Editor’s note: The progress of the digital RMB pilot program is highly anticipated. It has been six years since the People’s Bank of China established a dedicated research team, and the digital renminbi has first revealed itself. It is currently being tested in Shenzhen, Suzhou, Xiongan, Chengdu and other places. The digital renminbi red envelope tests recently launched in Shenzhen and Suzhou have allowed tens of thousands of people to participate, and the digital renminbi footsteps are getting closer. There is no timetable for the official issuance of the digital renminbi, but before it actually comes, we need to understand or even read it through.
From physical currency to metal currency, from paper currency to credit currency, the evolution of currency has spanned a long period of time, and its form has continued to change, but its original intention of improving operational efficiency and serving the economy and society has not changed.
Nowadays, under the wave of digitization, currency is also advancing with the times, and “digital currency” has emerged.
In 2009, Bitcoin, which has the characteristics of “decentralization, openness, transparency, traceability, and difficulty in tampering”, landed. The concept of “digital currency” took advantage of the trend, and a variety of “digital currency” layers such as Ethereum and Ripple Seeing overlaps, central bank digital currencies have also become the focus of attention of various countries in recent years.
Fan Yifei, the deputy governor of the central bank, pointed out in an article that in recent years, crypto assets such as Bitcoin and global stablecoins have tried to perform their currency functions, and a new round of private currency, foreign currency and legal tender has begun. In response to this situation, it is necessary for the country to use new technology to digitize M0 (Editor’s Note: Cash in Circulation) to provide a universal base currency for the development of the digital economy.
According to the classification of the former Vice President of Bank of China Wang Yongli in the article “The Essence and Context of “Digital Currency””, the current “digital currency” mainly includes four categories: 1. Decentralized “digital encrypted currency” that is endogenous on the network platform; 2 . Equivalently linked to a single legal currency, using the linked currency as a reserve exchange, mainly used in the “digital stable currency” of the network system; 3. Structurally linked to a basket of legal currencies, it needs to be exchanged with the linked currency as a reserve, The super-sovereign “digital stable currency” (such as Libra originally envisaged) mainly used in specific network systems; 4. The “central bank digital currency” (CBDC) of legal digital monetization.
Behind the emergence of the digital renminbi, what are these “digital currencies” that have emerged one after another?
Digital cryptocurrency: take Bitcoin as an example
Digital cryptocurrency is mainly represented by “Bitcoin”, which has derived thousands of types such as Ethereum and Litecoin.
On January 3, 2009, the founder of Bitcoin, alias Satoshi Nakamoto, established the Bitcoin genesis block, and Bitcoin was born.
Bitcoin is an encrypted currency based on cryptography and a decentralized transmission mode based on blockchain technology. According to Satoshi Nakamoto’s design, Bitcoin has a total upper limit of 21 million, halving the output every four years, and is decentralized, open and transparent, traceable, and difficult to tamper with.
The production process is called “mining”. Anyone in the Bitcoin network can fight for the right to bookkeeping. Whoever solves a mathematical problem related to bookkeeping will book it first, and get a certain amount of Bitcoin as a reward.
“The purpose of Bitcoin design is to provide a possibility for the future economic system, a completely transparent new currency mechanism that is dead by data agreement.” Chen Weixing, founder of Pancheng Capital and Kuaidi Taxi, once accepted the surging Said in a news interview.
Chen Weixing believes that the central bank’s monetary system and deposit insurance can solve the risk of bank runs, but the side effect is that the government will be forced to print more money and borrow more debts. This vicious circle creates a new debt crisis. To print money.
Followers of Bitcoin believe that it can solve this problem and even regard it as “digital gold”. They believe that Bitcoin may gradually produce a new banking system and credit system.
However, Wang Yongli told The Paper that although the mechanism of gold is highly imitated, Bitcoin is not real gold at all, but can only be digital “virtual gold” or “virtual assets.”
Although Bitcoin’s payment and transaction functions have been controversial, it has still entered the public eye as an investment product. Or affected by the entry of institutional funds, in late October, the price of Bitcoin skyrocketed, breaking through several price barriers from $11,000 in just one month, breaking through the highest price in history on November 30, reaching nearly $20,000. Mark. On the evening of December 16th, Bitcoin finally broke through $20,000. Since then, it has continuously refreshed its historical records. Within 24 hours, it has risen by more than $3,000, breaking through the $23,000 mark.
A “digital stable currency” anchored to a single legal currency or digital asset
Digital stable currency, because it anchors legal currency or certain assets, compared with pure virtual currencies such as Bitcoin, the price is relatively stable. Digital stable coins inherit the characteristics of traditional encrypted digital currencies and control price fluctuations through model settings.
According to the types of collateral, digital stablecoins can be divided into three main types, namely stablecoins secured by legal currency, stablecoins secured by cryptocurrencies, and stablecoins based on algorithms.
