Central Bank Report: Full Text of Topic 17: Overview of Central Bank Digital Currency Research and Development Progress

Summary of Topic 17 Central Bank Digital Currency Research and Development

In recent years, with the continuous deepening of the information revolution and digital With the rapid economic development, the international community and major economies are paying close attention to the development of Central Bank Digital Currency (Central Bank Digital Currency, hereinafter referred to as CBDC). Sweden and others have entered the pilot test phase of CBDC, some economies are in the research and development stage, and some economies are still demonstrating the feasibility of CBDC. Due to the differences in the research and development background, goals, and design of CBDC in various economies, the potential impact on the financial system is also different.

1. The concept and classification of central bank digital currency

Ensuring the payment system is safe, efficient, and inclusive is an important function of the central bank. With the popularization of the Internet and the rapid development of financial technology, electronic payment methods such as online payment and mobile payment have been widely used, improving payment efficiency and increasing the concentration of the payment market. Encrypted assets relying on distributed accounting technology are constantly emerging, and some stablecoin encrypted assets may be widely adopted due to their advantages such as price stability mechanism and network effect. They intend to play the role of payment means and value storage, which may bring a series of risks. In order to adapt to the development of the digital economy, respond to the decline in the use of cash, promote competition in the payment market, maintain payment security, further improve payment efficiency, and improve financial inclusion, central banks in some economies have launched CBDC research and development.

CBDC usually refers to a digital tool issued as a central bank liability for payment and settlement. From the perspective of type, CBDC can be divided into retail type and wholesale type. The former is oriented to the general public and used for daily transactions, while the latter is oriented to specific institutions and used for large settlement. From the perspective of operation mode, CBDC can be divided into single-layer operation and double-layer operation. The former is issued directly to the public by the central bank, while the latter is first exchanged by the central bank to institutions such as banks, and then exchanged by these institutions to the public; from the perspective of system design, CBDC can be divided into account-based or agent-based Token-based, the former refers to transactions through digital currency accounts opened in the central bank or commercial banks, and the latter refers to the use of tokens for transactions between digital wallets through a centralized or decentralized settlement system; from In terms of interest-bearing rules, CBDC can be divided into interest-bearing and non-interest-bearing.

Second, the progress of central bank digital currency international research and development

Currently, a small number of economies have begun to operate CBDC on a trial basis, some economies are conducting research and development experiments, and some economies are actively demonstrating the feasibility of CBDC but have no specific research and development plans. In terms of payment types, the CBDCs that have entered pilot operation at this stage are all retail-type, adopting a two-tier operation and no interest-bearing method, while the wholesale-type CBDC is in the stage of research and development or feasibility demonstration.

(1) The central banks of a small number of economies have begun pilot operations of central bank digital currencies

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The Riksbank started the research and development of e-krona in 2017 and started the pilot in February 2020. The use of cash in Sweden has declined sharply over the past decade, prompting the Riksbank to develop a CBDC. E-krona is positioned as a supplementary tool for cash. It is a retail CBDC that does not pay interest. It adopts a two-tier operation model, uses distributed accounting technology, and follows limited anonymity. In addition, the central banks of Uruguay, Ukraine, Cambodia, Bahamas and other countries have also launched CBDC pilots.

 

(2) The central banks of some economies are developing and testing central bank digital currencies

The European Central Bank and the Bank of Japan proposed the Stella project in 2016 and began to jointly develop a wholesale CBDC, which will help inter-bank settlement, DVP settlement, synchronous settlement, and balance confidentiality and reliability within the economy. The auditability and other aspects were tested separately and the expected goals were achieved. In December 2019, the European Central Bank issued a report introducing the retail CBDC scheme (EURO chain project), which is positioned as a cash replacement, adopts a two-tier operation model, and follows limited anonymity, and is currently undergoing research and development. In July 2020, the Bank of Japan released a technical report on the popularity and operational flexibility of CBDC, and stated that it would explore the feasibility of CBDC through empirical experiments.

The Bank of England proposed the RSCoin project in 2015, cooperated with the University of London to study CBDC, and carried out small-scale trials. RSCoin adopts a hybrid architecture combining centralized and distributed bookkeeping, and is a retail CBDC with a two-tier operation model. In March 2020, the Bank of England systematically explained the design ideas of retail CBDC, presenting the concept of future CBDC from multiple dimensions such as issuance goals, design principles, operating models, and system application technologies. The Bank of England pointed out that the CBDC issued in the future is an innovation in the form of currency and related payment infrastructure, and will adopt a model of cooperation with the private sector to supplement cash and enhance the Bank of England's ability to achieve policy goals.

The French central bank launched the "Digital Euro" research and development work in March 2020, aiming to improve the inter-bank clearing and settlement process , which is a wholesale CBDC. In May 2020, the Bank of France completed the first test of the "Digital Euro", and a series of tests will be carried out in the future.

The Bank of Canada proposed the Jasper project in 2016 and began research on wholesale CBDC. The first three phases of the project mainly focused on using distributed accounting technology to improve the domestic large-value payment system, and achieved technical success, but the efficiency improvement was relatively limited; in the fourth phase, the Bank of Canada cooperated with the Monetary Authority of Singapore and the Bank of England to explore research and development A cross-border, cross-currency large-value payment system has achieved phased results. In February 2020, the Bank of Canada announced the start of research and development of a retail CBDC to cope with the emergence of a "cashless economy" and the challenges of private digital currencies. The specific design plan has not yet been announced.

