This year, with the expansion of the digital renminbi pilot program, more and more people have experienced the digital renminbi test version; in major financial forums, the digital renminbi is also a hot topic that cannot be ignored. However, the digital renminbi, as a sovereign digital legal currency, has different levels of awareness of the digital renminbi by governments, enterprises, and people at home and abroad in the process of advancement. The People’s Bank of China and experts and scholars from all walks of life continue to discuss the digital renminbi that people are most concerned about.

At the recent International Financial Forum (IFF) 2021 Spring Meeting, Yao Qian, director of the Science and Technology Regulatory Bureau of the China Securities Regulatory Commission, stated that the birth of the digital renminbi is in the context of the digital wave. It is necessary for the central bank to actively innovate the issuance and circulation of legal tender. Explore the central bank’s digital currency to optimize the payment function of legal tender, alleviate the impact of private digital payment tools, and improve the status of legal tender and the effectiveness of monetary policy.
Improving the status of legal tender

On April 28, Fed Chairman Powell commented on the digital renminbi: “Its real use is to help the government see all real-time transactions. It is more related to what is happening in their own financial system than to deal with international competition.”

Yao Qian believes that “helping the government see all real-time transactions” is not the motivation for the Chinese central bank’s digital currency experiment. The third-party non-cash payment methods such as Alipay and WeChat that Chinese have long been accustomed to have technically realized the transparency of all real-time transactions, which has also led to data privacy protection, anonymity, monopoly, regulatory transparency and other issues. The RMB has also been optimized for these issues.

In general, the protection of the privacy and anonymity of users by digital renminbi is the highest among the current payment tools. The digital renminbi adopts the design of “small amount anonymity and large amount traceability”. “Controllable anonymity” is an important feature of digital renminbi. On the one hand, it reflects its M0 positioning and protects the public’s 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 activities, and to maintain financial security.

Regarding whether the central bank’s digital currency will challenge the status of the US dollar as a global currency, Powell believes that overall there is no need to worry too much. Yao Qian believes that the U.S. dollar’s ​​international currency status is historically formed, and most international trade and cross-border payments are currently based on U.S. dollars. Although some global stablecoins, such as Libra, aim to solve the pain points of cross-border payments, weakening the U.S. dollar’s international currency status is not necessarily the goal of CBDC. The digitization of sovereign currencies has its inherent logic.

“In the long run, the emergence of digital currency or digital payment tools may certainly change the existing pattern, but that is the result of natural evolution after the digitalization process and market selection.” Yao Qian said.

Regarding whether the digital renminbi as a digital legal currency has better management and control over the Chinese economy, Qian Jun, executive dean and professor of finance at the Fanhai International School of Finance of Fudan University, told our reporter that the digital renminbi will not completely replace cash in the short term. , The potential changes are relatively large. In the short term, China will have two sets of currency systems in parallel, one is the efficient settlement of digital renminbi, and the other is the current currency in circulation. In the medium and long term, the introduction and innovation of technology itself also requires systematic transformation and upgrading and coordination of different systems; the impact on monetary policy will also appear in the medium and long term.
Digital RMB R&D focus

At the aforementioned meeting, Yao Qian pointed out seven key points that the central bank’s digital currency research and development needs to consider.

First of all, is the technical route based on accounts or tokens?

According to public reports, the digital renminbi has adopted the account route, while some countries have chosen the encrypted currency technology route represented by blockchain technology. The two technical routes of account-based and token-based are not an all-or-nothing relationship. In essence, tokens are also an account, but a new type of account-an encrypted account. Compared with traditional accounts, users have stronger independent control over encrypted accounts.

Yao Qian said: “In 2014, we conducted in-depth research on centralized and decentralized cryptocurrencies, including E-Cash and Bitcoin. In a sense, the early digital currency experiments of the People’s Bank of China and The idea of ​​cryptocurrency is the same. We look forward to controlling the key to cryptocurrency instead of taking a detour.”

Previously, the central bank had developed a quasi-production-level central bank digital currency prototype system based on the “central bank-commercial bank” dual system. However, in the repeated trade-offs of implementation, the final choice was to start with the technical route based on traditional accounts.

