How does the central bank's digital currency DC/EP affect you and me?
In 2014, the People's Bank of China initiated forward-looking research on central bank digital currencies. In 2016, the Digital Currency Research Institute of the People's Bank of China was established, becoming the first official agency in the world to develop digital currencies for legal central banks.
The picture shows the exterior of the People's Bank of China
Visitors experienced the convenience that financial services bring to life at the China International Finance (Banking) Technology and Equipment Exhibition.
“The central bank's digital currency is coming!” Recently, a picture of the central bank's digital currency closed testing on the Agricultural Bank's account went viral on the Internet. Subsequently, the progress of the central bank's digital currency pilot project was revealed one after another by various departments in many places, which attracted widespread attention.
What is a central bank digital currency? How is the central bank's digital currency used? What impact will it have on economic and social development and people's daily lives?
The central bank's digital currency is the digitization of the RMB
China was one of the first countries to study central bank digital currencies. As early as 2014, the People's Bank of China initiated forward-looking research on central bank digital currencies. In 2016, the Digital Currency Research Institute of the People's Bank of China was established, becoming the first official agency in the world to develop digital currencies for legal central banks. At the end of 2017, the State Council approved the People's Bank of China to lead commercial institutions to develop a digital renminbi system (English name: digital currency/electronic payment, DC/EP for short).
“The central bank's digital currency is a digital form of RMB; it itself is not a new currency.” Mu Changchun, director of the Digital Currency Research Institute of the People's Bank of China, told the reporter that digital yuan is a controlled and anonymous payment instrument issued by the People's Bank of China, with designated operating institutions participating in the operation and exchanging to the public. It is based on a broad account system, supports the loosely coupled function of bank accounts, is equivalent to banknotes and coins, and has value characteristics and legality.
Specifically, first, the digital yuan is issued by the People's Bank of China. It is a legal tender with a national credit endorsement and legal solvency. Compared with virtual currencies such as Bitcoin, digital yuan is fiat currency, equivalent to fiat currency, and is the most effective and secure. Bitcoin is a virtual asset that has no value base, does not enjoy any sovereign credit guarantee, and cannot guarantee stable value. This is the most fundamental difference between central bank digital currencies and crypto assets such as Bitcoin.
In terms of issuance and exchange, the digital yuan has adopted a two-tier operating system. In other words, the People's Bank of China does not directly issue and exchange central bank digital currency to the public; instead, it first exchanges digital yuan with designated operating institutions, such as commercial banks or other commercial institutions, and then these institutions exchange it for the public. This two-tier operating system is basically the same as issuing banknotes, so it will not have a big impact on the existing financial system, nor will it have a big impact on the real economy or financial stability.
Regarding the broad account system as a basis, Mu Changchun explained that the bank account system is a very strict system. Generally, many documents and personal information must be submitted to open a bank account, and under the central bank's digital currency system, anything that can form a unique personal identity can become an account. “As long as you can prove your identity, you can use it as an account. For example, your license plate number can be used as a digital yuan sub-wallet to pay when you pass the highway or park. This is the concept of a broad account system.”
The so-called support for loose bank account coupling means that a digital yuan wallet can be opened without a bank account. For people in some rural areas or remote mountainous areas, even if they don't have a bank account, they can enjoy corresponding financial services through digital wallets, which helps to achieve inclusive finance. Furthermore, for overseas travelers and other people without a domestic bank account, they can also make small payments more conveniently by opening a digital yuan wallet.
How is the digital yuan equivalent to banknotes and coins? In fact, when the People's Bank of China exchanges the central bank's digital currency with a designated operating agency for issuance, the institution is required to pay 100% of the reserve to the People's Bank of China. This is a 1:1 exchange process. This can guarantee that the central bank's digital currency will not be overissued, and there is no room for market speculation.
“It all boils down to one point. The central bank's digital currency is a payment instrument, reflecting the basic function of money.” Mu Changchun said that the central bank's digital currency is actually the digitization of the RMB; it is a digital version of the RMB.
It won't impact WeChat Alipay
According to the “2018 China Inclusive Finance Index Analysis Report” released by the central bank in October 2019, as of the end of 2018, China had 7.22 bank accounts per capita, and the proportion of adults using electronic payments nationwide exceeded 80%. So, with China's electronic payment system so developed, why should the central bank's digital currency be studied and launched?
The introduction of a central bank digital currency is of far-reaching significance. Mu Changchun said that the advent of Bitcoin and other crypto assets will have a certain impact on a country's monetary sovereignty. The primary purpose of launching a central bank digital currency is to protect monetary sovereignty and the status of fiat currency. At the same time, the advent of digital yuan will improve the efficiency of payment systems and enhance the level of facilitation of RMB payments. “Everyone knows that during peak shopping periods like 'Double 11' and '618', the retail payment system is under a lot of pressure, so the digital yuan must also be able to meet this high level of concurrency and retail demand, and contribute to improving the efficiency of the entire payment system.”
Xiao Xiaolin, an assistant professor at the Department of Applied Economics at Peking University's Guanghua School of Management, analyzed that the central bank's digital currency can solve two problems in the actual application of cash and electronic payments. One is that banknotes and coins are easy to anonymize and falsify, and there is a risk that they will be used for money laundering and terrorist financing; second, electronic payments based on the tight coupling model of existing bank accounts cannot meet the public's demand for anonymous payments.
According to Huang Guoping, director of the Investment and Financing Research Center of the Chinese Academy of Social Sciences, existing banknotes and coins are expensive to print and issue, and are inconvenient to carry, so there is a need for digitalization. However, once the central bank's digital currency is launched, it will greatly reduce all costs required for minting coins.