The Singapore Monetary Authority proposed the Ubin project in 2016, began to study wholesale CBDC, and explored the use of blockchain technology to provide more Simple and efficient payment system, mainly used for cross-border transactions and settlements. The first three phases of the project mainly involved the reconstruction of the inter-bank large-amount payment system and the DVP system. The fourth phase was connected with the Bank of Canada’s Jasper project and successfully conducted cross-border and cross-currency payment tests. In the fifth stage, a blockchain-based payment network was successfully developed, enabling different currencies to be paid in the same network.

The Bank of Korea will begin to develop a retail CBDC in April 2020, and plans to carry out testing in three steps, followed by demand analysis and Technical review, business process analysis and consulting, pilot system construction and testing are expected to be completed by the end of 2021.

(3) The central banks of some economies are demonstrating the feasibility of the central bank’s digital currency, and there is no specific research and development plan

The Federal Reserve stated that it is evaluating the costs and benefits of CBDC, studying related legal issues, and conducting research on distributed ledger technology and its potential in the field of digital currency (including CBDC). Uses for research and experimentation. The Swiss National Bank has conducted research on the necessity of issuing CBDC and related technical, policy, and legal issues and determined the basic design ideas. It plans to develop and test product prototypes in 2020. The Reserve Bank of Australia has established a CBDC research institute, which plans to test the feasibility of using wholesale CBDC in the field of large-value settlement. The Reserve Bank of India has conducted internal discussions to study the feasibility of CBDC, but has not disclosed the specific plan and implementation time. In addition, countries such as Italy, Norway, and Denmark are also actively conducting CBDC research.

Third, the possible impact of central bank digital currency on the financial system

International organizations and the central banks of some economies have carried out forward-looking research on the possible impact of CBDC on the financial system. Overall, the potential impact of CBDC varies greatly depending on its type, mode of operation, and interest calculation mechanism. A retail CBDC that adopts a single-tier operation model or pays interest has a greater impact on monetary policy transmission and financial disintermediation, while a wholesale CBDC and a retail CBDC that adopts a two-tier operation model and does not pay interest have less impact on the financial system .

Interest-bearing CBDC may affect the monetary policy transmission mechanism, while non-interest-bearing CBDC has less impact. Some people believe that the non-interest-bearing CBDC only has a payment function and may only replace cash, and will not have a substantial impact on monetary policy. The interest-bearing CBDC not only plays the role of a payment medium, but also has a saving function, and its liquidity and security are higher than bank deposits. The CBDC interest rate may become the lower limit of the deposit interest rate. The central bank can affect the bank deposit interest rate by adjusting the CBDC interest rate. . In addition, if CBDC basically replaces traditional cash, the central bank can increase holding costs by imposing negative interest rates on CBDC, break the constraints of the zero lower bound of interest rates, and further guide market interest rates downward. It is also argued that the use of CBDC can prevent the impact of private digital currencies on the effectiveness of the monetary policy transmission mechanism.

Interest-bearing CBDC may have an impact on banks’ financial intermediary functions, while non-interest-bearing CBDC has less impact . There is a view that if CBDC pays interest, for security reasons, depositors may transfer bank deposits to CBDC, and funds will flow from bank accounts to central bank accounts. Faced with the pressure of disintermediation, banks may be forced to raise deposit rates or choose to borrow funds from other banks with higher costs, which will lead to credit contraction and increase the risk of bank maturity mismatches. If CBDC does not pay interest and is only used as a supplementary tool or substitute for cash, it will generally not lead to financial disintermediation, but in extreme cases, that is, when the deposit rate is adjusted to zero or negative, it may still cause financial disintermediation. There are also views that the risk of financial disintermediation can be reduced by adopting two-tier operations, not paying interest, and limiting CBDC holdings.

CBDC can help improve payment efficiency, reduce payment costs, and help inclusive finance. Retail CBDC is generally used as a cash supplement, which is efficient and convenient, complements existing electronic payment tools, and enhances the competitiveness of the payment market. Interest-bearing CBDC is not only safer than electronic payment tools, but also has a savings function, which is a strong alternative to existing electronic payment tools. Wholesale CBDC helps to improve large-value payment settlements, improve cross-border payment efficiency and security, reduce payment costs, and facilitate international trade and financial transactions. In areas where traditional financial services are underdeveloped, CBDC relies on the advantages of digitization and security to improve the coverage and convenience of financial services and the level of financial inclusion through mobile clients and network communications.

CBDC will help improve the ability to fight money laundering, terrorist financing and tax evasion. Unlike cash that is used completely anonymously, CBDC can achieve controllable anonymity, improve the ability to identify customers, and improve the efficiency and accuracy of identifying illegal and criminal acts such as money laundering, terrorist financing, and tax evasion while protecting the reasonable privacy of users.

Fourth, digital RMB research and development progress

The People's Bank of China has been researching legal digital currency since 2014, and at the end of 2017 organized some commercial institutions to jointly carry out the research and development of the digital RMB system (DC/EP). At present, the digital renminbi system has basically completed top-level design, standard formulation, function research and development, joint debugging and testing, etc., and is following the principles of stability, security, controllability, innovation, and practicality. The Winter Olympics scene conducts an internal closed pilot test.

The digital renminbi is positioned at M0 and is a retail CBDC. It adopts a two-tier operation model and does not pay interest. The People's Bank of China pays attention to assessing the possible impact of the digital renminbi from the perspectives of macroeconomics, monetary policy, financial development, and financial stability, to ensure that the relevant design will not have a major impact on the existing monetary and financial system and monetary policy transmission. There is no timetable for the official launch of the digital renminbi system. The People's Bank of China will continue to steadily and orderly promote the research and development of the digital renminbi system, do a good job in pilot testing, strengthen relevant policy and impact research, and continuously optimize and improve R&D design.

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