[IN-DEPTH] China is actively experimenting and studying the implementation for a digital currrency

Opinion: All Chinese Blockchain Projects Can Moon This Year 

China may be the first with an official digital currency with integrated smart contracts! China is actively experimenting and studying the implementation for a digital currrency backed by their central bank, The People's Bank of China The goal to replace M0 rather than M1 & M2.

The advantages of a digital currency over cash are huge. So, it is not if, but when governments introduce their own cryptocurrency. 

If China will be the first big economy that introduces their own currency, they will open the gates to the world as the most innovative country in blockchain technology. This will be huge for all Chinese Blockchain projects. 

You can read the full, extended version written by First Financials App, below.  

2018-01-25 18:57:13
Source: First Financials APP

In recent years, central banks and monetary authorities in major countries and regions are studying the issue of digital currencies in the central bank. The Singapore Central Bank and the Swedish Central Bank have already begun relevant experiments. The People's Bank of China is also organizing an active exploration and study. This article puts forward some thoughts on the issue of digital currency in China's central bank.

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In recent years, central banks and monetary authorities in major countries and regions are studying the issue of digital currencies in the central bank. The Singapore Central Bank and the Swedish Central Bank have already begun relevant experiments. The People's Bank of China is also organizing an active exploration and study. This article puts forward some thoughts on the issue of digital currency in China's central bank.


Fan Yifei, vice president of People's Bank of China

First, China's central bank digital currency should be used double delivery system

The issuance of central bank digital currencies by big powers is a complicated systematic project. China has a vast territory and a large population. The economic development, resource endowments and population education level in various regions are quite different. During the process of designing, releasing (distributing) and circulating digital currencies of the central bank, we must fully consider the diversity of system and system design And complexity. For example, you need to consider the use of remote areas with insufficient network coverage. If one-tier delivery, will face the enormous test of these factors. To enhance the convenience and service availability of the central bank's digital currency and enhance the public's willingness to use the public, two-tier delivery can be considered to deal with the above difficulties.

The "double-layer delivery" is conducive to making full use of the existing resources, talents and technologies of commercial organizations and other advantages. Through market-driven promotion of innovation and competition, priority is given to selection. Commercial banks and other institutions of IT infrastructure applications and service system has been more mature, the system has a strong ability to deal with the application of financial technology has accumulated some experience, talent reserve is more adequate. Therefore, in addition to the existing infrastructure, human resources and mature applications and service systems of commercial banks, it is a great waste of social resources to reinvent the wheel and duplicate construction. Under the premise of safety and reliability, central banks and commercial banks and other institutions can work closely with each other without presetting technical routes, fully mobilizing market forces, and optimizing systems through competition so as to jointly develop and operate together. This will not only help integrate resources, exert joint efforts but also promote innovation. Moreover, the public is accustomed to dealing with financial business through commercial banks such as banks. Double-tier delivery also helps to raise the public's acceptance of the central bank's digital currency.

"Double delivery" helps diversify risk. In the past, the central bank has accumulated rich experience in the development of the payment and settlement system of inter-bank payment. However, the inter-bank clearing and payment system is a direct service to financial institutions. The central bank's digital currency directly serves the public and involves millions of households. If we only rely on the central bank's own R & D capabilities to support such a large system, it is not easy to meet the safety, efficiency and stability goals, but also to meet the needs of the user experience. At the same time, the central bank is also subject to the objective constraints of budget, resources, personnel and technology. Through the two-tier design, the central bank can avoid over-concentration of risks.

"Double delivery" to avoid "financial disintermediation." Under the "single-tier delivery", the central bank will directly launch digital currency to the public, and the central bank's digital currency and the commercial bank deposit currency will form a competitive relationship. Obviously, the PBOC's digital currency endorsed by the central bank possesses a higher credit rating than the deposit currency of commercial banks, which will squeeze the deposit of commercial banks. This may result in "deposit-moving" and thus affect the ability of commercial banks to issue loans. In addition, the reduction of deposit capacity by commercial banks will increase their reliance on the interbank market, raise fund prices, increase the cost of social financing, damage the real economy and trigger "financial disintermediation." To maintain its lending power and financial stability, the central bank will have to subsidize commercial banks. In extreme cases, it will also subvert the existing financial system and emerge a "grand unification" situation where the central bank wraps up all over the world.

To sum up, the "double-tier delivery mode of the" commercial banks in the central bank-agency operation "is an option that is suitable both for China's national conditions and for making full use of existing resources and arousing the enthusiasm of commercial banks. First of all, do not change the debt of the currency in circulation. In order to ensure that the currency is not overdue, the agency should pay 100% of the reserve to the central bank. Therefore, the digital currencies of the central bank held by the public are still the liabilities of the central bank, guaranteed by the central bank credit, and have unlimited compensation. Second, without changing the existing currency delivery system and binary account structure, it will not constitute competition for the deposit currency of commercial banks, will not increase the dependence of commercial banks on the interbank borrowing market, will not affect the lending capacity of commercial banks, and will not Will lead to "financial disintermediation" phenomenon. Thirdly, since it does not affect the existing transmission mechanism of monetary policy, it will not strengthen the pro-cyclical effect in a stressful environment and therefore will not have a negative impact on the current mode of operation of the real economy. Finally, the model is more conducive to play the advantages of the central bank's digital currency, save costs, improve currency circulation, improve payment convenience and security. In addition, having the credit advantage endorsed by the central bank will help curb public demand for privately-encrypted digital currencies and consolidate my monetary sovereignty.