Among them, the representative of a stable currency secured by legal tender is USDT (TEdacoin), which is also the world’s first stable currency. It was issued by the US Tether company in 2014 and is secured by US dollars, claiming to be linked to the US dollar 1:1.
Large institutions are also trying to implement stablecoins backed by fiat currencies, such as JPMorgan coins.
On February 14, 2019, the world-renowned financial group JPMorgan Chase released the cryptocurrency JPM Coin on its private chain platform Quorum, which is intended to be used to improve the service efficiency of wholesale payment services.
Different from traditional stablecoins for all individual and institutional customers, only institutional customers of JPMorgan Chase can use the digital currency for transactions, and the objects of use are B-side customers such as banks, brokers, dealers, and companies.
“Super-sovereign” digital currency linked to a basket of fiat currencies
According to the amount of collateral, the above-mentioned stablecoins with legal tender as collateral are all digital stablecoins anchored to a single currency. There is also a digital stablecoin that anchors a package of legal tenders, also known as a super-sovereign country. Currency, such as Libra, is now renamed Diem.
Libra is a borderless digital currency planned by the management association led by the global social network giant Facebook.
In June 2019, Libra released version 1.0 of the white paper for the first time. It plans to be proportionally linked to the US dollar, euro, Japanese yen, British pound, and Singapore dollar. Due to regulatory pressure, Libra made major changes in the 2.0 version of the white paper released in April 2020, shifting its focus to anchoring a single currency.
Nonetheless, according to a Reuters report in October, the Group of Seven (G7) announced its opposition to Facebook’s issuance of Libra stablecoins before they are properly regulated. The G7 believes that the global stablecoin project should not start operation until the relevant laws, regulations and supervision requirements are fully met through appropriate design and compliance with applicable standards.
On November 27, according to the British media Financial Times, three people involved in the Libra plan revealed that Libra is going to be launched as early as January 2021. Initially, it will only issue a single currency anchored to the US dollar, anchor other currencies, and anchor a package. The currency of Libra will be launched later.
And just 4 days later, on December 1, the Facebook official website updated information that Libra had been renamed Diem. Reuters reported in this report that the change is to emphasize the independence of the project, thereby obtaining regulatory approval.
Reuters quoted Diem Association CEO Stuart Levey as saying that the name was changed to emphasize a simpler and more complete structure. Diem means “day” in Latin, and the current goal is to launch a digital currency anchored only to the US dollar.
Central Bank Digital Currency and Digital RMB
In May 2020, the Governor of the Central Bank Yi Gang stated in an interview that the current digital economy is an increasingly important driving force for global economic growth. The development and application of legal digital currency is conducive to efficiently satisfy the public’s demand for legal currency under the conditions of the digital economy, improve the convenience, security and anti-counterfeiting level of retail payments, and can help accelerate the development of my country’s digital economy.
Mu Changchun, director of the Central Bank Digital Currency Research Institute, also mentioned in an open class that the reasons for China’s launch of central bank digital currency include: First, in order to protect its monetary sovereignty and legal currency status, it needs to plan ahead. Secondly, the central bank digital currency can not only maintain the attributes and main value characteristics of cash, but also meet the requirements of portability and anonymity.
In China, the central bank digital currency (or digital renminbi) is also known as DC/EP (Digital Currency Electronic Payment), which is a digital currency and electronic payment tool.
“The central bank’s digital currency focuses on replacing M0 (i.e. banknotes and coins), and maintains the attributes and main characteristics of cash, and meets the needs of portability and anonymity. It will be the best tool to replace cash.” Deputy Bank of China Long Fan Yifei once said.
Former Bank of China President Li Lihui summarized the potential benefits of legal digital currency into four aspects at the Financial Development Summit Forum held by The Paper on November 18: First, it can save costs; second, it can strengthen the public nature of the payment system. Third, it can ensure the reliability of financial transactions. Fourth, it can accurately regulate the supply of money and strengthen the control of the money market.
On November 27th, Zhou Xiaochuan, President of the China Institute of Finance and former Governor of the People’s Bank of China, pointed out at the forum that DC/EP is a two-tier R&D and pilot project plan, not a payment product. The DC/EP project plan may include several payment products that can be tried and promoted. These products were finally named e-CNY, or digital RMB.
So, what is a digital RMB?
Mu Changchun gave the authoritative definition of digital renminbi at the 2nd Bund Financial Summit: Digital renminbi is a digital form of legal tender issued by the People’s Bank of China. It is operated by designated operating agencies and exchanged with the public. It is based on a broad account system. It supports loose coupling of bank accounts, which is equivalent to banknotes and coins, has value characteristics and legal compensation, and supports controllable anonymity.
Similarities and differences between digital renminbi, cash and other virtual currencies
Digital renminbi and cash are only the difference in currency form, and digital renminbi is digital. In addition, cash is completely anonymous, while digital RMB is controllable anonymity, that is, it has a certain degree of anonymity.
