On June 8, the Hong Kong Monetary Authority announced the “FinTech 2025” strategy. Regarding the deepening of the central bank’s digital currency research, the Hong Kong Monetary Authority said in its strategy that it will conduct in-depth research to strengthen preparations for Hong Kong’s issuance of central bank digital currency at the wholesale and retail levels.
Since 2020, major central banks around the world have accelerated their deployment in the digital currency field. A digital fiat currency competition between countries has quietly kicked off. In the 21st issue of 2020, “China Foreign Exchange” organized the cover topic of this organization, and conducted in-depth discussions on the topic of “central bank digital currency boom”. Among them, the article “Design Elements and Promotion Ideas of Digital RMB” pointed out that the issuance and launch technology of digital RMB does not constitute an obstacle, and the challenge for digital RMB is still in promotion. The promotion ideas for the future digital renminbi proposed in the article are still outdated.
At present, the issuance and delivery technology of digital renminbi does not constitute an obstacle, and the challenge for digital renminbi is still in promotion.
In the trend of private digital currency innovation to promote currency “de-cashing” and “decentralization”, many central banks are actively studying central bank digital currencies (CBDC). As early as 2014, the People’s Bank of China officially launched the study of CBDC to demonstrate the feasibility of the issuance; in 2016, the People’s Bank of China established a Digital Currency Research Institute to undertake the research and development of CBDC; after the launch of the Libra White Paper in June 2019, the People of China Banks frequently speak out against CBDC. my country’s version of CBDC is expected to be launched at any time, and it will be temporarily named “DC/EP” (Digital RMB). DC/EP has basically completed top-level design, standard formulation, function research and development, joint debugging and testing under the premise of adhering to two-tier delivery, M0 substitution, and controllable anonymity, and has carried out a large number of pilot tests.
The role of digital renminbi issuance
The DC/EP being piloted in my country is a retail CBDC issued to the public. Some countries in the world have studied and demonstrated the feasibility of issuing retail CBDC, mainly for the convenience of retail payment and the promotion of inclusive finance. Some small countries that have issued central bank digital currencies are mostly out of the need to seize the sovereignty of their own legal currency, or out of consideration of curbing high inflation.
As far as my country is concerned, because the third-party retail payment market represented by Alipay and WeChat Pay has been highly developed, and the domestic legal currency position is stable, the necessity of launching a digital renminbi has been controversial. The author believes that the value of the introduction of the digital renminbi to my country is mainly reflected in the following three aspects:
The first is to strengthen macro management and control capabilities and improve the accuracy of capital investment. This is first reflected in the central bank’s digital currency can promote monetary policy to effectively break through the lower limit of interest rates. Issuing the central bank digital currency at the retail end and abolishing the use of large amounts of cash at the same time can count negative interest rates on the central bank digital currency, or charge a wallet custody fee for the central bank digital currency as appropriate, which is essentially equivalent to implementing a negative interest rate policy. As a result, the constraint on the lower limit of the zero interest rate can be broken, and the space for monetary policy can be released. Therefore, if the digital renminbi can replace deposits in the future, it can pay dividends and create credit, which will have a substantial impact on monetary policy. Secondly, it can improve the central bank’s timely grasp of macroeconomic dynamics and the traceability of credit funds, and optimize the currency transmission mechanism. Through the detailed record of each transaction, the digital currency can follow or even guide the economy more microscopically, and achieve a more precise dynamic grasp of the microeconomic end, creating a real-time and comprehensive perception method for the central bank. Yao Qian, the former director of the Digital Currency Research Institute of the Central Bank, gave a CBDC design based on “conditional triggers” to achieve precise credit allocation to groups such as small and micro enterprises, thereby improving the accuracy of central inclusive financial policy support Sex.
