The "big time" of central bank digital currency: from RMB 1.0 to RMB 3.0

Original title: "the 'great era' of central bank digital currency: from RMB 1.0 to RMB 3.0"

Zero one finance and economics

On the evening of April 17, the digital currency research institute of the people's bank of China (pboc) issued the latest response to the pboc's private test of digital currency. The digital currency research institute of the people's bank of China (pboc) said that the current DC/EP information is the test content in the technology research and development process, which does not mean that the digital RMB is officially issued. The current closed test of digital RMB will not affect the commercial operation of listed institutions, nor will it affect the RMB issuance and circulation system, financial market and social economy outside the test environment.

A growing body of information suggests that the central bank is expanding the application of the test to "rehearse" for a formal launch. Fan yifei, deputy governor of the people's bank of China, said the central bank's positioning of digital currency is to partially replace M0, or the digital replacement of RMB notes.

Since its birth in 1948, the development form of RMB can be divided into three stages: RMB 1.0 refers to the currency as the main form of the RMB, which has not yet come to an end. The renminbi 2.0 era is marked by the yuan's move to electronization, in which cash and deposits in the banking and other financial systems have long been digitized. RMB 3.0 refers to the digitization of RMB, that is, the digitization of Chinese central bank currency.

So how do we explain RMB 3.0?

Note: this report is excerpted from "RMB 3.0: operational framework and technical analysis of digital currency of the people's bank of China" and is published on 2019.10.

I. digital currency, electronic currency, cryptocurrency and central bank digital currency

The form of money is constantly evolving.

For most of the time in history, the evolution of monetary form was relatively slow, but in recent years, new monetary concepts and monetary forms have emerged continuously. In the more than 10 years since satoshi nakamoto created bitcoin in 2008, thousands of cryptographic digital assets have sprung up on the market. At the same time, the development of Internet technology makes electronic money, virtual money and other new types of money gradually into people's vision. Recently, the central bank's digital currency concept has also become the focus of the market thanks to the speech by mu changchun, former deputy director of the payment and settlement department of the central bank, and the launch of relevant courses on the App.

There are so many currency concepts that are misleading and even harder to understand. In order to make readers better understand the digital currency of the central bank, this paper hopes to further clarify many related concepts.

Digital Currency is a Currency that exists in Digital form and records value attribution and value transfer on the Internet. The imf calls this a "numerical representation of value". The concept of digital currency is very broad, covering almost all the types of electronic currencies, cryptocurrencies and central bank digital currencies that we know today.

Many people now confuse digital currencies with cryptocurrencies such as bitcoin. But in fact, the two are not simply equivalent. Conceptually, cryptocurrency is included in the concept of digital currency. Cryptocurrencies are issued currencies created based on blockchain cryptography. Bitcoin, ethereum, EOS and other currencies that are common in the coinage are all cryptocurrencies.

Equally confusing concepts include virtual and cryptocurrency. Before the emergence of cryptocurrency, with the rise of online communities, a class of virtual currencies, such as network points and game COINS, which are mainly used for the transaction of various virtual goods in the community, gradually emerged. The ECB defines a virtual currency as "digital currency that is used and accepted by members of a particular virtual community". In other words, virtual currency can be regarded as a kind of digital currency. However, in recent years, in the relevant documents of China's regulatory authorities, virtual currencies are generally referred to as unregulated cryptocurrencies represented by bitcoin, ethereum, etc.

Central bank digital currency is a digital form of legal currency, which is based on national credit and generally issued directly by the central bank of a country. In its report on central bank digital currency (CBDC), the bank for international settlements defines central bank digital currency as the digital form of central bank currency. It should be noted that the digital currency issued by the central bank is not necessarily based on the blockchain, but can also be issued based on the traditional centralized account system of the central bank.

The bis report distinguishes between three forms of CBDC, two based on tokens and one based on accounts. Of the two token based versions, one is designed to be widely used as a payment tool, as long as it is for retail transactions, but can also be used for a wider range of applications; The other is restricted access to digital settlement vouchers for targeted payments and clearing transactions in financial markets.

& have spent Figure 1: the monetary flower of BIS & NBSP; & have spent & have spent


Different from alipay, WeChat, PayPal and other mobile payments, central bank digital currency is an extension and expression of legal currency in the digital world and a new form of currency. And alipay, WeChat payment and other electronic payment tools are tightly coupled with bank accounts, is a digital use of legal currency.

Ii. From RMB 1.0 to RMB 3.0

(I) the birth and changes of 1.0 RMB

On August 30, 2019, the fifth set of the 2019 edition was officially released, including 50 yuan, 20 yuan, 10 yuan and 1 yuan notes and 1 yuan, 5 jiao and 1 jiao COINS.

Before that, as a witness of China's economic construction and social development, the RMB has gone through five changes.

