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The understanding of DC / EP should be more from the perspective of currency competition between private digital dollars and public digital RMB. There is a recent term called “Currency Cold War”, this word is from the new book “Currency Cold War” by David Birch, a thought leader in the field of digital identity and digital currency.

At this stage, global political, economic and technological changes have promoted a new competition between currencies-this competition mainly comes from the private digital dollar Libra and the public digital RMB / EP.

Today ’s topic will not involve Libra too much, but for a more complete understanding of the topic of digital currency, I suggest readers to pay attention to my recent article “DC / EP vs Libra, the global digital currency competition officially kicks off.”

The relationship between DC / EP and traditional bank deposits

We can understand DC / EP as the digitization and tokenization of cash, and the positioning is the same as the banknotes issued by the central bank. DC / EP is the digitalization of traditional cash. They all represent the liabilities of the central bank. Bank deposits are the liabilities of commercial banks. DC / EP or cash has a higher reputation than commercial banks’ deposits.

Traditionally, the process of going to the bank to exchange bank deposits for cash is called cash withdrawal, but if a large number of depositors flock to the bank to withdraw cash, this process is called “run” and the bank will face tremendous pressure. When cash was replaced with DC / EP, this “run” still existed and became faster and more destructive.

DC / EP is essentially the digitization and tokenization of cash, and bank deposits are themselves digital currencies. So from this perspective, there is a common pattern between DC / EP and bank deposits, but there are still some differences in digitalization: digital bank deposits are tied to bank accounts; digital DC / EP inherits cash The characteristic of is not related to the bank account, only related to an address on the blockchain.

But because DC / EP and bank deposits are all digital, from this perspective, there is a natural alternative.

If DC / EP is going to replace bank deposits, it will affect the business model of commercial banks. In order to protect the commercial model of commercial banks from damage, the People’s Bank of China has imposed some restrictions on the design of DC / EP to limit its substitution effect on bank deposits.

First, the People’s Bank of China stipulates that DC / EP only replaces cash, not bank deposits. DC / EP is currently only used in retail scenarios.

Second, limit the amount of DC / EP wallet accounts with different authentication levels.

In theory, you do n’t need a bank account to hold DC / EP, but you generally need to use a “wallet” to help users manage their private keys for DC / EP transfers and payments. This is equivalent to a user authentication process without a traditional bank.

The central bank will classify the DC / EP wallet account and give different transaction quotas based on the holder ’s identity confirmation level. For example, if a DC / EP wallet account has not undergone any identity confirmation, the transaction amount that can be opened to you at this time is very small; when you submit a certain identity certificate, you can increase a certain amount; when you complete a higher level of identity Authentication (such as face-to-face authentication at a bank counter) may open a higher quota.

Through this upgraded DC / EP wallet account setting, the central bank gives different levels of wallet account limits for different amounts. This can limit the usage scenarios of DC / EP. In short, it is to restrict DC / EP from being used for wholesale payment or inter-institutional payment to avoid impacting traditional bank deposits; this setting will ease the bank ’s deposit to DC / EP “Running” is also useful.

Summary: In the short term, DC / EP’s position is only to replace cash, not bank deposits. In the long run, DC / EP will have a certain role in replacing bank deposits; DC / EP is the liability of the central bank, and bank deposits are the liabilities of commercial banks. The former is more creditworthy than the latter, so you are more willing to hold There are central bank liabilities, especially when interest rates are low and financial crises are coming.

Can they replace the relationship between DC / EP and Alipay / Tencent Pay?

From a payment perspective:

The current goal of DC / EP is to replace cash. Alipay / Tencent payment is traditionally based on bank account payments, and does not cover cash payments. So from this perspective, DC / EP will not impact Alipay and Tencent Pay.

From the perspective of payment tools and wallets:

Alipay / Tencent payment is a payment tool, or wallet, DC / EP is a currency tool. Currency tools can be mounted in payment tools, and Alipay / Tencent Payment can support mounting DC / EP like bank cards.

You can recall that you can set the priority of using multiple bank cards in Alipay, and you can also set up the use of Yubao accountPriority between bank accounts. But after you set it up, there will be no experience of which bank card is used preferentially or the balance of the balance of balance treasure in the payment process. Alipay as a wallet-type payment tool has shielded these differences.

