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Huang Yiping: Some conjectures and reflections on Central bank digital currency and cryptocurrency

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In the field of cryptocurrency, some new digital technologies such as tokenization, distributed ledger and blockchain technology have important application value to the formal financial system

Title: Huang Yiping: Some Conjectures and Reflections on the Central Bank's Digital Currency and Cryptocurrency

Huang Yiping is a former member of the Monetary Policy Committee of the People's Bank of China, chairman of the Academic Committee of CF40, and director of the Digital Finance Research Center of Peking University

The benefits and costs of the central bank's digital currency ultimately depend on the specific design of the digital currency system. When designing central bank digital currency, countries need to consider multiple dimensions such as preventing disintermediation of commercial banks, privacy protection, incentive measures and resolving financial risks. The design of digital RMB, such as "dual-layer distribution + no interest payment", can provide important references. It is believed that digital RMB will develop towards a more comprehensive, safer and more standardized direction in the future.

The design and issuance of central bank digital currency should pay attention to data governance and prevent the data of various digital wallet developers from forming new "islands". The central bank integrates and owns a complete set of digital currency payment data, which is more effective in data security and privacy protection, but it should also pay attention to the productivity of data. In cross-border data governance, the proposal for a multi-country collaborative platform may be a direction worth considering.

Cryptocurrencies like bitcoin are more like digital assets than they are strictly digital currencies. China's current ban on cryptocurrency trading is beneficial in the short term for policy objectives such as anti-money laundering and capital account management. However, some new digital technologies in the field of cryptocurrency, such as tokenization, distributed ledger and blockchain technology, have important application value to the formal financial system. If cryptocurrency transactions are banned for a long time, some important opportunities for the development of digital technologies may be missed, and the ban may not be effective for a long time.

-- Huang Yiping, Chairman of CF40 Academic Committee, Director of Digital Finance Research Center, Peking University

* The following is the keynote speech delivered by the author at the Bund Roundtable "Central Bank Digital Currency: Trends and Prospects" of the Fourth Bund Financial Summit Plenary session "Fintech: Digital Technologies Unleash Digital Productivity" on December 11, 2022, translated and edited by the Secretariat of the China Finance 40 Forum, with the subtitle added by the editor.

The Design, Trend and Regulation of Central Bank Digital currency.

The design of a central bank's digital currency needs to consider several dimensions.

The People's Bank of China launched the digital yuan in 2014 and has been piloting it for several years. According to the White Paper on the Digital RMB, there are three main reasons for China to promote the digital RMB: First, to provide multiple forms of currency, with digital forms of currency as a complement to paper money. Second, make the financial system more inclusive and secure, and improve payment efficiency and fairness of payment services. Third, it may be used to support some form of cross-border payments in the future.

In the unofficial discussions, there are other speculations. The first is that the digital yuan is meant to replace existing mobile payment services. The second is that the digital yuan is intended to centralise payment data in the hands of the central bank. The third view is that the digital yuan is to promote the internationalization of the yuan, so as to replace the dollar. But officials do not accept these claims.

Central bank digital money is one of several new trends that have emerged recently. The benefits and costs of a central bank's digital money ultimately depend on how the system is designed.

The design of the digital yuan is clear. It is a central bank digital currency for individual users with a two-tier distribution mechanism that is loosely coupled to bank accounts. This means that when making small payments, the user can use the token directly and pay no interest. My personal understanding is that the digital yuan is designed primarily for payment. This is why some official rhetoric will talk about the digital yuan primarily as an M0 replacement, rather than an M1 or M2 replacement. The design of the central bank's digital currency, "two-tier distribution plus interest free payment," is also important to minimize the potential impact on financial intermediaries such as banks, which is important to all central banks.

There are trade-offs to be made in designing a central bank's digital currency, such as privacy. If privacy is not properly protected, the public may be less willing to use the central bank's digital currency. I've heard stories of street shops refusing to accept mobile payments because they heard the government was going to tax online payments. It is unquestionably necessary that digital transactions should be incorporated into the country's tax system. But the examples above undoubtedly show that positive or reverse incentives can change behavior patterns. While some argue that central bank digital currencies may improve financial efficiency and speed up the circulation of money, others argue that central bank digital currencies may lead to disintermediation of banks, which in turn could push up financing costs and slow economic growth. The final outcome will depend on how the central bank designs its digital currency. The same goes for financial stability. Whether a central bank's digital currency will trigger new financial risks, and whether it will help central banks more accurately monitor and defuse new risks, also depends on the way the central bank's digital currency is designed.

