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Qian Yao: For example, the central bank's digital currency runs on Ethereum and other networks, which can benefit the unbanked and achieve financial inclusion

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In order to take advantage of "digital", the future of digital currency will definitely go to smart currency

Yao Qian, director of the Science and Technology Supervision Bureau of China Securities Regulatory Commission (CSRC), attended the International Finance Forum (IFF) 2021 Spring Meeting on May 29-30 and shared his views on the needs of the central bank's digital currency research and development, according to Sina Finance.

Yao pointed out that Powell should not worry too much about whether digital currencies will challenge the status of the US dollar. The status of the US dollar as an international currency is historically formed, and international trade and cross-border payments are mostly based on the US dollar. It is not necessarily the CBDC's goal to weaken the dollar's status as an international currency. The digitalization of sovereign currencies has its own internal logic. In the long term, the emergence of digital currency or digital payment tools may of course change the existing landscape, but that is a natural evolution of the process of digitization and market selection.

Yao Qian from seven aspects to talk about the central bank digital currency research and development needs to consider the focus.

1. Technical route. Based on account, or based on token? According to public reports, the digital RMB has adopted the account route, while some countries have chosen the cryptocurrency technology route represented by blockchain technology. Personally, I understand that the two technical routes of account-based and token-based are not either/or. In essence, a token is also a kind of account, but a new type of account -- crypto account. Users have more control over encrypted accounts than traditional accounts.

As early as 2014, we have conducted in-depth research on both centralized and decentralized cryptocurrencies, including e-cash and Bitcoin. In a sense, the PBOC's early experiments with digital currencies are in the same line of thinking as cryptocurrencies. We look forward to holding the key to cryptocurrencies rather than going around them. At that time, we developed a quasi-production-level digital currency prototype system for central banks based on the dual system of "central bank-commercial bank". However, it is a pragmatic choice to start from the technical route based on traditional accounts among the repeated trade-offs of implementation.

Second, value attributes. Is the central bank directly indebted or is the operating institution indebted? The essential difference lies in the liabilities section of the central bank's balance sheet, which records the central bank's digital currency for end users or the reserves held by the agent operating institutions. If the operating institutions deposit 100% of the reserve funds with the central bank and issue digital currencies as reserves, such digital currencies of the central bank are internationally known as synthetic CBDC, which is similar to the banknote issuing bank system in Hong Kong. This mode has attracted the research attention of many institutions, including the People's Bank of China and the International Monetary Fund. Of course, some countries are still using the traditional model of direct central bank debt.

Three, operation architecture. Double or single? In my article "Digital Currency and Bank Accounts" in 2017, I proposed the architecture system of "traditional accounts of commercial banks + digital currency wallet", in order to avoid the impact of central bank's digital currency on commercial banks. At present, the two-tier structure is gradually forming the consensus of all countries. Digital RMB also uses a two-tier operation system. In my opinion, double-decker operation and single-deck operation are not a binary relationship, just like taxi and bus, the two seem to go hand in hand and accommodate each other for users to choose.

We can imagine,If central bank digital currencies run directly on blockchain networks such as Ethereum and DIEM, then central banks can use their BaaS services to provide central bank digital currencies directly to users without the need for intermediaries. The single-layer operation enables the central bank's digital currency to better benefit the groups without bank accounts and achieve financial inclusion.

IV. Whether interest is accrued. Some people have doubts about the interest calculation of the central bank's digital currency, fearing that it will trigger the transfer of deposits from commercial banks to the central bank and lead to the contraction of credit capacity of the entire banking system, turning it into "narrow banking". In recent years, central banks have seemed less "intimidated" by the narrow banking implications of CBDC. The European Central Bank's Digital Euro Report, for example, proposes a so-called "A Tiered Remuneration System", in which interest is calculated on different digital euro holdings at a variable interest rate, to mitigate the potential impact of digital euro on banking, financial stability and monetary policy transmission. Digital RMB currently does not take into account interest.

5. Release mode. Issue, or exchange? The difference between currency issuance and exchange lies in that the former is initiated by the central bank and belongs to active supply; The latter is initiated by currency users and is an on-demand exchange. Is the digital currency generated by the central bank issued or exchanged? It depends on its positioning and the needs of monetary policy. If it's just M0 substitution, then it's on demand, just like cash. If the central bank actively issues digital currency to the market through asset purchase in order to achieve the monetary policy objectives, it is the issue of expanding the balance sheet. Expansion sheet offerings must define eligible asset types and operate in appropriate quantities and at appropriate prices.

6. Smart contracts. Some people are concerned that the loading of smart contracts in addition to the functions of legal tender itself will affect its legal compensation functions. Therefore, it is suggested to take a cautious attitude towards the loading of smart contracts in PBOC digital currencies. Digital money can't just be a simple analog of physical money,In order to take advantage of "digital", the future of digital currency will definitely go to smart currency. On the basis of full consideration of security, central bank digital currency should start from a simple smart contract and gradually expand its potential.

Seventh, regulatory considerations. A balance needs to be struck between privacy protection and regulatory compliance. On the one hand, KYC, anti-money laundering, anti-terrorist financing and anti-tax evasion are the basic principles that central banks should follow for digital currencies. On the other hand, users' personal privacy protection should be fully considered.

Yao noted that he has left the People's Bank of China (PBOC) and that he only spoke on behalf of his academic views, not on behalf of the PBOC or his current institution.