If DC / EP is regarded as a currency tool, it is equivalent to bank deposits. The use of DC / EP theoretically requires a wallet, which corresponds to the Alipay / Tencent payment function.

In the future, we can imagine that we can mount DC / EP as a new currency tool in Alipay / Tencent payment. The experience is exactly the same afterwards. From this perspective, DC / EP has no impact on Alipay.

From the perspective of using Alipay and using the balance of Yubao to pay:

Yuebao’s balance is actually a currency tool. We use Yubao’s balance for payment. In this scenario, we describe Alipay. After the balance between the balance balance and the payment function of Alipay is connected, the balance balance is regarded as the deposit currency. From this scenario, many people regard Alipay as a currency tool. In fact, Alipay uses the balance of Yubao as a currency tool. The balance of Yubao and bank deposits are equivalent M2 currency instruments.

The current positioning of DC / EP does not replace bank deposits, and the central bank has done many designs for this purpose. But in the medium and long term, DC / EP has a certain role in replacing bank deposits. Therefore, DC / EP will still replace the M2 level currency instrument represented by Alipay or Yubao balance.

Will the replacement of bank deposits by DC / EP hurt the business model of commercial banks?

First understand how commercial banks create bank deposits.

Commercial banks essentially create bank deposits through the act of lending. Squeezing and reducing the space for deposit money of commercial banks means reducing the space for commercial banks to lend. The core business model of a commercial bank is lending. When it affects the lending capacity of a commercial bank, it naturally affects the business model of the commercial bank.

The central bank digital currency represented by DC / EP, we call it the retail central bank digital currency. In fact, the biggest resistance worldwide is commercial banks. Among the major economies in the world, only China has really promoted the retail central bank’s digital currency, and none else. Because China is a publicly owned economy, the central bank is less lobbied by commercial banks.

Why should China develop central bank digital currency?

The most fundamental reason is to enhance the strength of RMB internationalization.

1. DCEP will comprehensively upgrade the central bankManage the efficiency and capabilities of the monetary system to help the central bank achieve better financial stability. Including helping the central bank to better manage the creation and supply of currency; making the transmission mechanism of monetary policy more efficient; comprehensively helping the central bank to seize more rights to create currency from commercial banks; enhancing the central bank ’s monitoring of commercial bank behavior Ability to manage and adjust; improve the efficiency of central bank in cross-border payment, cross-institution payment, clearing and settlement.

2. The tokenization of the central bank enables the currency to exhibit some characteristics and advantages, which helps to enhance the attractiveness of DC / EP in international scenarios:

1) It is easy to obtain and does not need to be tied to a bank account, so it is easier to obtain and use RMB overseas;

2) Strong penetrating power, tokenized currency is more likely to penetrate the border, including geographic, judicial and currency boundaries, but this is a double-edged sword, other currencies have the same penetrating power after tokenization ;

3) Elimination of intermediaries, the value transfer on the blockchain is carried out point-to-point, eliminating the need for bank intermediaries, so in scenarios such as cross-border payment, the cost may be lower, the speed is faster, and the user experience is better;

4) DC / EP is not only a currency tool, but also an infrastructure for payment and clearing. It can protect China from the use of SWIFT by the United States to monitor and control China ’s dollar economic activities.

DCEP promotion path and subsequent impact

1. The initial promotion path will start from the domestic closed and simple scenes, mainly retail scenes. All commercial banks related to DC / EP are required to update and upgrade their payment and clearing infrastructure.

2. DC / EP-related wallet services, including banks, third-party payment and Internet companies, they can all be wallet service providers.

3. DC / EP is a digital / programmable RMB, and it is possible to create new business models. But in the short term, the central bank’s support for DC / EP programmability is primarily aimed at regulatory functions. Financial business innovation may be restricted by the central bank in the short term.

4. The most important battlefield in the future is abroad. Outside the country, I personally think that the cooperation with DC / EP will definitely include private digital RMB, which means that a complete digital financial infrastructure must be established.

5. Within the territory, DC / EP will acquire all users; overseas, the competition for the user base is mainly through applications that go overseas to China, including mobile apps or toB applications.

Q & A session:

1. How is the central bank digital currency issued to economic entities?

The issuance method is the 1: 1 exchange of bank reserves. It is exactly the same as the way cash is issued, and has nothing to do with finances.

