Zou Chuanwei: The impact of blockchain on the payment system

Original title: "Blockchain's Impact on Payment Systems"

Source: Wbe3

Thank you very much for your introduction, and thank you very much for Web3's invitation. It's a great honor to be here today.

This is a prepared speech given to me by the Foundation. As you all know, this is a very complicated issue, but I don't have much time to discuss it today. I want to focus on the stability coin and the central bank digital currency.

In fact, it is not easy to explain this issue clearly in 20 minutes. So today, I will first introduce the concept of mainstream currency and payment system, how to classify digital currency, what is the basic logic of blockchain as a financial infrastructure, and how to Token legal tender. Then there are two main types, the stability coin and the central bank digital currency.

It should be said that the field has advanced by leaps and bounds in the past year, and what we can say today is quite different from what we could say a year ago. Its application scenarios, in the wholesale link, retail link, cross-border link. And the last thing is looking ahead, which is where you're going to look at it, if you're talking about it this time next year, and what new directions might occur. Currency and payment system, currency actually has many processes, when people talk about the RMB and the US dollar, they think they are the same thing, but they are far from it.

Money is layered, this pyramid on the right, and at the top is central bank money, but most of it is commercial bank money, your deposits. For example, M0, which is cash in circulation, is currently in a physical form. There's a big chunk of the central bank's money in M1, the reserve requirements, the liabilities of the central bank to the commercial Banks, and in reality most of the money is in the deposits of the commercial Banks, which is a pyramid structure of money. The pyramid in what form is the structure if you look at it, it is linked with the bank account, bank account is also a pyramid structure, the top is the central bank's account, at present only commercial Banks, there may be other financial institutions, mainly commercial Banks, to open a deposit account at the central bank. We can only open a deposit account in a commercial bank, which is a very typical account structure. What are the characteristics of the account structure? The trade under account structure says simple also very simple, for example I want to give you when icbc transfers 1 dollar, industrial and commercial bank deducted 1 dollar from inside me, add 1 dollar from inside your account balance, this everybody can understand arrive. More complex is this thing, account system is not complete current, not be any two person account can produce trade between account. For example, if I am in AVIC and you are in CCB, when I want to give you 1 yuan, in addition to icbc deducting 1 yuan and CCB increasing 1 yuan, there will be a transaction between these two Banks, and the transaction between these two Banks will be realized through their accounts in the central bank. At the next level, if you trade across the account system, you operate within the account system at the previous level. This is a very distinct feature of the account system.

We're going to talk about payment, which you might think is a very simple thing to do, but it's far from it. It's a very complicated thing to do, and I don't think we'll have enough time to do it in one day.

In a nutshell, there is the front end and the back end, what is the front end? For example, if you go to Starbucks and order a cup of coffee, the other party takes your order. This is a process of payment. What is liquidation? A cup of coffee is only $25, you give him $100 bills, he calculates that he should give you $75 back, figure out what the debt relationship is, this is a liquidation. What is settlement? Here's your change of 75 dollars. Here's your coffee. Here's your bill. These three steps are actually quite complex.

There is also a link, the payment is divided into wholesale payment and retail payment, the wholesale is said to 2B, in fact, is not prepared, mainly occurs between commercial Banks, and between commercial Banks and the central bank. This is the wholesale part. The second link is retail, which is the payment service provided by commercial Banks to people and enterprises, including Alipay, which belongs to the link of retail payment. The last link is settlement, settlement may be boring, not just give you the money? But there are many exquisite, in the wholesale link, we now use the real-time full settlement, such as icbc and CCB between this settlement, ICBC to CCB how much money? Then the people's Bank gets rid of it the first time, which is called real-time full settlement. But if it is retail payments, such as common people in icbc to transfer money between users to the construction bank, the amount is small, and more frequently, each other was possible in the direction of the phase offset, will wait for a period of time, such as icbc to the China construction bank 100 dollars, this time the construction bank to icbc 50 yuan, 50 yuan gave the icbc to CCB. This is called delayed payment, and this is really critical, and I'll talk about the various relationships with blockchain later.