On December 1, 1948, the people's bank of China was established and the first set of renminbi was issued on the same day. The first set consists of 16 denominations and 62 denominations, with the minimum denomination of 1 yuan and the maximum denomination of 50,000 yuan. This set of RMB was issued on the basis of unifying the currencies of the revolutionary base areas. It is the product of the transition from the disordered monetary system before the founding of the People's Republic of China to the independent and unified monetary order.

The second set of RMB was officially issued on March 1, 1955. The denomination structure was more reasonable than that of the first set of RMB. The minimum face value was 1 cent and the maximum face value was 10 yuan. The second set of RMB for the first time adopted the primary and secondary currency system, and issued COINS of 5, 2 and 1 cents, ending the history of China's modern and modern times without unified circulation of COINS.

In 1962, after three years of economic difficulties, the national economy began to recover and develop. On April 20 of the same year, the third set of RMB began to be issued. The maximum face value of the notes was still 10 yuan, and the minimum face value was 1 jiao. The COINS included 1 yuan, 5 jiao, 2 jiao and 1 jiao. The third set of RMB is the first set of currency independently developed by China, and together with the second set of RMB, it spans the whole planned economy era in China, which has become one of the markers of the planned economy era in China in a certain sense.

With China's reform and opening up into a new stage, the growing national economy has new requirements on the monetary aggregate and monetary structure. On April 27, 1987, the people's bank of China began to issue the fourth set of RMB, the front of this set of RMB USES large character portrait watermark, increased 50 yuan and 100 yuan two kinds of large currency.

On June 30, 1999, zhu rongji, then premier of the state council, issued the 268th order of the state council: in order to meet the needs of economic development, further improve China's monetary system and improve the anti-counterfeiting performance of RMB, we have decided to issue the fifth set of RMB successively since October 1, 1999. " In the fifth set, 20 yuan notes were added and 2 yuan notes were removed.

The fifth set of RMB has been in circulation since October 1, 1999. Since then, the fifth set of RMB has been issued on August 31, 2005, November 12, 2015 and August 30, 2019 respectively.

(ii) the "digital age" of 2.0 RMB

The yuan has been the currency of the people's bank of China for 71 years, from the first set of the yuan on December 1, 1948, to the fifth version on August 30, 2019.

With the rapid development of computer and Internet technology, the RMB has gradually become electronic and entered the 2.0 era. Cash and deposits circulating in Banks and other financial systems have long been digitized through electronic systems, while the large-scale popularization of third-party mobile payments such as alipay and WeChat payment has gradually reduced the proportion of cash in circulation. Nowadays, except for some special occasions, Chinese people hardly need to use cash to go out. Mobile payments have changed every aspect of people's lives, bringing a quick and convenient payment experience. People are beginning to imagine a future "cashless society", and China has become one of the closest countries to a cashless society.

According to statistics released by the people's bank of China, global banking financial institutions handled 220.312 billion non-cash transactions in 2018, with a value of 3768.67 trillion yuan. Banking financial institutions handled 175.192 billion electronic payment transactions with a value of 23,539.70 trillion yuan, of which 60.531 billion transactions with a value of 277.39 trillion yuan were mobile payment transactions.

But mobile payments in China are more commercially driven and an electronic way to pay for money than a real digital "renminbi". From precious metal to paper money to replace precious metal as currency, and then to the future digital money, is the inevitable outcome of the development of economy and technology to a certain stage; And increasingly developed along with the network communication technology, social activity is increasingly frequent and active, with people shopping consumer habits change and consider about the safety of the currency, people tend to be more and more use of electronic banking, electronic payment rather than carry paper money, therefore, provided by the central bank more than the paper money fast, low-cost digital currency media, is necessary for social development.

In recent months, the people's bank of China (pboc) has made a series of statements about the central bank's digital currency, which has made the digital RMB a reality and ushered in the era of RMB 3.0.

(iii) 3.0 central bank digital currency: DC/EP

It has been five years since the people's bank of China set up a research group to study the central bank's digital currency in 2014.

If 2014, when zhou xiaochuan proposed the central bank's digital currency research and development, was the start of everything now, the central bank's establishment of the digital currency research institute in 2017 is an important node in the story. Over the past five years, the digital currency research institute of the people's bank of China has joined several commercial Banks to study the feasibility of the central bank's digital currency from the perspectives of digital currency program prototype and digital bills.

On August 2, 2019, the people's bank of China held a working video conference for the second half of 2019, which made it clear that China's central bank should accelerate the development of digital currency (DC/EP) in the second half of the year, and timely track the development trend of domestic and foreign virtual currencies.

On August 10, mu changchun, then deputy director of the payment and settlement department of the people's bank of China, said at the third China finance 40 yichun forum that the people's bank of China's digital currency "can be seen now", once again putting the central bank's digital currency into public view.

