5 truths behind the central bank's digital currency “punching Alipay and kicking Bitcoin”
This article was originally written by the public account “Suning Institute of Finance”. The author is Xue Hongyan, Deputy Director of the Suning Institute of Finance.
Everybody loves the RMB. The central bank's digital currency is getting closer and closer, igniting public enthusiasm. Some people are bad at money knowledge and are concerned about issues such as “what” and “why”; others are passionate about eating melons and are concerned about topics such as “what to do with Alipay,” “what is the future of Bitcoin,” and “the hegemony of the US dollar is facing a fatal blow.”
Punch Alipay, kick Bitcoin, and challenge the hegemony of the US dollar. I have to say that the entertainment industry eats too much melons; they have all eaten the financial sector. What's the truth?
In this article, we'll try to answer them one by one. The reason for this is an attempt at an answer, because any unofficial interpretation is subjective speculation.
What is a central bank digital currency?
Central bank digital currency is first and foremost a type of currency.
What is currency? Money is a unit of account and a lubricant for economic activity. You can think of money as a bill of lading, behind which there is a right to claim goods and services, so money also becomes a symbol of wealth — people hold and store money with the intention of one day exchanging it for the goods and services they need.
Regarding money, the economist Hayman Minsky famously said, “Everyone can create money, but the question is whether it can be accepted.” This means that in an economic sense, everyone can issue money, but not everyone can issue a currency that is accepted by the public. Some people are willing to accept Bitcoin, so Bitcoin can also perform monetary functions within a specific range and become a kind of “virtual currency” (many countries, including China, do not recognize its monetary attributes).
In the modern economic context, currency usually refers to legal tender. It is issued by the central bank. It has legal and mandatory characteristics, and no one can refuse to accept it within the border. The RMB is the legal tender in China and corresponds to different forms of currency: cash notes are RMB, behind bank deposits are RMB, and the central bank's digital currency is also RMB.
So, what is a central bank digital currency? You can think of it as a renminbi that exists in digital form.
Since they are all RMB, they must be interchangeable between different forms — digital currency can be exchanged for cash or bank deposits; conversely, cash and deposits can also be exchanged for central bank digital currency.
The question is, cash and current deposit accounts can already meet everyone's payment needs. From the user's perspective, why do they need central bank digital currency?
Indeed, when analyzing the necessity of central bank digital currency, experts mostly base it from the perspective of central banks and financial institutions. For example, compared to cash, digital currency can save printing costs, and there are no problems with damage, replacement, or banknote transportation, and can greatly reduce the cash management costs of the financial system. Compared with bank deposits, digital currency can trace the flow of funds, and small ones prevent illegal entry of credit funds into the stock market and property markets, and generally play a role in anti-money laundering and anti-terrorist financing.
Where are the benefits for ordinary people reflected? The advantage is that it is anti-theft, because it is traceable, and there is no fear of theft. The inconvenience is reflected in the need to re-cultivate a habit of using money.
Of course, there is no need to worry. There may be more and more scenarios that support digital currencies in the future, but all scenarios will be compatible with cash and credit card payments. As far as users are concerned, whether or not to use central bank digital currency will not affect our daily lives at all.
Will central bank digital currencies replace cash?
To a certain extent, the central bank's issuance of digital currency is also following the trend — in line with the trend of a “cashless society” and providing a better payment carrier for the digital economy. So will central bank digital currency replace cash? It won't.
The term “cashless society” was very popular in 2017. Not only did payment giants take advantage of the momentum to promote it, but even some merchants began refusing to accept cash, causing a great deal of controversy, and came to an end with the central bank's statement “refusing to accept cash as an illegal act.” Since then, no one has promoted a “cashless society,” but the “cashless society” has not stopped penetrating.
The use of cash is burdened with significant operational and management costs, and the country has always encouraged reducing the use of cash in economic activities. For example, the “Interim Regulations on Cash Management” introduced in 1988 clearly state that “the state encourages account holders and individuals to use transfer payments to reduce the use of cash in economic activities,” but for enterprises, it is clearly stipulated that they can only use cash under limited conditions and not exceed a certain amount; otherwise, it is suspected that it is illegal. Otherwise, it is difficult for cash payments to track the flow of funds. Large cash transactions are often the hardest hit area for gray transactions and illegal transactions. From an enterprise's perspective, large cash payments can also cause problems such as anti-counterfeiting identification and cash storage, and are generally more likely to accept electronic transactions.