Compared with Bitcoin, the biggest difference between the digital renminbi and Bitcoin is that the digital renminbi is a legal digital currency, endorsed by national credit, and has legal compensation. Secondly, digital renminbi does not have the characteristics of Bitcoin decentralization and blockchain technology.
Wang Yongli pointed out that the central bank’s digital currency cannot be decentralized. In terms of technology, he believes that digital RMB does not necessarily have to use blockchain.
Zou Chuanwei, chief economist of Wanxiang Blockchain, also believes that the DC/EP technology may partially borrow the characteristics of the blockchain, but it should not be used in the core system. There are some bottlenecks in the central bank’s digital currency blockchain in retail scenarios, including performance bottlenecks and security bottlenecks.
For some technical features of blockchain and distributed ledger technology (DLT), such as decentralization, Zhou Xiaochuan believes that it is necessary to consider whether decentralization is a feature required for the modernization of the payment system. “In fact, it is not necessarily possible, and it cannot be done. Fortunately, it may bring a lot of drawbacks.” Regarding the immutability of blockchain, Zhou Xiaochuan believes that the probability of tampering with existing systems, especially account systems, is extremely low. Moreover, it is also necessary to consider how to actively modify the transaction when errors occur.
“Blockchain and DLT have always been one of the solutions in the central bank’s digital currency system, but there are still technical problems to be solved, especially the urgent need to improve payment processing capabilities. From the perspective of retail system applications, this technology is temporarily unable to Occupy the mainstream and still need to be further developed and improved.” Zhou Xiaochuan said.
Compared with stablecoins such as Libra, the central bank’s digital currency also has a legal compensation difference.
“The central bank’s digital currency and Libra are essentially credit currencies issued based on Tokens.” said Hao Yi, a postdoctoral fellow at Renmin University of China. The main difference between Libra and the central bank’s digital currency lies in its different credit base. Libra mainly relies on the commercial credit of Facebook and its partners, as well as a basket of mortgaged currency assets. The central bank digital currency is based on a country’s national credit.
Sun Yang, a researcher at Suning Financial Research Institute, also believes that DCEP is a sovereign digital legal currency with national credit endorsement, which is more reliable than Libra, is more contextualized and closer to people’s livelihood, and the participating institutions also have strong execution power.
In addition, Hao Yi also pointed out two differences: the two sides have different regulatory systems. The central bank digital currency is a part of the legal currency. Currency issuance and management have a mature legal system, but the management of Libra does not yet have a complete legal support; the scope of application is different, the central bank digital currency is mainly limited to one country; Libra is for global payments. Its scope of application may exceed most of the world’s legal currency.
Who will kill you?
In the future, in the currency field, what kind of pattern will “digital currency” form? Unification? Or a hundred flowers blossom?
Li Lihui believes that virtual currency has its soil for survival: one is in the public domain blockchain community, and virtual currency is its pricing tool. The second is that virtual currency can be anonymous and cross-border. It can be a tool for the illegal flow of funds and a tool for transactions. The global market needs trustworthy and controlled tools.
Although Libra’s original intention was to supplement fiat currencies, not to compete, many central banks regarded Libra as an intruder.
According to a Reuters report on July 2, the current sharp decline in cash usage and the possibility of Facebook’s 2.5 billion users adopting its digital currency Libra has prompted central banks to start studying how to issue their own digital currencies.
However, Wang Yongli believes that even if Libra is linked to a single currency, there are still big doubts about its actual use space and value, and it is impossible to subvert and replace the legal tender system.
He wrote that the coexistence of multiple “digital currencies” precisely shows that people lack sufficient understanding of the nature and development logic of “currency”. From a strict “currency” perspective, “digital currency” can ultimately only be the digitization of legal tender, and the fundamental development can only be “central bank digital currency.”
With the exception of Libra, he believes that “digital coins” generated in networks such as Bitcoin cannot become real currency in circulation. Compared with gold, highly closed: the total amount and the new supply per unit time are difficult to adapt to the growth of social wealth; there is an expectation of appreciation, which is conducive to speculation, but it violates the law of currency development and operation logic and can only be an investment Digital assets may become “community coins” or “commercial coins” used by specific online communities; as “community coins”, they still have to accept financial supervision.
Li Lihui also pointed out that virtual currency has two major flaws: one is technical flaws. The decentralized blockchain architecture requires ultra-large-scale data synchronization, which has relatively low benefits and slow calculation ideas. Bitcoin cannot solve the problem of transmission. Second, statistics are too heavy to support entities. There are great risks in investment or speculation, and great caution is required.
“Protecting the interests of investors and preventing systemic financial risks should be the bottom line of financial supervision in mature countries. my country prohibits illegal securities transactions and illegal fund-raising. From the current situation, it is still difficult for virtual currencies to enter popular transactions and payments. Scene.” Li Lihui said.
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