Then, the discussion about the central bank digital currency rising, according to Forbes, including alibaba, tencent, the industrial and commercial bank of China, China construction bank, bank of China, agricultural bank of China and China unionpay seven institutions has become the first obtain the Numbers of the People's Bank of China monetary institutions, and said the central bank's fastest digital currency will double 11 introduced during this year. Although some people close to the central bank later denied the rumors, it is not hard to see that the pboc's digital currency is on the way.

Table 1: China's central bank digital currency research progress & NBSP; & have spent

Why do central Banks issue digital currency?

On June 18, 2019, Facebook released its Libra white paper, a digital currency project that has attracted the attention and discussion of central Banks around the world. The people's bank of China is no exception.

The people's bank of China began studying digital currencies in 2014, but by 2018 they had matured and were "on the horizon" when Libra triggered heated discussions among global central Banks in August 2019.

China's central bank Digital Currency is referred to as "DC/EP" in English, "DC" is the abbreviation of "Digital Currency", "EP" is the abbreviation of "Electronic Payment", its main function is as a means of Electronic Payment.

Electronic payment has become the general trend of future development. In the United States, credit card payments are highly developed but electronic payments are relatively backward, while Libra and other digital currencies mainly anchored by dollars can help the United States achieve breakthroughs in electronic payments to some extent. But now that China's mobile payments, led by alipay and WeChat payment, are leading the world, why is the central bank still so focused on digital currency?

The first thing to be clear about,The people's bank of China's forthcoming digital currency is fundamentally different from Libra. The digital currency of the people's bank of China is the central bank currency issued by the people's bank of China. It is a liability of the central bank, guaranteed by the central bank, and has unlimited legal compensation (that is, it cannot refuse to accept the digital currency of the central bank). It is an effective supplement to the existing monetary system.

Libra is a digital currency that has yet to receive regulatory approval, and is being prepared for issuance by the Libra society, a group led by Facebook. Although the value of Libra is tied to a basket of currencies, it is still a big shock to the existing monetary system, crowding out existing countries' legal currencies.

Second,The central bank's upcoming digital currency focuses on replacing M0, rather than M1 and M2, simply by digitizing paper money. In China's current monetary system, M1 and M2 based on the commercial bank account system have been electronic and digitized, so there is no need to use another technology to digitize them again in a short time.

On the other hand, the current interbank payment and settlement system that supports the M1/M2 flow in China is constantly evolving under the promotion of marketization, and the payment efficiency and performance are sufficient to meet the needs of the current economic development. Replacing M1/M2 with digital money would only result in a huge waste of resources to the existing system and would not necessarily improve payment efficiency.

In addition,Replacing M1 / M2 with digital currency may make the issuance of digital currency by central Banks more complex and unpredictable due to the nature of its relationship with the commercial bank account system, and may even cause credit expansion and money multiplier effect due to the impact on commercial deposits, thus disturbing the normal operation of the existing monetary system. So the central bank won't have the incentive to reinvent M1 / M2 anytime soon.

So why replace M0?

First of all,At present, the printing, issuing and storage costs of banknotes and COINS are very high compared with digital currency. Meanwhile, due to the development of electronic payment, the convenience of banknotes and COINS is not enough, so the usage scenarios gradually shrink.

Secondly, M0 is used for money laundering, terrorist financing and other risks due to anonymous transactions and forged anonymity. With the improvement of security awareness and data protection awareness, ordinary users have a certain demand for anonymous payment and anonymous transaction. However, current payment tools, whether mobile payment or bank card payment, cannot get rid of the bank account system and meet the demand for anonymity, so they cannot completely replace banknote payment. But from the central bank's point of view,The digital currency of the future will do its best to protect privacy and the need for anonymous payments, but the social security order is just as important, with the necessary checks in place when it comes to crime.

& have spent Figure 2: the number and growth rate of M0 in China in the past 10 years. & have spent

Note: M0, M1 and M2 are all important indicators used to reflect the money supply. M0 is cash that circulates outside the banking system, and everyone's deposits and withdrawals at the bank affect the increase or decrease of M0 in the market. M1 is the narrow sense of money, "M1=M0+ demand deposits of enterprises in Banks"; M2 is the broad money, "M2=M1+ quasi-money", the quasi-money here includes time deposit, resident savings deposit, other deposits, security company customer deposit, housing provident fund center deposit, deposit of non-deposit financial institutions in deposit financial institutions and so on.

Therefore, in order to solve the above problems, the digital currency of the central bank should not only maintain the attributes and main value characteristics of banknotes, but also meet the requirements of portability and anonymity, and balance the protection of privacy and the fight against illegal and criminal behaviors. Mu repeatedly defined the central bank's digital currency as "a digital payment tool with value characteristics" and "a digital replacement of banknotes".

Original link:https://mp.weixin.qq.com/s/oT8SRxMLdHhBkJpAYVBSeg

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