The most complicated part is the cross chain payment, which is a very complicated thing. I'll just explain a couple of common misconceptions, you've probably heard of SWFT, money doesn't go through SWFT, SWFT is more accurate, it's just a messaging system, just like a telegraph system, it's a communication link. Money is in flow, go through bank account when crossing the border, everybody should have this concept at any time, money exists only inside bank account, trade can go through bank account only. For example I want to make a sum of money to Boston bank from Shanghai Bank now, there is no account connection between these two, how does that money pass? The money will first go through the Bank of Shanghai to the Bank of China, the Bank of China to the Bank of America, and the Bank of America to the Bank of Boston. There is currency exchange and cross-border message processing, but money flows through inter-bank accounts. The network of correspondent Banks is very complex, and sometimes there may be more than two agents, it may be a very complex network of one agent. That's why it takes so long and costs so much to talk about cross-chain payments today. This cost is caused by SWFT. You don't have to pay for send WeChat messages or facebook now, so why does it cost so much to communicate between Banks? The cost of money is largely the result of a network of correspondent Banks.

I'm going to focus on it today, so I'm not going to be able to talk about digital money in a comprehensive way, but I'm going to talk about central bank digital money, there's a difference between central bank digital money and wholesale money, there's a difference between stable currency and reserve currency, and I'm going to focus on legal tender. There are two types of reserves: the largest, USDT, and the most prepared, Libra and USDC. There are two types of reserves, the single currency and a basket of currencies. This is a booming currency experiment around the world.

What is the concept of blockchain as finance? Xiao has just talked about Token legal tender, Token securities, its logic is what? How do you make sense of it? Why is it tokenized? Can a house be tokenized? In fact, it is very complex, but it is also very simple to say simple, the core logic is to use the Token on the block chain, a distributed ledger Token, as the reality inside the code such as legal tender or securities, is such a meaning. But if it's too detailed, you have to understand three steps to understand it accurately: the issuance step, the redemption step and the trading step. In the issuance link, such as the digitization and tokening of legal tender, you must have a reserve fund, which adds 1 yuan to the reserve, And I issued a new Token on the ledger of blockchain. Where does this reserve sit? It doesn't sit in a warehouse like a bank note. Money has a place to put it, especially if it's digital. If reserves are in commercial Banks, they correspond to stability COINS such as Libra; if they are in central Banks, they correspond to central Banks' digital currencies. That's how it came about. That's the release part.

The link of redemption is very simple. If I am on this block chain and I push this Token to the issuer, he will give me the Token reserve in this legal tender account, no matter from the central bank account or from the commercial bank account.

In the link of the transaction, the link of the transaction and the bank account has nothing to do with the circulation of the block chain, which is also a kind of situation that we are more accustomed to. This is the Token of legal tender. If you look at the Token of securities, it is nothing more than to turn the account of the central bank or commercial bank on the left into the account of the central securities institution. It can be expanded in accordance with this, and everything else remains unchanged.

Now let's look at what the blockchain actually does inside. We talked about tokenization, what does it change, what doesn't it change, why do we do it? In reality, the currency system has been developed and digitized. In addition to cash, except for M0, most currencies have been digitized. So why discuss blockchain? There is a lot of misunderstanding, many people think that the blockchain represents a new accounting revolution, subversion of our double-entry bookkeeping method. It doesn't change the concept of accounting for assets and liabilities. It doesn't change the concept of economics. What it wants to change is the way property rights and transactions are recorded, and that's the key. For example, we have made a comparison between the current account system and the Token system. Also known to block chain Token system is a Shared account book, we Shared a big account, all transactions are recorded in an account book, different participants such as it is to sell or buy, has its own account, accounting standards may not be the same, with the accounting standards is different also, so need to each other. That's the first point.

Second, any account system is now westernized management, you want to be based on the trust of account management, whether it is written good alipay or WeChat, all need trust and permission. Blockchains can be managed in a decentralised way, without trust or permission.

Third, the current trend in the account system, especially in the financial sector, is to record. But the unit in the blockchain is Token, and Token is an address, which is anonymous, but can be associated with your identity through KYC's program.

Finally, the most important difference, we know that in the blockchain system, any two addresses can be connected, the point of the address is fully connected, such as a Chinese and an American to play bitcoin, and there is no difference between two Chinese to play bitcoin. As I mentioned earlier in the account system, if you are at the bottom and you are paying across different account systems, you have to go to a higher level of processing.

Now we're talking about the stability currency, and we're looking at the size of USDT, $13 billion, and the economic explanation for it is very simple, basically the realization of a private bank. At present, it is only 70% ready, which means it has overissued about 400 or 5 billion yuan, which is the stability currency issued out of thin air, and this part of stability currency is money creation. It works in normal circumstances, for the simple reason that reserves are used to pay for claims, and in normal circumstances, if I harvest no more than 70 percent of it at the same time, it's OK, and that has implications for financial risk, and implications for monetary sovereignty.

