This article is from WeChat public account:Economic Observer Observer (ID: eeoobserver), author: Chen Yongwei, cover from the original
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Not long ago, Huang Qifan, vice chairman of the China International Economic Exchange Center, revealed a message to the outside world at the first Bund Financial Summit: the digital currency DC/EP developed by the People’s Bank of China has matured, and the People’s Bank of China is likely to Became the world’s first central bank to launch digital currency.
This news has caused a lot of conjectures. Why should the central bank develop DC/EP? And why should you disclose this news to the outside world at this time? What is the technical characteristics of DC/EP? How does it appear to the market and the society? For a time, all kinds of arguments came one after another, so lively.
Why develop DC/EP
In fact, if we look back at the news reports over the past few years, we will know that the central bank is ready for the digital currency. As early as 2014, a special digital currency research project team was established, and the legal digital currency is the key research topic of the project team. In 2015, the central bank completed the prototype of the legal digital currency on the basis of in-depth research on the issue of digital currency issuance and business operation framework, key technologies of digital currency, and carried out two rounds of revision. At the beginning of 2016, the central bank organized a digital currency seminar and at the meeting clarified the strategic goal of the central bank to issue digital currency. In December 2016, the Digital Money Institute directly under the Central Bank was formally established. On January 25, 2018, the digital ticket trading platform was successfully launched. On March 9, 2018, Zhou Xiaochuan, then president of the central bank, officially revealed the news that the central bank is developing legal digital currency at the press conference of the 13th National People’s Congress and revealed the name of this legal digital currency.It will be called DC/EP.
From the above news (perhaps now called “old news” is more appropriate), we can easily see that although from a global perspective, China The statutory digital currency project is very advanced, but this is by no means a whim of no preparation, nor is it a strategy to cope with the challenges of digital currency such as Bitcoin and Libra, as some have speculated, but it has been carefully planned.
So, Why does the central bank spend so much energy? To develop DC/EP? The most critical reason is that traditional currencies have many flaws, and legal digital currencies can largely compensate for these shortcomings.
Speaking of the shortcomings of traditional currency, the first thing we think of is its high cost in the process of distribution, circulation and transportation. We know that the current banknotes require a lot of energy to carry out anti-counterfeiting during the production process, and the resulting cost is high. After these currencies are produced, they are also costly to transport to the bank, and there will be losses in the circulation process, all of which will incur costs. Although this cost may be negligible from a single fund, the cost is enormous if the huge amount of money in the entire society is taken into account. Of course, in recent years, with the rise of third-party payment instruments such as Alipay and WeChat, the scene of directly using banknotes has gradually decreased. Accordingly, these costs are also getting smaller. Therefore, it is certain that saving currency circulation and distribution costs areHowever, it may be one of the motivations for the central bank to develop DC/EP, but it will not be the main driver.
So, what are the defects of the traditional currency that the legal digital currency hopes to make up? Yao Qian, former director of the Central Bank’s Digital Money Institute, published a paper in the English academic journal (China Economic Journal) Called “Central Bank Digital Currency: Optimization of the Monetary System and Its Distribution Design.” In this paper, he pointed out three important flaws of traditional currency: weak traceability (weak trace ability), homogeneity (homogeneity) and real-time (real-momentness).
The so-called weak traceability means that it is difficult for the central bank to track its circulation after issuing currency. How many times these currencies have flowed into the real economy, the capital market, or the financial sector, the central bank of which does not know. If you don’t know the operation of the currency, it is difficult to formulate the corresponding monetary policy in a targeted manner and adjust the circulation of the money in a timely manner.
The so-called homogeneity means that the only function of the traditional currency is to calculate the price. This means that the traditional monetary policy can only control the total amount, and influence the supply of money to the private sector by adjusting the “price” and “quantity” of the currency at the macro level. In this case, it is difficult for monetary policy to peg the money supply.
The so-called real-time nature means that transactions and payments in traditional currencies are carried out in real time. The consequence of this is that the central bank can only control the currency in real time of the transaction. Once the process of money supply ends, the central bank loses control of the currency. After that, whether the money can flow to the real economy and whether the implementation of the established monetary policy can be guaranteed is difficult for the central bank to determine. In this way, even if the central bank’s monetary policy is optimal at the moment of implementation, once the currency flows from the central bank to the market, the monetary policy may have gone.
The above defects, the legal digital currency can be effectively overcome. And this should be the most important reason why the central bank spends so much effort to develop DC/EP.