2.Can digital currency be converted into bank deposits?

Yes, like traditional cash can be exchanged with banks. However, the exchange process of DC / EP and bank deposits should be restricted: 1. No interest accrued on DC / EP 2. DC / EP wallet account grading

3. How do individuals or enterprises obtain DCEP permissions now?

The central bank maintains the existing “secondary release” mechanism for DC / EP, that is, the central bank exchanges DC / EP to commercial banks, and commercial banks are responsible for distribution to the public.

The most direct way is for individuals or businesses to have bank deposits and convert bank deposits into DC / EP.

4. Does DCEP open API interface?

This involves the programmability of DC / EP. Will be open, but the central bank of China is more conservative. In the short term, it will mainly focus on the supervision of smart contracts. It is optimistic that the medium and long term will be open to a wider range of uses.

5. At present, the IT system of commercial banks is already at a high level. Is it necessary to upgrade DCEP on this basis to upgrade IT systems on a large scale?

The IT infrastructure of DC / EP is not significantly different from the existing IT infrastructure of existing banks. The difference between them will be more on the level of system software and application software related to DCEP, on the one hand, if hardware is involved, it will be related to the security of DC / EP, that is, encryption and decryption algorithms. The hardware does not involve large machines.

6. What is the relationship between DCEP and blockchain? How safe is DCEP?

The technology of DC / EP is a fusion of blockchain and traditional centralized technology. The function of DC / EP is divided into many parts. The traditional centralized part should not worry too much about security. For the part related to blockchain, the People’s Bank of China has invested heavily in the security related to the DC / EP blockchain. It has convened the most top expert teams and enterprises in the security field and blockchain field in China, and carried out very With adequate testing, the safety of this part should be guaranteed.

7. Who developed the DCEP wallet now?

The wallet is a tool for end users. I guess the central bank will not directly participate in the development. The first batch of banks (workers, peasants, and construction companies), Ant Financial, Tencent and other institutions that will participate in the DC / EP test will develop wallets.

8. Is DCEP issued by the central bank or major commercial banks?

The central bank adopts a two-layer operating structure, that is, the central bank first exchanges DC / EP to commercial banks or other operating institutions, and then these institutions distribute it to the public. The two-tier operating system will not change the existing currency distribution system and binary account structure.

9. Is there a timetable for DCEP issuing central bank?

The main purpose of DCEP is to promote RMB internationalization and enhance RMB externallyInternational strength, internally resist the competition of foreign digital currency Libra against us.

Starting in mid-April 2020, DC / EP followed the principles of “first domestic and then overseas”, “simple closed scenario first and complex open scenario”, and “first retail payment scenario followed by large wholesale payment scenario”, etc., and took the lead in testing.

On the one hand, DC / EP, as a new form of central bank currency, needs more time to be fully tested to mitigate potential risks;

On the other hand, DC / EP shoulders the important task of preventing Libra from eroding RMB sovereignty in China. To do this, DC / EP must be officially launched before Libra.

According to this, the author is cautiously expecting the DC / EP launch date to be slightly earlier than Libra. Libra’s high probability will be officially launched in October 2020; therefore, the DC / EP high probability will accelerate the test rhythm after May 2020, and will be officially launched in some safer scenarios before October.

The current test plan is basically based on this goal. In the tests in Suzhou and Xiong’an, although the central bank said it was a closed system test, it later rumors, because there are 19 tests in the Xiong’an New District, including Starbucks retail payment companies are in it, it is impossible to be completely Closed, this test is for the purpose of going online.

10. How big is the impact of DCEP on commercial banks, and how much impact will the changes have on commercial bank models after the impact?

When we look at the impact of DC / EP on commercial banks, we need not be too pessimistic. The emergence of DC / EP is mainly to help the central bank to better manage the creation and supply of money, make the monetary policy transmission mechanism more effective, enhance the central bank’s ability to cope with business cycles, and will not fundamentally change the business business model.

Second, even in China, DC / EP replaces a part of bank deposits, we also need to consider possible incremental business. As DC / EP goes abroad and the internationalization of RMB advances, it will bring incremental business to commercial banks. In addition, the gradual opening based on the programmability of DC / EP currency will also create new business opportunities for commercial banks.