The sollibra stability coin we see today is a legitimate and compliant coin. In the beginning, it follows the compliance framework. Then, based on the full amount of legal tender preparation, the single currency stability coin is mainly a payment instrument. So it will not affect a country's monetary sovereignty, financial risk is controllable. And it would reinforce the strong position of the United States, the weak position of other currencies. As a simple example, if you look at how many Chinese people have dollar stabilisation currency and how many people have dollar deposit accounts, I'm sure it's not an order of magnitude, you can see how high the financial penetration of this thing is. What we are seeing now is that major countries are increasingly monitoring the stability currency of the single currency, especially in the last month or so, as the INTERNATIONAL Financial Stability Board, the European Union and the United States monetary Authority have all introduced this regulation. This thing is also very clear, in the future will be a legitimate business, payment tools.

In addition, Libra tried to make a basket of stable currencies before. I used tokens in a chain of alliances to represent a basket of currencies. Since the second World War, SDR has been discussed. Unfortunately, a currency like Libra1.0 is certainly not successful, because it suffers from the drawbacks of the mechanism set up in economics, where its actual weight often deviates from its theoretical weight. How to rebalance this is a very complicated question.

Second, the regulation of the adequacy of the basket, now you can't find a regulatory authority internationally, for example the dollar reserves are sufficient and they are managed every year, but if you have several currencies together they are not managed. So Libra's current move to a 2.0 structure is very clever. I first make some single currency stabilisers and then build a basket of currency stabilisers based on this.

Central Banks' digital currencies, after so much discussion in the past, have come close to consensus on many big issues around the world. For example, the central bank's currency is mainly cash, which is available to ordinary people in a physical way. The second is the reserve requirement, digitized, for commercial Banks. If CBDC replaces cash, it is equivalent to retail CBDC, just like our national DC/EP. If only to replace the deposit reserve, is the wholesale type, wholesale type of foreign have a lot of experiments. It is issued from on demand convertibility or equivalent expression, based on 100% deposit reserve issuance. For example, if ICBC wants to get 10 DC/EP, it will type a report with the People's Bank of China. After the people's Bank agrees, it will deduct 1 billion from ICBC's deposit reserve and give 1 billion DCEP to ICBC. In this process, since DCEP and deposit reserve are both the money of the central bank, the total amount of money of the central bank has not changed, only the structure has been adjusted. So it's not going to have an inflation effect, it's going to have a neutral effect on inflation.

Major countries' CBDCS all have wholesale and retail links. The wholesale link is that commercial Banks use deposit reserve funds to exchange CBDCS with the central bank. In the retail link, the common people may exchange CBDC for deposits at present and cash in the future to commercial Banks. There will not be any central bank issuing CBDC directly to the common people, bypassing commercial Banks to issue CBDC to the common people, because on the one hand, it means that the central bank has to face the pressure of retail scene and commercialization, and it will have a great impact on commercial Banks. CBDC can take either the traditional account mode or the Token mode, but the mainstay is the Token mode. Because only the Token model has this particular increase in total liquidity and tends to pay no interest, it would not be a monetary policy tool because it is used as a substitute for cash, which also does not pay interest.

At present, wholesale CBDC has gone through many rounds of tests in many countries and has been thoroughly studied. Currently, it is called retail CBDC, because it involves very complex monetary and economic issues, but it will gradually become a hot spot. If you look at the international discussion, has been gradually from the wholesale to retail type. Moreover, DC/EP is in a very leading position among global retail CBDC. You may have noticed that the amendment to the central bank law we are discussing recently is a very big improvement. It allows the RMB to exist in digital form in addition to physical version and paper version in the future. This is the first such change among big countries. But the changes have largely eliminated the possibility of developing a stable yuan in China.

First of all, let's take a look at the wholesale payment projects. Representative projects, such as those in Singapore, Europe, Japan, Canada and Hong Kong, all belong to this type. There are many tests, starting from 2016 and 2017, and every stage has been reported. The conclusions are quite consistent. For example, through the block chain in the wholesale link, RTGS can indeed be supported and the full savings and liquidity intensive mechanism can be realized. For example, Banks need to pay a sum of money to each other, why should I pay this amount of money? Generally, it will correspond to a securities transaction, which is associated with Token securities. Because securities are traded with one hand and the other hand, can digital CBDC support this financial transaction scenario? This is actually a key point for wholesale CBDC. Front columns of these projects, so I have done a lot of exploration in this direction, and there is also a basic requirement in capital transactions, called a securities exchange, English name is DVP, is I pay money to the past, and get the ticket at the same time, both sides each other conditions, so that it can prevent the happening of the risk. This is a basic principle in the financial infrastructure. Therefore, if the DC/EP of the single ledger can be realized in the decentralized link, that is, my legal currency and securities are all in the same blockchain system, it is no problem for it to achieve CBDC. But if it is cross - account book is more complex, this involves cross - chain issues. The main feature of Boca is the cross-chain technology. Currently, the cross-chain technology used in the world is still the hash practice. After testing in various countries, it is found that the hash practice is defective.