Yao Qian emphasized: “We need to look at the development of the central bank’s digital currency from a dynamic perspective. With the continuous development and maturity of technology, the central bank’s digital currency will also absorb various advanced technologies and continuously improve its technical architecture system.”

Secondly, for the judgment of the value attribute of the digital renminbi, is the central bank directly indebted or the operating agency indebted? The essential difference between the two lies in the central bank’s balance sheet liability column, which records the end user’s central bank digital currency or the reserve of the agency operating agency.

If the operating agency deposits 100% of the reserve fund with the central bank and uses it as a reserve to issue digital currency, then the central bank’s digital currency is called a synthetic CBDC internationally, which is similar to Hong Kong’s note-issuing bank system. This model has caused Research concerns of many institutions including the Central Bank of China and the International Monetary Fund. Some countries still use the traditional central bank direct debt model.

Third, is the operating architecture two-tier or single-tier?

At present, the two-tier structure is gradually forming a consensus among countries. Digital RMB also uses a two-tier operating system. Yao Qian said that two-tier operation and single-tier operation are not an alternative. The two are compatible for users to choose from.

If the central bank’s digital currency runs directly on blockchain networks such as Ethereum and Diem, then the central bank can use their BaaS services to directly provide the central bank’s digital currency to users without the need for intermediaries. Single-tier operations can enable the central bank’s digital currency to better benefit groups without bank accounts and achieve financial inclusion.

Fourth, is the digital renminbi interest-bearing? Interest calculation may lead to the transfer of deposits from commercial banks to the central bank, leading to the shrinking of the credit capacity of the entire banking system and becoming a “narrow bank”.

According to Yao Qian’s analysis, in recent years, central banks seem to be less afraid of the narrow banking impact of CBDC. For example, the European Central Bank’s digital euro report proposed a so-called hierarchical interest calculation system, which uses variable interest rates to calculate interest on different digital euro holdings to reduce the potential impact of the digital euro on the banking industry, financial stability, and monetary policy transmission. The digital renminbi currently does not consider interest calculation.

Fifth, should the issuance model be direct issuance or exchange?

The difference between currency issuance and exchange is that the former is initiated by the central bank and belongs to active supply; the latter is initiated by currency users and is exchange on demand.

Is the generation of central bank digital currency issued or exchanged? It depends on its positioning and the needs of monetary policy. If it is only M0 replacement, then it is the same as cash, which is exchanged on demand; if the central bank actively issues digital currencies to the market through asset purchases in order to achieve monetary policy goals, it is an expanded scale issuance. Expansion issuance must define qualified asset types and operate with appropriate quantities and prices.

Sixth, will smart contracts affect the legal compensation function?

Central bank digital currency research projects carried out by Canada, Singapore, the European Central Bank, and the Bank of Japan have all experimented with smart contracts.

Yao Qian said that digital currency cannot just be a simple simulation of physical currency, and if the advantages of “digital” are to be used, the future digital currency will definitely move towards smart currency. Previous cases of system disasters caused by security vulnerabilities in smart contracts indicate that the maturity of the technology needs to be improved. Therefore, the central bank’s digital currency should start with simple smart contracts and gradually expand its potential on the basis of 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 the central bank’s digital currency should follow. On the other hand, it is necessary to fully consider the protection of users’ personal privacy. The results of the European Central Bank’s public consultation on the digital euro also show that the residents and professionals involved in the consultation believe that privacy is the most important design feature of the digital euro.

Yao Qian emphasized that in the digital world, the authenticity of digital identities, privacy issues, security issues or larger social governance propositions require us to do in-depth research.

Yao Qian further pointed out that the central bank’s digital currency research and development is a complex systemic project, which is not only a problem in the technical field, but also involves laws and regulations, financial stability, monetary policy, financial supervision, international finance and other broader fields. The current digital dollar, digital euro, and digital yen seem to be gaining momentum. Compared with them, the competitiveness of digital renminbi requires further consideration.