Of course, in addition to dealing with traditional currency deficiencies, new numbersThe challenge of money is also a dimension that cannot be ignored. With the maturity of blockchain technology, more and more encrypted digital currencies have appeared on the market. From the earliest fully decentralized Bitcoin to the recent Libra, all of these encrypted digital currencies challenged the central bank’s monetary authority. In this context, the central bank’s development of DC/EP is even more necessary.
What would DC/EP look like
So, what kind of currency will the upcoming DC/EP be? Zhou Xiaochuan gave this introduction in a speech: “DC(Digital Currency) is a digital currency, EP(Electronic Payment) is an electronic payment; the middle is a slash, meaning that the two can be either a ‘and’ relationship or an ‘or’ relationship. That is to say, digital currency and electronic payment do not need to be opposed, the purpose is to achieve the efficiency, low cost and security of the payment system. In addition, the new payment system and digital currency must be able to effectively comply with the current ‘reverse Money laundering ‘and ‘anti-terrorist financing’ requirements.”
From this introduction, we can read two pieces of information: On the one hand, DC/EP is a currency guaranteed by the central bank credit. Like paper money, it has a value character and is also legal. On the other hand, this new digital currency will attempt to make a fuss about the payment function and try to highlight its advantages in terms of payment.
Speaking of this, maybe someone wants to say that DC/EP is not the central bank to come up to make an Alipay or WeChat payment? This understanding is obviously wrong. Although DC/EP is also “money”, the money in Alipay or WeChat payment is also “money”, but this “money” is not the “money”, and the two are still very different in nature.
In addition to the related discussions, I think it is necessary to introduce several concepts about money that are often heard in economic reports – M0, M1 and M2. Broadly speaking, these three concepts all refer to “money” or money, but they have one fundamental difference, that is, the difference in “liquidity”.
The so-called M0 refers to the cash in circulation, which is the sum of the cash in stock of each unit outside the banking system and the hand-held cash of the residents. It is already in cash and does not require redemption, so its liquidity is the highest.
M1 is based on M0 plus current deposits from non-financial companies. We know that demand deposits can be easily exchanged for cash, but there are still some formalities in the middle, so its liquidity is lower than M0.
M2, on the basis of M1, plus time deposits of non-financial companies and other deposits of residents. We know that it is more difficult to convert time deposits into cash than the current period, and there may be a certain cost in the exchange process, so M2’s liquidity is lower than M1.
Among these monetary forms, only M0 is directly controlled by the central bank. In reality, we often say that the central bank has opened a printing machine and printed a ticket. In fact, it means that the central bank has issued new cash, which is M0. The parts other than M0 are “created” by banks through credit.
The process of currency creation is very complicated. To elaborate, you need to use a “money banking”, but we can explain it in a general way. Suppose you have 100 yuan in your hand now. If the money is just in your pocket, then it is only 100 yuan. But if you want to charge interest and save it to the bank, then the situation changes. Assuming that the bank receives the money, put 10 yuan of it as a reserve into the central bank, and then release the remaining 90 yuan into the market through the loan, then the total amount of money in the market will increase by 90 yuan – you The original 100 yuan in cash has now become a deposit, but at the same time there is another 90 yuan in cash.
Understanding the difference between M0, M1 and M2, we can discuss DC/EP further. In nature, it is the currency directly created by the central bank, which is M0 and is cash. And what kind of “money” does we use in Alipay or WeChat? Although it seems to be easy to use, in most cases it is no different from cash, but in fact their nature is closer to M2. When we use such third-party payment software, we actually transfer the money to the account of the third-party payment company and then complete the payment through their account.
Of course, in most use cases, people will not care about the difference between M0, M1 and M2, as long as they can spend, it is “money.” So, as a currency that emphasizes payment attributes, what advantages does DC/EP have over existing third-party payments? From the information already disclosed, its advantages are mainly as follows:
The first is legal. Many people will have this experience: you go to a store to buy things, you open the WeChat payment when you check out, but were told that you can only use Alipay. For DC/EP, this situation will not exist. Since DC/EP itself is legalCurrency, when you use it to pay to the other party, the other party must accept it.
The second is anonymity. Since the current third-party payment is actually carried out in the platform and account of the third-party payment, the user is actually transparent to the platform when trading. In many cases, users actually want to retain some personal privacy. While DC/EP was designed, it considered the anonymity of small-scale payments. With distributed billing techniques similar to blockchain, it allows for the anonymity of transactions to be guaranteed. Of course, if it is a large transaction, the user also needs to open the corresponding authority, and may need to provide more personal information during the transaction.