The second is to improve the management of mobile payment data and revitalize the value of data. For my country, an important strategic value of issuing digital renminbi lies in improving the data governance of mobile payments. On the one hand, the problem of data infringement in the field of electronic payment is serious. Existing electronic payment tools around the world have excessively infringed on the privacy of users, and due to the existence of the positive externality of privacy protection, the public’s use of cash with privacy protection functions is lower than the social optimal level. In China, the relevant rules and regulations corresponding to the protection of personal privacy have not been effectively established, and there are excessive collection of personal privacy data and data abuse by third-party payment institutions. On the other hand, the extremely valuable data in the field of electronic payment has not been fully revitalized. my country UnionPay dominates the payment transactions in the commercial banking system, which can basically realize the connection of data, but the transaction data of third-party payment has not been connected, and the effective integration of data has not been realized. As a result, the value of “1+1>2” in the use of electronic payment data has not been fully exploited. Since the development of the digital economy is inseparable from the support of a large number of mobile payment data in the context of real transactions, the data governance of mobile payment tools does not completely prevent third-party payment institutions from obtaining or using payment-related data, but to allow data to be obtained and used. It is more rule-based to prevent excessive data collection and abuse. At the same time, there is also a problem of breaking the existing “data islands”, that is, to maximize the efficiency of data use while meeting the requirements of financial regulatory compliance. The value mining of data is maximized. The launch of retail CBDC will provide an important means for data governance in my country’s retail payment market.
The third is to fill in the gaps in the current payment tools. When studying the feasibility of issuing CBDC, the European Central Bank made it clear that the launch of CBDC should not jeopardize the efforts of the private sector to innovate convenient retail payment tools. For my country, although the cash utilization rate continues to decline, the scale of cash utilization is still huge. The market space for the use of digital renminbi to replace cash still has a certain imagination. Currently, the planned digital RMB “dual offline payment” function is aimed at this market. For existing payment instruments, the digital renminbi does not necessarily reflect an absolute dominant market position. The low replacement ratio of digital renminbi to existing payment tools reflects to a certain extent that existing payment tools have fully met the market’s needs for convenience and security. Of course, considering the increasing emphasis on privacy by individual users, digital renminbi provides users with the dominant power in the protection of privacy information, which may lead to misaligned competition with existing electronic payment tools, forcing the continuous improvement of existing payment tools Data governance.
Analysis of Design Elements of Digital RMB
Considering that no major country has successfully issued a CBDC, in order to prevent the uncertainty of the issuance of CBDC on my country’s economic and financial markets, my country has made a relatively conservative choice in the process of designing the characteristics of the digital renminbi.
One is reflected in interest payments and limits. In theory, digital renminbi can realize interest payment, and can realize differentiated interest payment for different individuals. my country’s digital renminbi is positioned as a substitute for M0 instead of M1 and M2, which is legally compensatory. In order to prevent the impact on bank deposits, digital renminbi does not pay interest. And because digital currency makes the conversion of deposits (M1 and M2) to cash (M0) very convenient, once financial panics and financial risks occur, the infection will accelerate, and it will still have an impact on the banking system. In order to prevent the aforementioned substitution effects of the digital renminbi, it is suggested to impose some quota restrictions on the digital renminbi. Daily and annual cumulative transaction limits can be set for the digital renminbi, and large-amount scheduled exchanges or higher fees may be charged for large-amount transactions.
It is worth noting that the non-payment of interest on the digital renminbi will reduce the value of the digital renminbi in macro-control. Yao Qian, former director of the Central Bank’s Digital Currency Research Institute, once proposed that if the central bank’s digital currency is not only a payment tool, but also an interest-bearing asset, then it will create a new price-based monetary policy tool: first, in wholesale At the end, when the central bank’s digital currency interest rate is higher than the reserve interest rate, it will replace the reserve interest rate as the lower limit of the money market interest rate corridor; second, at the retail end, the central bank’s digital currency interest rate will become the lower limit of the bank deposit interest rate. The digital renminbi that does not pay interest may cause the public to reduce their willingness to hold, thereby weakening the role of the digital renminbi in the transmission of macro policies.
The second is reflected in anonymity. The controllable anonymity design of the digital renminbi also follows the golden mean, which can meet the end-to-end anonymity needs of the payment parties, and provide necessary real-name information and transaction data to support the central bank to achieve regulatory compliance. This is the principle of “voluntary front-end and real-name back-end” followed by our country in the design of legal digital currency. Regarding the design of controllable anonymity, Fan Yifei, deputy governor of the People’s Bank of China, once pointed out that if there is no transaction third party anonymity, personal information and privacy will be leaked; but if complete third party anonymity is allowed, it will encourage crimes such as tax evasion and terrorist financing. And money laundering. In order to strike a balance, it is necessary to achieve controllable anonymity and disclose transaction data to the central bank, a third party.
