Zhou Xiaochuan clarifies three major misconceptions about digital currencies in five major ways (with full speech)

Zhou Xiaochuan clarifies three major misconceptions about digital currencies in five major ways (with full speech)

On May 22, Zhou Xiaochuan, President Emeritus of Tsinghua University’s Wudaokou School of Finance and former central bank, delivered a keynote speech on “Digital Currency and Electronic Payment System” at the “2021 Tsinghua Wudaokou Global Finance Forum”.

In his speech, Zhou first clarified three misconceptions about digital currencies: first, China’s digital currency is to replace the reserve currency status of the U.S. dollar and the international payment currency status; second, the digital currency is closely linked to the internationalization of the RMB; third, DECP and e-CNY want to replace the current role of third-party payments.

“The digital currency is not designed to replace the U.S. dollar as a reserve currency or an international payment currency; the digital currency can help improve the status of the RMB and the cross-border use of the RMB, but the internationalization of the RMB depends more on institutional and policy choices, and more on the progress of reform and opening up, rather than on technical factors. ; DECP is a two-tier system, developed with the participation of commercial banks, telecom operators and several major third-party payment institutions, all in the same boat.” Zhou said.

Zhou also commented on the controlled anonymity of digital currencies, with Zhou arguing that payment systems must necessarily strike a balance between protecting privacy and anti-money laundering, anti-terrorism, anti-drug and anti-border gambling. “The Chinese DECP clearly puts forward the concept called controlled anonymity, which is not a mathematically precise point in terms of controlled anonymity itself, but it expresses the meaning of protecting privacy and anti-money laundering and anti-drug transactions, and finding a balance point in between. We can study in depth where this balance point is, but do not take this matter intentionally or deliberately to belittle or attack the DECP process.”

The following is the full text of Zhou Xiaochuan’s speech.

Good morning, distinguished guests and participants! I am glad to participate in this Tsinghua Wudaokou Global Finance Forum, and I have just heard President Qiu Yong and Dean Zhang Xiaohui make very important speeches. This year is the 110th anniversary of Tsinghua University, and the national leaders have personally given important instructions and high expectations for the development of Tsinghua University. In this context, Tsinghua University’s Wudaokou School of Finance and the Global Finance Forum hosted by it are also getting better and better. Today, I would like to talk about an academic issue, “Digital Currency and Electronic Payment System”.

This topic has been discussed a lot for some time, and it is indeed a topic that the Party Central Committee and the State Council have clearly paid attention to and included in the 14th Five-Year Plan to actively explore the development and pilot promotion of the content. However, after reading many media reports and comments in this area, I found that there are still many concepts that need to be further clarified and some directional issues still need to be explored. Although China has already entered the R&D and pilot phase of DC/EP, there is still much to discuss in terms of understanding this issue, so I take this opportunity to share with you again, and at the same time I feel that it is also of international interest. Of course, I am now in this position as an observer, for some specific problems in the process of research and development and pilot, in fact, I also have a certain distance, observation is not very accurate, I want to exchange with you on this topic to discuss.

First of all, the media, especially the foreign media, will discuss this issue to cause some misunderstanding. I just said that in fact, in the past few years, we have done a lot of discussion on these basic concepts, but it is not that we have achieved a unanimous understanding, or we do not necessarily have a deep understanding of the issue.

To cite a few examples, one of the more common statements in the foreign media now is that China’s DC/EP or e-CNY cannot replace the dominant position of the US dollar in the international arena, no matter how much it develops. I think this statement itself is not quite the right proposition, because the development of DECP is mainly based on the modernization of the domestic payment system, keeping pace with the digital economy and the Internet era, improving efficiency and reducing costs, especially for the retail payment system, which is not designed to replace the U.S. dollar as the reserve currency or the international payment currency.

There is another argument, which is also more talked about by foreign media, that the development and piloting of digital currency is closely linked to the internationalization of RMB, and that digital currency is not very helpful to the internationalization of RMB, or that it will not achieve the internationalization of RMB. I think this issue, the modernization and digitization of the RMB payment system will help to a certain extent to improve the status of the RMB and to improve the cross-border use of the RMB, but it is not too much help. The internationalization of the RMB depends more on institutional and policy choices, and more on the progress of China’s reform and opening up, rather than on technical factors.

There is also a discussion that the DECP and e-CNY promoted by the PBoC are trying to replace the current role of third-party payments, which I think is also a delusion. The People’s Bank of China clearly said that the DECP plan is a two-tier system, and the whole R&D team is organized by the People’s Bank of China, with the participation of major commercial banks, including the industry, agriculture, China and construction, as well as telecom operators and several major third-party payment institutions, all aiming at a new stage of upgrading based on their previous work. We are all in a boat, of course, people in a boat sometimes have different views, and sometimes there may be controversy on some issues, but after all, it is a boat. It is not what some people say as if it is a kind of infighting and who will replace who.

I happened to watch a movie the other day about playing volleyball. I wanted to give an example. How volleyball players train, volleyball to increase the strength of the attack and bucket, the athletes need to train muscle. As a result, some people on the side may see this training and then start to say cool things, saying “your muscle training is good, but you do not care how to train to participate in weightlifting competitions to get ranked, the door is not”. The team said we have no intention to participate in weightlifting competitions, so don’t talk about such irrelevant things. In addition, the way volleyball is played now is more and more emphasis on the back row attack, jumping beyond the three-meter line. When training the back row attack, some people will say that the coach and the second passer intentionally devalue the attack of the number two and number four players and focus on the back row attack. This kind of criticism is not very meaningful, because in a team in fact, everyone wants to have a good pass, have the opportunity to score, and frankly speaking, volleyball games often evaluate the best snapper, who gives more opportunities to score more, so sometimes there will be some internal disputes, this is very normal, but after all, they are a team, we have to cooperate to get progress together.

