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 currencies, countries need to consider multiple dimensions such as preventing commercial bank disintermediation, privacy protection, incentives, and defusing financial risks. Designs such as digital renminbi “two-tier distribution + no interest payment” can provide important references. I believe In the future, the digital renminbi will develop in a more comprehensive, safer and more standardized direction.

The design and issuance of the central bank’s digital currency requires attention to data governance, and it is necessary to prevent the data of each digital wallet developer from forming a new “island”. The central bank coordinates and integrates and owns a complete set of digital currency payment data, which is more effective in terms of data security and privacy protection, but it also needs to pay attention to the productivity of data. In cross-border data governance, the proposal on multi-country collaborative platforms may be a direction worth considering.

Cryptocurrencies such as Bitcoin are more like digital assets than digital currencies in the strict sense. China’s current ban on cryptocurrency transactions is beneficial in the short term to achieve policy goals 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 for the formal financial system. If cryptocurrency transactions are banned for a long time, some important digital technology development may be missed. opportunities, and prohibition may not necessarily be effective in the long run.

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

The Design, Trend and Supervision of Central Bank Digital Currency

The design of the central bank’s digital currency needs to consider multiple dimensions

The People’s Bank of China has been implementing digital renminbi since 2014 and has been piloting it for many years. According to the “Digital RMB White Paper”, there are three main reasons for China’s promotion of digital RMB: First, to provide multiple forms of currency, with digital currency as a supplement to banknotes. The second is to improve the inclusiveness and security of the financial system, improve payment efficiency and fairness of payment services. The third is that it may be used to support some form of cross-border payment in the future.

In unofficial discussions, there are other speculations. The first one believes that the digital renminbi is to replace the existing mobile payment services. The second view is that the digital renminbi is intended to centralize payment data in the hands of the central bank. The third believes that the digital renminbi is to promote the internationalization of the renminbi and replace the US dollar. Officials, however, do not accept these claims.

Central bank digital currencies are one of several emerging trends that have emerged recently. The benefits and costs of the central bank’s digital currency ultimately depend on how the digital currency system is designed.

The design of the digital renminbi is clear. It is a central bank digital currency for individual users, with a two-tier distribution mechanism that is loosely coupled with bank accounts. This means that when users make micropayments, they can directly use tokens without paying interest. In my personal understanding, the design motivation of the digital renminbi is mainly payment. This is why some official calibers say that the digital renminbi is mainly used as a substitute for M0, not a substitute for M1 or M2. The design of the central bank’s digital currency “two-tier distribution + no interest payment” is also very important, so as to minimize the potential impact on financial intermediaries such as banks, which is very important to all central banks.

There are still some trade-offs to be made when designing a central bank digital currency, such as privacy protection. If privacy protection is not done well, the public’s willingness to use the central bank’s digital currency may be reduced. I have heard stories of small street shops refusing to accept mobile payments because they heard that the government would tax online payments. There is no doubt that digital transactions should be included in the tax system of the country. But the above examples undoubtedly show that positive or negative incentives can change people’s behavior patterns. Some people believe that the central bank’s digital currency may improve financial efficiency and increase the velocity of money circulation, but others believe that the central bank’s digital currency may lead to bank disintermediation, thereby driving up financing costs and slowing down economic growth. The final result will depend on the specific design of the central bank’s digital currency. The same is true for financial stability. Whether the central bank’s digital currency will cause new types of financial risks and whether it will help central banks monitor and resolve new risks more accurately depends on how the central bank’s digital currency is designed.

Prospects for the future development trend of digital RMB

There are many conjectures about the future development trend of digital renminbi. First, digital renminbi is currently only available to individual users, but it may be expanded to issue to institutions at some stage in the future. Second, the current scope of application of digital RMB is limited to the domestic market, but the People’s Bank of China has already participated in the Bank for International Settlements’ multilateral central bank digital currency bridge (mBridge) project. At some stage in the future, cross-border payment may become an important function of digital RMB. Third, the People’s Bank of China has not paid interest on the digital renminbi at present, but it cannot rule out the possibility that it will consider paying interest at some stage in the future. Fourth, whether it is possible for private institutions to issue stablecoins backed by digital renminbi in the future is a very sensitive issue, but at least it is worth thinking about what are the pros and cons.

The digital renminbi has been piloted for many years, but it has not yet been widely used. Quoting Mu Changchun from the Digital RMB Research Institute of the People’s Bank of China, there are three things that need to be promoted: one is to develop a more comprehensive ecosystem and build a wide range of usage scenarios across the country; the other is to further optimize the system to ensure financial stability and financial stability. Security; the third is to formulate a more complete legal and policy framework to manage the use of digital renminbi.

Need to pay attention to the balance of data security and productivity

Judging from the current structure of China’s mobile payment system, there are two main payment platforms, namely WeChat Pay and Alipay. Both systems are relatively independent, 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 these data, the platform has derived many new businesses and products. Now the relatively mature big data credit risk assessment is to firstly use the data in the ecosystem to conduct credit risk assessment on credit white accounts and provide credit services. Of course, some people may also worry about whether the data is in the hands of private companies, whether it will bring about problems in the protection of user rights.

Therefore, there is speculation that one of the motivations for the central bank to develop digital renminbi is to centralize payment data. In the digital RMB system, nine authorized institutions each develop digital wallets, and payment transactions can be completed between these wallets. For example, the buyer pays money from the ICBC wallet account to the seller’s Alipay wallet. The difference between this process and the current transfer from one WeChat payment to another is that ICBC only has this half of the transaction information, while Ant only has the half of the payment information. In this way, the transaction data is fragmented. But the central bank will have the whole set of data, objectively speaking, this may be beneficial for data security and data protection.

At the same time, a new question needs to be answered, that is, when all the data is concentrated in the central bank, will the central bank pay more attention to data security instead of giving full play to the productivity of big data analysis. Obviously this is also an important trade-off.

The proposals made by Tobias ADRIAN, director of the Department of Monetary and Capital Markets of the International Monetary Fund, etc., are worthy of attention. On the one hand, if this platform is established, it may provide a new infrastructure for state-to-state payments. On the other hand, this platform can also provide support for international data exchange, that is, countries keep their own data, and at the same time use services without providing original data, output algorithms, verification or other services.

In the future, it may be necessary to update the supervision method of encrypted assets

In the end, there are several aspects to consider when it comes to cryptocurrencies’ stance. First, a cryptocurrency such as Bitcoin is not strictly a currency, but more like a digital asset due to its lack of intrinsic value. What’s more, studies have shown that about a quarter of all bitcoin account holders and half of all transactions are related to illicit transactions.

Secondly, the regulatory attitude towards cryptocurrencies and digital assets depends on the maturity of the country’s financial system and regulatory system. As we all know, the Chinese government currently prohibits the trading of cryptocurrencies in China. The main reason is that our country still faces major challenges in anti-money laundering. In addition, our country still retains many capital account control measures. If digital assets such as cryptocurrencies can be traded freely, the problems will far outweigh the benefits.

Finally, long-term trends need to be fully considered. Banning cryptocurrencies may be practical in the short term, but whether it is sustainable in the long run deserves an in-depth analysis. Some new digital technologies brought by cryptocurrencies are very valuable to the formal financial system, including tokenization, distributed ledgers, blockchain technology, and so on. If cryptocurrency trading and related activities are banned for a long time, some important opportunities for digital technology development may be missed, and the ban may not be effective for a long time. There is no particularly good way to ensure stability and function as to how cryptocurrencies should be regulated, especially for a developing country, but ultimately an effective approach may still need to be found.