Anonymity is only in a relative sense. From the perspective of developing a digital economy, completely eliminating the use of mobile payment data for commercial purposes will obviously bring greater losses to economic and social values. In the environment of big data and cloud computing, transaction security is no longer completely dependent on traditional identity authentication systems. It has become a trend to ensure transaction security and avoid risks through customer behavior analysis. For transaction information that chooses to be anonymous, digital renminbi can still be used for macro-desensitization big data analysis, but it does not infringe the privacy of legitimate users at the micro-level. However, the “desensitization” of the identity of transaction information will greatly increase the difficulty of connecting diversified data and reduce the value of data. Based on the loosely coupled technology design of the current digital renminbi account, residents can choose to bind the token to the bank account, allowing transaction data to be matched with real names.
The third is reflected in the design of the “central bank-commercial bank” dual credit release mechanism. Under this mechanism, the central bank will issue digital currency to the commercial bank business library. The commercial bank is entrusted by the central bank to provide the public with legal digital currency deposit and withdrawal services, and work with the central bank to maintain the normal operation of the legal digital currency issuance and circulation system . Under the design of the dual-level release mechanism, the core issue is how to divide data governance rights among commercial banks, and between commercial banks and central banks. Under a “central bank-commercial bank” dual credit issuance mechanism, commercial banks can become a central collection point for digital RMB data storage, which can give commercial banks an incentive to obtain the right to obtain retail payment data and carry out product innovation based on CBDC transaction data . However, in order to prevent the formation of new “data islands”, it is recommended that the central bank set up special financial technology companies or designate clearing institutions such as UnionPay and Net Union to be responsible under the premise of clarifying the data governance authority of the central bank and commercial banks. Unified collection of CBDC transaction data of various banks. On the basis of meeting the regulatory needs of the People’s Bank of China on “anti-money laundering, anti-terrorist financing, and anti-tax evasion”, in the future, we can also consider opening up data to the market in an appropriate manner, including opening up big data based on personally identifiable information to market institutions. Use right, and appropriately open personal privacy data to market institutions on the basis of individual authorization, so as to fully tap the economic and social value of payment data accumulated by CBDC transactions.
Ideas for the promotion of digital RMB in the future
At present, the implementation of digital renminbi does not constitute an obstacle in terms of issuance and release technology. The challenge of digital renminbi lies mainly in promotion. The author believes that for the promotion of digital renminbi, efforts should be made from the following aspects.
Commercialized the promotion of digital renminbi
In terms of delivery strategy, according to the current two-tier delivery design of digital renminbi, the digital renminbi is ultimately delivered to end users through the second-tier agency service bank. The author believes that in the process of launching, the strategy of focusing on commercialization and supplementing by administrative means should be followed to avoid unfair competition with other payment methods in the market.
In terms of channel selection, in addition to state-owned commercial banks, opportunities should be created for private institutions to participate in the central bank’s digital currency issuance and operation. In order to increase the degree of marketization of DC/EP, in the future, technology companies that meet the qualifications, with their own scenarios and flow resources can be prudently allowed to open deposit accounts in the central bank that are only used for digital renminbi. Even if private institutions cannot directly open accounts with the central bank, they can also establish a whitelist of wallet service providers, allowing commercial institutions with scenarios and user resources to open digital currency wallets for users, which can be quickly promoted in combination with business scenarios.
Promote digital renminbi in government intervention scenarios
In addition to the promotion of commercialization methods, the author believes that the first to promote the use of digital renminbi in government intervention scenarios will help improve the acceptance and liquidity of digital renminbi, and improve the convenience of payment in government public scenarios. At present, the construction of my country’s digital currency laws and regulations is not yet complete. The “Chinese version of the regulatory sandbox” currently being promoted and constructed can be used in the Shenzhen Digital Economy Innovation and Development Pilot Zone, Beijing Financial Technology and Professional Service Innovation Demonstration Zone, and Hainan Free Trade Zone We will carry out pilot work with controllable scope and risk, and carry out innovative applications such as digital currency research and mobile payment. In the selection of specific scenarios, it can be the first to try scenarios such as personal income tax payment, medical registration, water, electricity and coal payment, traffic confiscation, public transportation travel, and charity donations.