In addition, it is said that when the central bank designed DC/EP, it also implanted a lot of “black technology.” For example, Mu Changchun, deputy director of the central bank’s payment and settlement department and director of the Digital Money Institute, revealed in an online public class that DC/EP can complete payment directly through the mobile phone if both parties to the transaction are disconnected. Let people keep using the payment function under many extreme conditions (eg natural disasters). However, it is still unclear whether this technology will be implemented and whether special equipment is needed for support.
After understanding the basic properties of DC/EP, let’s take a look at its basic operating framework. In theory, there may be two choices in the operation framework of a currency. One is that the central bank issues money directly to the public, and the other is that the central bank issues money to commercial banks, and then commercial banks then use credit to allow money to flow to the market. on. We know that in the traditional currency era, basically the second framework, the so-called “central bank-commercial bank” system, is the case in the digital currency era. Will the central bank bypass commercial banks and issue money directly to the public? It seems that this possibility is not great.
Zhou Xiaochuan once made it clear that the issuance and operation of digital currency should still be completed based on the “central bank-commercial bank” system, but the transportation and custody of the currency has changed. The mode of transportation has changed from physical to electronic transmission, and the way of preservation has changed from the central bank’s distribution library and banking institution’s business library to the cloud computing space for storing digital currency.
In September last year, Yao Qian published a paper entitled “Experimental Research on the Central Bank Digital Currency Prototype System” in the Journal of Software, and discussed the operational framework of the central bank’s digital currency in detail. In the article, he proposed a framework of “one currency, two banks, three centers”.
The so-called “one currency” is an encrypted number string that is guaranteed and signed by the central bank to represent a specific amount. “Two libraries” is issued by the Central BankThe bank library of the library and commercial banks, plus the digital currency wallet of individuals or unit users in the circulation market. The “three centers” are the certification centers, registration centers and big data analysis centers.
With a little comparison, we can find that the framework of “one currency, two banks, three centers” is basically consistent with the “central bank-commercial bank” system, but not much in the original Three “centers” have been added to the system. Among them, the certification center is responsible for centralized management of digital money institutions and user identities; recording user identities, completing ownership registration, and recording water flow; while big data analysis center focuses on analyzing market operation, for anti-money laundering, macro policy regulation Provide a basis for this.
So, why in the new digital economy era, the central bank will still tend to choose the traditional framework in the operation of legal tender? The main consideration here is the control of risks and costs. On the one hand, the substitution of legal digital currency for traditional currency is not completed overnight, which requires a gradual process. If the legal digital currency chooses an operational framework that is very different from the existing currency, then conflicts may arise in practice, causing a series of problems. On the other hand, the use of the original operational framework can fully mobilize the enthusiasm of commercial banks and guide them to participate in the issuance and circulation of legal digital currency, thus helping to properly spread risks and accelerate service innovation.
Of course, under the similar premise of the overall operational framework, the operation of the legal digital currency will be somewhat different from the current operational framework, which is concentrated in the design of the three “centers”. With these three “centers”, the central bank’s direct control over the currency’s circulation has been greatly strengthened.
It should be noted here that the concept of blockchain has been very hot recently, and many well-known digital currencies have adopted blockchain technology. So DC/EP will also use blockchain technology? According to the available information, at least at the central bank level, blockchain technology will not be adopted. The main reason is that DC/EP is different from other digital currencies in terms of qualitative and distribution purposes. Bitcoin and other digital currencies use blockchain technology. One of the reasons is to ensure consensus under distributed accounting and thereby guarantee its own currency credit. The DC/EP is the legal currency, and the country itself has a credit guarantee. Naturally, there is no need to do anything more. At the same time, the current blockchain technology is not high in efficiency. In the case of Bitcoin, every transaction requires full network verification and requires a lot of time, which obviously cannot be applied to large-scale transactions.
Impact of DC/EP
What is the impact of DC/EP release?? I am afraid to look at four levels: user level, market level, macro level, and international level.
At the user level, individuals believe that the impact of DC/EP should not be too great. Although we pointed out earlier that DC/EP is very different in nature from Alipay and WeChat, in actual applications, the feelings of the two should be similar. Of course, it may also bring some differences in some details, such as overcoming the rejection of certain merchants, implementing offline payments, and better guaranteeing anonymity. But on the whole, these improvements should be marginal, and the actual impact will not be too obvious.
From a market perspective, the impact of DC/EP is more obvious.
On the one hand, existing third-party payment systems are likely to be affected. Nowadays people are so keen on using third-party payment, the big reason is that banknotes are inconvenient. And if the legal currency is also electronic, and it is convenient to use, then naturally someone will turn back to use legal tender. Of course, compared with DC/EP, the existing third-party payment itself has many advantages, such as it can provide users with a certain interest, and provide users with certain credit points, while DC/EP does not have these attributes. . The existence of similar advantages can help third-party payment platforms to withstand the impact of DC/EP to a certain extent, but in any case, the impact itself still exists and cannot be ignored.