However, for small and sporadic transactions, cash has irreplaceable advantages. The biggest advantage is that it is highly flexible and versatile. It does not need to rely on third-party devices and networks, can be used for transactions anytime, anywhere, and is suitable for all groups and almost all small-amount scenarios. Looking back on the past, mobile payments have taken the lead, but even the smartest technology inevitably has bugs. At this time, cash was a safety cushion after the hottest headlines to ensure smooth payments.
At the same time, considering the complexity of the currency payment scenario and the complexity of the customer base, the unimpeded approach of Tier 1 and 2 cities is not necessarily suitable for the county area, and the payment methods sought by some people (such as young people) do not represent everyone's choice. And cash is available to everyone.
Finally, the anonymous nature of cash is an unrivaled advantage. Most of the time, people don't mind financial institutions having their own financial records, but there are also many times when people want some transactions to “know you know what I know.” “Virtual currencies” such as Bitcoin were once widely popular due to their anonymity characteristics, but it has been proven that cash is truly completely anonymous. In a sense, the traceability of central bank digital currency will further highlight the anonymity advantage of cash.
Therefore, central bank digital currency can replace cash in many scenarios, but it cannot replace cash in all scenarios. For the foreseeable future, cash will still lie quietly in our wallets and stay with us.
Is the central bank's digital currency making users abandon third-party payments?
In addition to cash, many people are also worried that Alipay and WeChat Pay's leading positions are not guaranteed. Technically, central bank digital currency can be “deconmediated” peer-to-peer transactions. As long as both merchants and consumers open central bank digital currency wallets, there can be direct transactions between the two wallet addresses. There is no such thing as mobile payments or banks.
However, of course, the central bank does not want to truly “de-intermediate” the issuance of digital currency. It still adopts a two-tier operation mechanism of “central bank - financial institution - user”. Users open accounts in financial institutions and do not directly engage in business relationships with the central bank.
Here's the problem. The central bank's digital currency operates on two levels, while third-party payments have a three-tier structure: central bank — bank — (UnionPay/Internet) — third party payment — user. The central bank's digital currency clearly states that a bank account is required, and does it also require a third party payment account?
In theory, this is unnecessary, just as when there is no third party payment, the payment transfer transaction works as usual. As far as the current settlement system is concerned, third-party payments are an experiential upgrade. They are the icing on the cake, and have never been a necessity. The same is true for central bank digital currencies. There is no third party payment, and there will be no real impact.
The central bank's digital currency is a new battleground. User habits are being cultivated from scratch. Looking at it now, bank apps are taking the lead, and the first-mover advantage is not here for third party payments.
Of course, there's no need to overstate the impact. From the user's perspective, there is no essential difference between central bank digital currency and cash or bank card balances. Its rare nature attracts a small number of young people seeking change. It must be widely accepted by the public, but it is a long-term and gradual process. In this long process, the first-mover advantage brought by the bank app pioneering the pilot was insignificant.
Finally, the rise of third-party payments is not a product of regulatory agencies' intention to promote or spontaneously nurture the financial system, but rather changes and innovations spawned by market demand itself. Created to meet market needs, user habits have become the biggest moat for third-party payments. As long as the user experience doesn't decline, third-party payments will have vitality.
At the end of the day, competition for payments has always been a competition of scenarios and experiences.
Is the central bank's digital currency crushing Bitcoin's living space?
The currency attributes of “virtual currency” are not recognized domestically, and Libra and Bitcoin have no room for survival in the country. The so-called central bank's digital currency is crushing the living space of Libra and Bitcoin, pointing more towards the cross-border market.
Both Libra and Bitcoin are positioned as international currencies. Relying on blockchain technology, they are not restricted by national borders, and are not bound by existing international settlement systems. In a context where many countries consider virtual currencies illegal, the cross-border scenario has become the fundamental source of virtual currency vitality.
At the technical level, central bank digital currency can significantly enhance the cross-border payment experience, but as a legal tender in China, central bank digital currency has the color of a sovereign country and does not have the flexibility of non-sovereign currencies such as Libra and Bitcoin at the level of acceptance by the international community. For example, some countries such as Japan accept Bitcoin as a means of payment, but it is impossible to accept RMB for domestic transaction scenarios. The latter involves monetary sovereignty issues.
Therefore, we can compare “virtual currencies” spontaneously developed in various markets from a technical perspective, but we cannot define sovereign currencies only from a technical point of view. A sovereign currency is an economic issue, a financial issue, but also a social and political issue; it is not a technical issue.
The essence of the central bank's digital currency is the renminbi. The renminbi is China's legal tender, and the internationalization of the central bank's digital currency is equivalent to the internationalization of the renminbi. However, the internationalization of the RMB has never encountered technical bottlenecks; behind it, there is both the strong inertia of the US dollar hegemony system and a power game between major powers.