Another use of wholesale CBDC is not only in securities trading but also in cross-border links. For example, a currency exchange between two central Banks should be conducted, such as a swap between THE US dollar and the Singapore dollar. For example, if both the US dollar and the Singapore dollar are digitized, this will involve their cross-chain operation.

I'm not going to talk about retail payments, but DC/EP is making good progress, and in terms of its applicable scenarios and user experience, it should be similar to paying with alipay and WeChat. However, we have a difference here, because we generally stipulate that third-party payment companies cannot directly participate in currency exchange, so it means that in the future, alipay and WeChat payment will not provide digital RMB wallet, nor will they provide the service between deposit and DC/EP exchange for ordinary people. Future digital yuan wallet may be provided by five commercial Banks, it might be an APP on the phone, may be embedded inside a mobile banking APP, can also be embedded to alipay and WeChat APP, such as your future with alipay sweep yards later, you in payment link will come out a few options, now you can pay by change, also can pay by bank card association, can also pay via digital RMB wallet in the future, but the Numbers the wallet is provided by each bank yourself.

There are still some unclear questions about the use of central bank digital currency in cross-border payment. The biggest question is whether to use retail or wholesale. There is no problem with the retail type, because when you pay with Bitcoin or other digital currency, it is the same, because you stand in the blockchain system, these addresses are common, there is no distinction between domestic and overseas, including onshore, offshore and cross-border. In the future, digital RMB wallet, for example, when a foreign friend comes to China for the Winter Olympics, he may have this thing in his wallet, and when he returns to China, he can use this thing to trade. But if cross-border payments go through the retail DC/EP channel, the demands on the banking system are very high, as it faces the demands of billions of people around the world. In addition, there is a wholesale DC/EP link, which will retain the commercial intermediary function, but improve the agent bank and make the chain of agent bank shorter. (PPT illustration) This is a project test done by the European Central Bank and the Bank of Japan.

Now, looking ahead, because we're pretty close to a consensus, what's going to happen in this area? For example, first, the regulation of the single currency stability currency based on insufficient legal tender reserves, which I don't know. Second, the single currency stabilisation currency, for example, in everyday scenarios outside of the cryptocurrency market, in everyday scenarios, there's a lot of talk about this, there's a lot of signs, but can it be popularized and become a mainstream tool? We need to look at that. Thirdly, the prospect of a basket of stable currencies such as Libra as a platform for cross-border settlement needs to be observed. Fourthly, related to those of you here, we have seen that the testing of wholesale CBDC is based on alliance chain, and there is no current cross-chain technology of Boca, so we still use hashing laboratory. Is there a cross-chain technology that supports DC/EP bond redemption and simultaneous cross-border sale that everyone can agree on? This is a technical issue. Fifthly, what is the plot arrangement of retail CBDC, such as DC/EP? Whether all these CBDC transactions were handled by the subject Banks in the first place, as if the PEOPLE's Bank provided a system of full and real-time settlement for the common people, or whether commercial Banks are now all at the same time, and finally the central bank, is unknown. Because this system requirements are different, and the impact on the industry pattern will be very large. Because if we go to the first kind, there is basically no commercial bank's position inside.

The next question is, what is the position of alipay and WeChat payment non-bank payment institutions in retail CBDC? To what extent will the digital RMB affect the market volume of alipay and WeChat?

The next question is whether the CBDC of wholesale type or retail type is used for cross-chain payment. There are more and more discussions on this issue in the international community, but it is still an open question, because it is not just a technical question. You also have to do some commercial calculations, which are quite interesting. The other is the programmability of stabilizers and CBDC, the logic of which is very interesting. You may be talking about DeFi, DeFi currently USES the programmability of digital currency, USES the performance of smart contracts, but it doesn't come out as a stable value digital currency, but you can see some of the logic is interesting. So is it possible in the future, for example, if you combine the DeFi approach with the central bank's digital currency or stabilization arm, that it will become a new form. Recently, shenzhen digital RMB red envelope has 200 yuan inside, which has a valid period of time and will be recovered automatically after the expiry date. This is actually an application of intelligent contract. Can this application be made more extensive? Is it going to allow us to have some more intelligent use of this fiat currency, of our payment scenarios, and what effect does it have on the circulation of money? That's what you're going to look at.

Thank you.

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