On the other hand, DC/EP will also have a certain impact on commercial banks and the entire financial system. Although the overall operational framework of DC/EP is very similar to the current “central bank-commercial bank” system, the role of commercial banks does not change on the surface. However, with the operation of DC/EP, the central bank will be able to master more big data that was difficult to master, and its control over commercial banks will be greater than before. At the same time, although DC/EP is still central to distribution, its attributes determine its significant decentralization in circulation. This objectively may dilute the channel role of commercial banks and have a certain deconstruction effect on many existing businesses of commercial banks. At the same time, DC/EP will make central banks more capable of regulating the behavior of commercial banks and other financial institutions. Although DC/EP is anonymous in individual transactions, the various big data left by the transaction process allows the central bank to keep abreast of the various situations, so as to timely intervene and guide the business of commercial banks and financial institutions. For illegal activities such as money laundering, the central bank and the regulatory authorities can directly intervene and deal with it.
At a macro level, the application of DC/EP will help the central bank better formulate and implement monetary policy to counter economic uncertainty.
We often say that the central bank regulates the currency circulation in the economy through monetary policy. But in fact, the central bank has very few methods for regulating the currency, and its role is also very indirect. The central bank directly controls only the so-called “high-energy currency”, which is the M0 we mentioned earlier, plus the reserve of commercial banks placed in the central bank. But once the “high-energy currency” enters the market, how the bank and the financial system can create money through loans, the central bank cannot directly control it, but can only implement indirect adjustment by adjusting the benchmark interest rate and deposit reserve ratio. This means that the central bank’s monetary policy will be beyond the reach of what is happening in reality.
In recent years, with the development of finance and the rise of third-party payments, the “high-energy currency” that the central bank can directly control is becoming less and less in the entire monetary system. Cornell University professor Isavar Prasad (EswarPrasad) published a paper last year. The results of the paper show that since 2003, the above proportions have shown a downward trend in all countries: China has dropped by 5%, India has dropped by 7%, and the Eurozone has fallen by 3%. Although the phenomenon itself does not explain the problem, it at least to some extent illustrates the central bank’s decline in control over the entire money market.
For similar problems, many economists have long suggested that technical means should be used to innovate the central bank’s monetary policy instruments. For example, in 2007, Nobel Prize-winning economist Joseph Stiglitz (JosephStiglitz) once conceived an electronic currency system. Under this kind of electronic money system, the central bank can influence the lending behavior of commercial banks through a credit auction mechanism, so as to better guide the issued currency to the real economy. In addition, with this electronic monetary system, the central bank can easily adjust the economy according to the actual economic situation and adopt a countercyclical monetary policy to ensure the effectiveness of monetary policy. As long as we simply compare the ideas of Stiglitz and the current DC/EP operating framework, we will find that there is a lot of fit between the two. In this sense, DC/EP will provide many new measures for the central bank’s monetary policy in the future to make monetary policy more precise.
It should be pointed out here that DC/EP not only makes the central bank’s monetary policy more precise and targeted, but its technical characteristics can also help the central bank solve many problems that were difficult to solve. For example, existing cash is based on a zero interest rate. Under some extreme economic conditions, the return on financial assets may fall below zero.People tend to trade assets for cash. At this point, it is difficult for the central bank to use the interest rate adjustment method to stimulate the economy. In the case of digital currency, this problem is easy to crack. The central bank can actually create a negative interest rate by charging a management fee to the digital currency account, without the need to adopt other means such as quantitative easing. Of course, this kind of policy is now only theoretical. In reality, we don’t see it very much, and we don’t want to see it.
The last is the level of international competition. We know that Facebook is now cooperating with a group of companies to try to implement the digital currency Libra. Although Libra is not officially owned by the United States, as Zuckerberg said at the congressional hearing, it will reflect the interests of the United States and will help expand the hegemony of the dollar. Under this circumstance, the emergence of DC/EP will help to counter the impact of other digital currencies such as Libra on China, and will create more favorable conditions for the internationalization of the renminbi.
Of course, the DC/EP application scenario is far more than the above. For example, in the field of poverty alleviation, its emergence will allow policy grants to bypass barriers and send them directly to those in need. However, due to space limitations, we will not introduce these uses one by one here.
DC/EP is coming, what exactly is it like? Let us wait and hope together!
This article is from WeChat public account:Economic Observer Observer (ID: eeoobserver), author: Chen Yongwei