Under the epidemic, central bank digital currencies can also reduce the chance of the spread of the virus in currency transactions. Yang Dong, executive director of the Regulatory Technology and Fintech Laboratory at Renmin University of China, said that institutions and individuals will be more inclined to use non-direct transaction media, including central bank digital currencies, in a short period of time, and central bank digital currencies will use this as an opportunity to accelerate their issuance and application.
Many people are concerned about whether the central bank's digital currency will have an impact on Alipay, WeChat Pay, etc. In response, Mu Changchun said that the central bank's digital currency will not have too much impact on current mobile payments, but will instead bring ordinary people a richer choice of payment instruments to meet more payment needs. “Currently, Alipay and WeChat use commercial bank deposit currencies for payments. After the introduction of the central bank's digital currency, it actually converted the money in the wallet from the commercial bank deposit currency into the central bank's currency. The wallet itself did not change; only the form or type of money in the wallet changed. WeChat or Alipay are still used as wallets to provide payment services for ordinary people.”
In fact, for people who are used to using mobile payments, Alipay, WeChat Pay, etc. have become a public product or service. Once extreme situations such as service interruptions occur, they will have a huge impact on social and economic activities and people's lives. This requires the People's Bank of China, as a public department, to provide tools and products with similar functions as a backup for corresponding public products.
Using central bank digital currency is a market-based selection process
When using mobile payments, people sometimes encounter awkward situations: such as paying in underground parking lots without an internet connection, or shopping on an airplane or cruise ship with poor signal. Unless you have cash, it's difficult to even buy a bottle of water. This kind of problem can be avoided by using central bank digital currency. In terms of application scenarios, central bank digital currency can achieve “dual offline payments” like banknotes, that is, payments can be made even when both parties are offline. In the future, as long as the mobile phone has a digital yuan wallet installed, there is no need for a network or signal. As long as the phone has electricity, the two phones can make transfers or payments as soon as they touch each other.
At the same time, central bank digital currency can also meet people's normal anonymous payment needs. Current payment instruments such as internet payments and bank card payments are all tied to traditional bank account systems and cannot meet the need for anonymity. Digital yuan, on the other hand, does not rely on bank accounts and has controlled anonymity functions. For some reasonable and legal micropayments, anonymous payments can be made, thereby protecting personal privacy and information security.
“You can pay as soon as you touch your phone. Is the central bank's digital currency wallet safe?” “Can the elderly in remote rural areas learn to use it?” From comments left by some netizens, it can be seen that netizens are paying great attention to the security and universality of central bank digital currency payments.
“There's no need for anyone to worry about this kind of safety issue.” Mu Changchun said that in terms of product design, an active confirmation is required before a digital yuan transaction. Without confirmation, the transaction cannot be completed, and the safety of funds can be guaranteed. At the same time, if the central bank's digital currency actually occurs in acts such as misappropriation, the digital yuan can provide a loss function for real-name wallets.
Regarding the universality of central bank digital currencies, according to reports, when designing digital yuan, the needs of people who are unwilling or unable to use smart terminals have been fully taken into account. In the future, whether using IC cards, functional machines, or other hardware, central bank digital currency payments can be made. “The central bank's digital currency is a payment tool that serves the people of the whole country. It will not only meet the needs of people using smart terminals; it must take care of the needs of all ordinary people.”
Will central bank digital currencies completely replace cash? Mu Changchun said that from a global perspective, banknotes have shown a downward trend in both absolute and relative amounts, and many countries, including China, have entered a cash-light society. The emergence and circulation of central bank digital currencies to what extent and how quickly they can replace the original banknotes depends on whether central banks' digital currency designs can meet the needs of the public and facilitate payments for ordinary people. “It's not a mandatory process; it's a market-based selection process. We designed the digital yuan based on the needs of ordinary people, and also realized the issuance and use of the digital yuan from a market-based perspective.”
Helping to control corruption
In reports from discipline inspection and supervision authorities, we can often see such cases: a leading cadre accepts huge bribes from others; a grassroots cadre falsely claims and misappropriates relief funds for people in need; a fugitive from a position crime laundered stolen money through underground money stores... So, what kind of role can central bank digital currency play in cracking down on corruption and official crimes?
According to Mu Changchun, as a payment tool, in design, the central bank's digital currency divides digital yuan wallets into several levels according to the intensity of holding customer information. If you are making a large payment or transferring funds, you must apply for a real-name wallet. For acts such as large-scale corruption, bribery, and money laundering, since the information has a real name, it can provide corresponding assistance in case investigation and fund tracking.
Digital currency also has great potential in response to frequent problems that infringe on the interests of people at the grassroots level. In the process of disbursing many livelihood funds, it is possible to distribute the relevant funds directly to people through digital currency smart contracts, and the relevant funds can be distributed directly to the public's digital wallets without going through layers of intermediate steps, thus eliminating the possibility of false claims and withholding misappropriation in advance.
In practice, some corrupt elements will evade supervision by breaking up large deals and reducing them to zero. When applied to the central bank's digital currency field, corresponding illegal and criminal activities may be carried out through small anonymous wallets. So aren't anonymous wallets unsupervisable? That's not the answer.
“We need to strike a balance between protecting personal privacy and preventing crime.” Mu Changchun said that digital yuan uses many technical measures to ensure that users' personal privacy and information security are not infringed upon, but illegal and criminal acts such as corruption and money laundering cannot be tolerated. When competent authorities issue corresponding legal documents in strict accordance with procedures, they must cooperate to verify and cross-compare the corresponding data to provide information support for the fight against illegal crimes.
Source: Central Commission for Discipline Inspection and National Supervision Commission website