Therefore, the influence of the central bank's digital currency in cross-border payments will not go beyond the scope of influence of the internationalization of the RMB. There is no real pressure on “virtual currencies” such as Bitcoin and Libra.
The real pressure on Bitcoin and Libra comes from every sovereign country. Bitcoin imagines the establishment of a monetary system that transcends sovereignty and is widely accepted. Its early logo of technological anti-inflation did attract some people, but money has never been the protagonist of society; it is only a subsidiary tool. What kind of society and economy would correspond to what kind of monetary system; how could there be a unified currency in the world without the same society?
Of course, the world is so big, there is still room for the same ideals in the world. Corresponsibly, Bitcoin and Libra can always find a foothold; however, they are limited to a place to base themselves.
Is the central bank's digital currency challenging the hegemony of the US dollar?
What is the hegemony of the US dollar? Simply put, the US dollar is an international hard currency, which gives the US a unique advantage — when money is needed, the US only needs to start a money printer, while other countries can only exchange it for commodities, as former French President Charles de Gaulle said:
“America is enjoying the superprivileges and tearless deficits created by the dollar. It uses worthless waste paper to plunder the resources and factories of other nations.”
Since global resources and commodities are all denominated in US dollars, theoretically, if the US starts a money printer, it can buy all the goods and assets it needs globally. To make it easier to understand, imagine this extreme situation: if all Americans don't work, they can live a happy life by relying on the Federal Reserve's banknotes to buy and buy money around the world (in fact, American consumers have always spent more than their income and earned 1 yuan for 2 yuan, which is inseparable from the hegemonic support of the US dollar).
Of course, there will actually be restrictions. If the US prints too much money, it will cause the US dollar to depreciate and shake global confidence in the US dollar. Central banks will instead hold other alternative assets such as gold or the euro, and shake the dollar's hard currency status. The problem is that the world still lacks a real competitor for the dollar.
After the COVID-19 pandemic, the Federal Reserve once again launched an epic “big drain” to print money, but the US dollar appreciated. Because of the global outbreak of the epidemic, safe-haven funds had nowhere to go; they can only go to the US to buy US debt. At the end of 2019, foreign investors held a total of 6.7 trillion US dollars in US Treasury bonds, accounting for about 30% of the outstanding balance of US Treasury bonds.
The hegemonic position of the US dollar made many “magic operations” of the Federal Reserve feel emboldened and fearless, and gave birth to various cases of “the dollar cutting a chive”, which greatly distorted the international financial system.
There shouldn't be just one type of hard currency in the world. After the 2008 financial crisis, many countries were overwhelmed by the drama “America sneezes, global flu,” setting off a wave of “looking for alternatives to the US dollar” around the world. Many countries have turned their attention to the renminbi, objectively accelerating the internationalization of the renminbi; however, China has set its sights on a supranational currency — SDR (Special Drawing Rights, which anchors a basket of currencies such as the US dollar, the euro, the Chinese yuan, the Japanese yen, and the British pound, which can be used to repay the International Monetary Fund debt and balance of payments deficits among member governments, etc.).
In 2009, then-central bank governor Zhou Xiaochuan proposed to better play the role of SDR, promote the use of SDR pricing in international trade, commodity pricing, investment, and corporate accounting, and then create an international reserve currency that is decoupled from sovereign countries and can maintain long-term currency stability.
Looking at it now, SDR is no substitute for the US dollar. Looking around, the US dollar has no rivals: the euro is plagued by financial crises in EU countries, the yen is being dragged down by Japan's “lost 30 years,” and the pound was the hegemon of the previous era. After looking around, people will still keep their eyes on the RMB.
The internationalization of the RMB is a reflection of the increase in the global influence of the Chinese economy at the financial level. There is still a long way to go to upgrade the structure of the Chinese economy and improve quality and efficiency. Naturally, the internationalization of the RMB cannot be achieved overnight. The central bank's digital currency can enhance the RMB experience at the level of cross-border transactions; that's all; there is no need to overinterpret it.
The international financial system should not have just the dollar, nor does the international financial system expect another dollar. The dollar today will not be the yuan's tomorrow. The RMB needs to find a new way to integrate into the world and be a mutually beneficial tool rather than a powerful tool for “cutting chives.”
Let's talk about central bank digital currencies here.
References:
1. [US] Nuriel Roubini, Stephen Meem, “The Economics of Crisis”, Zhejiang People's Press, 2018.
Source: Blockchain Information