Outlook on the development trend of digital RMB in the future

There are many guesses about the future development trend of the digital yuan. First, the digital renminbi is currently only available to individual users, but at some stage it could be expanded to institutions. Second, the scope of application of the digital renminbi is currently limited to the domestic market, but the People's Bank of China has participated in the Bank for International Settlements' multilateral central bank Digital Currency Bridge project. At some stage in the future, cross-border payment may become an important function of the digital renminbi. Third, the People's Bank of China does not currently pay interest on digital yuan, but it cannot be ruled out that it will consider doing so at some stage in the future. Fourth, it is very sensitive whether private institutions will issue stablecoins backed by the digital RMB in the future. But it is worth thinking about what the advantages and disadvantages are.

The digital yuan has been piloted for years, but has yet to be widely adopted. To quote Mu Changchun of the People's Bank of China's Digital Renminbi Research Institute, three things need to be done: first, develop a more comprehensive ecosystem and build a wide range of usage scenarios across the country; Second, to further optimize the system to ensure financial stability and security; Third, a better legal and policy framework should be developed to govern the use of the digital yuan.

There needs to be a balance between data security and productivity

Judging from the current pattern of China's mobile payment system, there are two major payment platforms, namely wechat Pay and Alipay. Both systems are relatively separate, and one Alipay account can only transfer money to another Alipay account. Therefore, although the data of Alipay and wechat systems are complete, they are separated from each other. But on the basis of this data, many new businesses and products are derived from the platform. Now the relatively mature big data credit risk assessment is to first use the data in the ecosystem to do credit risk assessment on the credit white households and provide credit services. Of course, there may also be concerns about whether the data in the hands of private companies will bring about the protection of users' rights and interests.

So there's speculation that one of the central bank's motivations for developing a digital yuan is to centralize payment data. In the digital yuan system, the nine authorized institutions develop their own digital wallets, which can complete payment transactions between them, such as a buyer paying money from an ICBC wallet account to a seller's Alipay wallet. The difference between this process and the current one from one wechat Pay to another is that ICBC only has this half of the transaction information, while Ant only has that half of the payment information. The trading data is then fragmented. But the central bank will own the whole set of data, which, objectively speaking, could be beneficial for data security and information protection.

At the same time, a new question needs to be answered, namely, when all the data is concentrated behind the central bank, will the central bank pay more attention to the security of the data, rather than the full productivity of big data analysis. This is obviously an important tradeoff.

The suggestion of multi-country collaborative payment platform put forward by Tobias ADRIAN, Director of the Monetary and Capital Markets Department of IMF deserves attention. On the one hand, if the platform is established, it could provide a new infrastructure for payments between countries. On the other hand, the platform could also support international data exchange, where countries keep their own data and use services to export algorithms, validations or other services without providing the raw data.

The way crypto assets are regulated may need to be updated in the future

Finally, there are several factors to consider regarding the position on cryptocurrencies. First, cryptocurrencies such as bitcoin are not strictly currencies, but more like digital assets, due to their lack of intrinsic value. What's more, studies have shown that roughly a quarter of all Bitcoin account holders and half of all trading activity is linked to illegal transactions.

Second, the regulatory attitude towards cryptocurrencies and digital assets depends on the maturity of the country's financial system and regulatory regime. As you know, the Chinese government currently prohibits cryptocurrency trading in China. The main reason is that our country still faces significant challenges in anti-money laundering. Moreover, the country retains many capital account controls, and if digital assets like cryptocurrencies can be traded freely, it will cause far more problems than benefits.

Finally, long-term trends need to be fully considered. A ban on cryptocurrencies may be practical in the short term, but it is worth in-depth analysis to see if it is sustainable in the long run. Some of the new digital technologies brought about by cryptocurrencies are valuable to the formal financial system, including tokenization, distributed ledger, blockchain technology, and so on. A prolonged ban on cryptocurrency trading and related activities risks missing out on important digital developments, and bans may not be effective for long. There is no particularly good recipe for how cryptocurrencies should be regulated, especially for a developing country, but ultimately an effective approach may still need to be found.