Second, under the arrangement of double-tier delivery system, China's central bank's digital currencies should be put into loosely coupled accounts and adhere to the centralized management mode

In order to maintain the central bank's digital currency properties and achieve the goal of monetary policy and macro-prudential management, China's central bank digital currency two-tier system should be different from the decentralization of various tokens distribution model. First, because the central bank's digital currency remains the central bank's debt to the public, its debt-to-liability relationship has not changed with the currency pattern. Therefore, the central bank must still guarantee its central position in the delivery process. Second, there is a need to ensure and strengthen the central bank's macro-prudential and monetary policy regulatory functions. Third, we will not change the binary account system and maintain the original mode of conducting monetary policy. Fourthly, in order to avoid over-issuing currencies by agencies, agencies need to have arrangements in place to enable the central bank to track and monitor digital money launches.

Therefore, the central bank's digital currency should adhere to the centralized delivery model. However, the centralized delivery model described here is different from traditional electronic payment tools. The transfer of funds for electronic payment instruments must be done through an account, using a tightly coupled account. Central bank digital currency should be based on loosely coupled accounts in the form of transactions so that the degree of dependence on the account greatly reduced. In this way, it can be as liquid as cash and can be controlled anonymously. Central bank holders of digital currency can be directly applied to various scenarios, is conducive to RMB circulation and internationalization. In addition, personal information and privacy are disclosed if no third party is anonymous, but crimes such as tax evasion, terrorist financing and money-laundering are encouraged if perpetual third-party anonymity is allowed. Therefore, in order to strike a balance, we must achieve controllable anonymity, disclosing the transaction data only to the third party of the central bank. Under a loosely coupled account system, agency dealerships may be required to asynchronously transmit transaction data to central banks on a daily basis. This will not only reduce the system burden on commercial organizations, but also allow central banks to have the necessary data to ensure regulatory goals such as prudent management and anti-money laundering .

Third, China's current central bank digital currency design should focus on M0 instead of M1, M2 alternative

At this stage, M1 and M2 are based on commercial bank accounts and have been electronically or digitized without the need to digitize again in digital currencies. Inter-bank payment and settlement systems (such as large and small amount payment systems and online payment cross-border clearing systems) that support the circulation of M1 and M2, various online payment methods of commercial banks' intra-bank systems and non-bank payment institutions are operating normally and are constantly improving Upgrade, increasingly efficient, able to meet the needs of China's economic development. Replacing M1 and M2 with the central bank's digital currency will neither help increase payment efficiency, but will also result in a huge waste of existing systems and resources. In contrast, the existing banknotes and coins are more expensive to issue, print, return to store and store, and have many levels of distribution systems, which are inconvenient to carry, easily forged, anonymously uncontrollable, and are used illegally for money laundering The risk of criminal activities, digital realization of the growing necessity. In addition, non-cash payment instruments, such as traditional bank cards and internet payment, are based on account-tight coupling model and can not fully meet the public demand for easy-to-use and anonymous payment services. It is impossible to completely replace M0, especially in account services and People in the area with poor coverage of communication networks still have a high dependence on cash. The central bank's digital currency holds the attributes and key features of cash to meet the need for portability and anonymity and will be the best bet for replacing cash.

Because the central bank's digital currency is a substitute for M0, it should not pay interest on it. This will not trigger "financial disintermediation," it will not lead to inflation expectations. Correspondingly, it will not have a big impact on the existing monetary system, the financial system and the real economy.

By the same token, since the central bank's digital currency is M0 alternative, all the existing provisions on cash management and anti-money laundering and anti-terrorist financing should also be observed. To tie in with related activities such as anti-money laundering, relevant agencies may be required to report to the central bank on large and suspicious transactions of the central bank's digital currency. Meanwhile, in order to guide the central bank's digital currency to be used in small retail business scenarios, it will not crowding out deposits and avoiding the pro-cyclical effect under arbitrage and stress conditions, and may set daily and annual cumulative transaction quotas and stipulate large amount of appointments exchange. If necessary, consideration may also be given to grading charges for the exchange of digital currencies of the central bank, no charge for the exchange of small amounts and low frequencies, and the higher fees for large amounts, high-frequency exchanges and transactions to increase conversion costs and institutional friction. In the case of interest rates below zero, this arrangement can also create conditions for the central bank to implement negative interest rate policy.

Fourth, the central bank should be cautious of loading smart contracts in digital currencies

According to the definition given by Nick Szabo, a smart contract is a set of promises that are defined numerically and include agreements on which contractual parties can enforce those promises. Smart contracts are written in computer-readable code. Once the trigger condition is reached, it is automatically executed by the computer. Can load time, credit and other preconditions, can also be applied to tax, anti-terrorist financing and other scenarios.

However, as mentioned earlier, the central bank's digital currency is an alternative to M0, with unlimited compensation, that assumes the functions of value measure, means of circulation, means of payment and value storage. The original cash did not carry any other social and administrative functions. The People's Republic of China Regulations on RMB Management prohibit the deliberate destruction of the renminbi. Therefore, adding extra social or administrative functions to the cash actually derails the renminbi.

In order to maintain the legal status of unlimited legal repudiation, the central bank's digital currency should not undertake other social and administrative functions besides the four functions that money should have. Loaded with the exception of the legal currency itself, the function of the smart contract will affect its legal functions, or even fade into valuable documents, to reduce the free use of digital currency in China's central bank will also adversely affect the internationalization of the RMB. But also reduce the speed of currency circulation, affect the conduction of monetary policy and the central bank to perform macro-prudential functions. At the same time, it may also infringe on the privacy of citizens and not conducive to the protection of individual rights and interests.

(The writer is vice president of the People's Bank of China) 

John Daluso