In the future, if the digital renminbi breaks through the retail payment function, its usage scenarios can be further expanded. For example, in the issuance of special funds such as poverty alleviation funds and demolition funds, the controllable anonymity requirements can be appropriately relaxed, and the traceability characteristics of digital currencies can be used to effectively deter and combat the problems of deduction and corruption. For digital renminbi that may be used for large-value payments, special fiscal and tax policies can be introduced to support the issuance and circulation of digital currencies. For example, when government departments and public institutions are required to provide services involving capital exchanges to the public, they should first choose central bank digital currency or open digital currency service channels; for taxable activities involving digital currency production and operation activities, tax deductions or preferential treatments will be given. However, in the process of promoting the expansion of digital renminbi application scenarios, it is still necessary to clarify the positioning difference between digital renminbi and existing payment and settlement tools.
Promote digital renminbi in cross-border payment scenarios
At present, the digital renminbi mainly solves domestic payments rather than cross-border payments. However, as the internationalization of the renminbi advances, the digital renminbi can be further expanded to cross-border payment usage scenarios. It is recommended to give priority to the multi-scenario pilot application of digital renminbi in the Guangdong-Hong Kong-Macao Greater Bay Area to deepen the business integration of Guangdong-Hong Kong-Macao in virtual banks and break through data barriers. For example, mainland residents can directly open a central bank digital currency account in a virtual bank in Hong Kong, and directly use digital RMB in Hong Kong, such as transportation, medical registration, online and offline (69.330, 0.49, 0.71%) shopping and other related commercial use scenarios. Virtual bank to develop. Currently, Southeast Asian regions such as Singapore and Malaysia have successively launched or announced virtual banking plans; in the future, other Southeast Asian countries may also follow up. The widespread application of digital renminbi in Southeast Asia will help accelerate the internationalization of the renminbi.
If you do not rely on the virtual banking system, you can consider accessing the existing multinational cooperation platform, or coordinate the central banks along the “Belt and Road” countries to build a cross-border payment alliance, and use the digital renminbi for tourism consumption, overseas shopping, and overseas Immigration and labor remittances, etc. In addition, if the digital renminbi breaks through the retail payment function, such as for cross-border investment, the digital renminbi can be used for digital asset transactions to improve the efficiency of digital asset circulation. At present, digital asset transactions are mainly concentrated on virtual currency exchange platforms, which lack connection with assets in the real world; but in the future, with the tokenization of real estate, equity, bills, etc., digital renminbi is expected to become the most commonly used cross-border digital asset transaction The unit of pricing and settlement.
Promote digital renminbi with diversified characteristics
First, negative interest rates can be set for digital renminbi. Although the current digital renminbi does not pay interest and only replaces M0, in the global central bank rate cut cycle, my country’s central bank has also opened an interest rate cut channel. In the future, interest rates are expected to fall further. Outside the toolbox of traditional monetary policy, negative interest rates on the digital renminbi can be used as a reserve tool, which can be introduced in due course to break the lower limit of zero interest rates and further stimulate the economy.
Second, a digital renminbi inclusive account can be set up specifically, and a positive interest rate can be applied to the inclusive account. The characteristics of digital currency allow regulators to set conditions and thresholds more accurately. Inclusive accounts can be targeted to specific groups of people, such as poor people in remote areas, to appropriately reduce account opening requirements, and set positive interest rates to achieve targeted poverty alleviation and improve financial inclusiveness.
The third is that digital renminbi can be used for credit and not only in the field of payment. For example, consumer loans flow into the stock market and housing market from time to time, and it is difficult to monitor the flow. For example, using digital renminbi to issue consumer loans can not only accurately count the total amount of consumer loans, but also track their uses, which is conducive to alleviating the debt crisis and promoting the healthy development of consumer finance.
Author/ Translator: Jamie Kim
Bio: Jamie Kim is a technology journalist. Raised in Hong Kong and always vocal at heart. She aims to share her expertise with the readers at blockreview.net. Kim is a Bitcoin maximalist who believes with unwavering conviction that Bitcoin is the only cryptocurrency – in fact, currency – worth caring about.