-money laundering, anti-terrorist financing and anti-tax evasion are the basic guidelines that central bank digital currencies should follow, while on the other hand, users’ personal privacy protection should be fully considered. The results of the ECB’s public consultation on the digital euro also show that residents and professionals who participated in the consultation agreed that privacy is the most important design feature to focus on for the digital euro.
Yao Qian stressed that in the digital world, the issue of authenticity, privacy and security of digital identity may involve a larger social governance proposition, which requires us to do in-depth research.
Yao Qian further pointed out that the research and development of the central bank’s digital currency is a complex systemic project, not only in the technical field, but also in broader areas such as laws and regulations, financial stability, monetary policy, financial supervision, and international finance. At present, the digital dollar, digital euro and digital yen seem to be ready to be launched, compared with which the competitiveness of the digital yuan needs further consideration.
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