I cite this example to say that some unwarranted concepts or references are actually a lack of understanding of the R&D program and the pilot, and also easy to cause “this mountain looking at that mountain high”. It is obvious that the plan has been proposed, already in the system construction and pilot process, do not play volleyball at the same time want to win in other sports, this may be a problem.

Then there is the debate about controlled anonymity. In fact, payment systems necessarily have to strike a balance between protecting privacy and anti-money laundering, anti-terrorism, anti-drug and anti-border gambling. On the one hand, privacy is guaranteed, but at the same time the necessary monitoring of certain activities has to be implemented. So if you look at this from two perspectives, there are people on the left who say you’re not protecting privacy enough, and there are people on the right who say you’re condoning money laundering and drug dealing. So it’s necessarily a balance somewhere in the middle, but that balance can also be a little to the left or a little to the right. The concept of controlled anonymity, as explicitly proposed by China’s DECP, is not a mathematically precise point in terms of controlled anonymity itself, but it expresses the idea of finding a balance between privacy protection and anti-money laundering and anti-drug dealing. We can look deeper into where this balance point is, but we should not use it to intentionally or deliberately belittle or attack the DECP process.

There is also a question about whether the issuance of digital currency should be subject to special legislation, etc. I will say a few words about this later, and there may be a lot of conceptual aspects that need to be discussed.

Anyway, with all the media and discussions, we still need to enhance communication and discussions in this area, so that the community, including the global community, can have a clearer understanding of the progress and development of digital currencies and a better understanding of China’s DECP and e-CNY.

Secondly, I would like to talk about the modernization of the payment system, which focus should we focus on?

First of all, we said that digital currencies have many different focuses from a global perspective, some focus on improving the effectiveness of retail systems, some focus on wholesale transactions, and some focus on the possibility of adopting new payment and settlement systems for exchange and financial market transactions. Some say there is so much global trade, including trade in goods and services, whether trade in goods and services can be more convenient. When Facebook first pushed Libra, it felt that cross-border remittances were not convenient and could not be improved. There were also individuals who mentioned the convenience of cross-border investment, so it’s multiple areas that may have prospects for development, and I want to talk about what issues we should actually focus on. On the whole, the modernization of the payment system is a period of time to take a step, this step is generally speaking a relatively large step, we have enough motivation, for example, like the cell phone update, some manufacturers published a version in a few months, but from the user’s point of view my cell phone before the money to buy, and can still be used, the performance is not much worse. So must feel that this step to be relatively large, and only later will consider to upgrade, especially small steps, small improvements we have to change the system, then there may be insufficient power. So to use this gap, measure the step in the end how big to see what direction we choose.

How to look at this step, one is to look at the function of the system, how effective it is, how it performs. The second look at the cost, whether the cost can be reduced, the efficiency and cost of a ratio is cost-effective. In addition, we should also look at the possibility of errors in the system, because the financial system involves stability and confidence, the probability of errors is very concerned. Another is that it is difficult to avoid 100% error-free, a small probability of error, after the error can not correct the error. For example, if the payment is wrong, can you refund, can you stop the loss, there is a credit card called charge back, that is, you can get the money back. Then there is the ability to control the risk from the performance, how strong the system has the ability to control the risk. Sometimes some technology from the point of view of technology development, very hope to use his technology, but from the point of view of the financial system, for stability, risk control, the probability of error and the importance of the ability to correct errors, may be higher than from the technical point of view of some requirements.

From these perspectives, China attaches more importance to the retail system, which can take a bigger step. China is a society that uses more cash, but it is not particularly prominent from a global perspective. I estimate that even in developed countries where credit cards are more popular, it is still worthwhile to take this step up with the emergence of the Internet, especially the mobile Internet. In addition, this is also the demand of customers, customers do not want to have too complicated, too many kinds of payment methods. They would like to see the emergence of mobile internet as a mainstream retail payment method after the cell phone is available. So the cost savings of this step is also great, and the impetus to move forward is relatively large.

From the wholesale point of view, there are now some countries to engage in CBDC, from my personal observation, China e-CNY is not exactly CBDC, of course, can also be attributed to the CBDC discussion in the big topic, but it also has its own characteristics. Most of the people and non-financial system people do not know much about the wholesale part of the payment system, they do not know the clearing system behind it, they do not know how the bank clearing and settlement behind it works. He doesn’t know how the clearing system behind it works, how the bank behind it clears and settles, etc. He doesn’t know if the system is currently less effective, if it makes mistakes, if it costs too much, if it overcharges the bank, and if the fees charged are indirectly passed on to other bank customers. With the development of technology, there is a great potential to further improve the wholesale system. But at present, there is not a lot of room for improvement in cost effectiveness, and even if there is improvement, it is not too obvious, and the community will not feel it too much. In general, we feel that the wholesale segment should also be given attention, but it seems that this step is not too big now, to step is a rather small step, is such an approach.

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