The Relevant Theory of Digital RMB
Research and development background and necessity
Every change in currency form in history has been driven by technological progress and economic development. From the earliest discovered coins of the Spring and Autumn period and the Warring States period, even earlier, to the Jiaozi coins of the Song Dynasty, and then to the Chinese yuan, these are all the currencies experienced by China. Currently, the main payment methods in China include mobile payment, cash, bank cards, etc. In addition, each currency form has a corresponding wallet or carrying tool. How did you make a wallet in history? For example, stringing money together with thread is a method; For example, making a bag out of cloth or leather bags is also a wallet. Nowadays, electronic wallets are more convenient to carry and pay for. The research and promotion of digital renminbi is also driven by the development of the mobile internet era.
Firstly, theoretically position the digital RMB. Currency has three major functions: pricing, payment, and value storage. The Renminbi is issued by the People's Bank of China on behalf of the country and has a pricing function. It is measured in yuan and is now approximately 7.2 yuan, which is equivalent to 1 US dollar. This currency unit is relatively moderate and stable in the long run. Among the three major functions, payment is the foundation of currency, and digital RMB focuses on payment, but the prerequisite for payment is a pricing. For example, the products in our store have a price that can be paid for with other things, but paying in Bitcoin, gold, or other general equivalents is not as convenient as paying in RMB. Another function of currency is value storage, which is expected to be diluted in the discussion and development process of digital renminbi. If digital renminbi becomes the main channel for storing value, it will lead to a series of other problems.
The digital RMB focuses on payment issues, mainly in three aspects. Firstly, it can improve the efficiency of currency issuance and central bank payment systems. Secondly, it can provide backup and upgrade for the current electronic payment system. Now we have bank card payment, Alipay, WeChat and other payment platforms. As a universal payment tool, digital RMB can circulate in all the above payment channels and provide better infrastructure and better platforms. Thirdly, inclusive finance can be promoted, allowing some groups who currently do not receive bank account system services to enjoy more financial services. For example, it can play a positive role in serving residents and low-income groups in remote areas, the elderly and those with limited mobility, as well as short-term foreign visitors to China.
Positioning and principles
Digital RMB is the legal tender in China, and like cash, its value is based on property rights. The concept of property rights in law refers to who possesses and who owns it. A popular term in international discussions now is tokenized deposit, which means tokenized deposits. But in reality, tokens are tokens, and their value is based on property rights. But deposit is a concept of asset liability. There are significant differences in the legal attributes of property rights and deposits during the payment and transaction processes. The value of property rights can be directly transferred, and deposits, as bank liabilities, must pass through the bank as a third party during the transfer process and cannot be directly transferred. So the specific properties and meanings of tokenized deposit still need further in-depth exploration. But the nature of digital RMB is clear, it is a currency, and its value is based on property rights. The transfer of property rights automatically realizes the transfer of value.
Another widely discussed issue is the positioning of digital currency applications. Should we focus on retail payments or wholesale payments? Retail payments can directly serve residents and businesses, while wholesale payments are payments between financial institutions such as banks. The payment system of a country is the responsibility of the central bank, and under a unified payment system, bank to bank transfers can be achieved. Currently, Europe is piloting wholesale digital currencies, with a focus on transfers and settlements between commercial banks. The Federal Reserve's first step in considering digital currencies is also wholesale payment services. China's digital renminbi is considering focusing on retail payments. Focusing on retail can provide the greatest improvement in the three areas mentioned earlier, namely improving efficiency, providing payment system backup, and promoting inclusive finance.
China's digital currency is relatively leading in the world. In the process of developing and promoting digital renminbi, we adhere to three principles: people-oriented, market-oriented, and legalized. Firstly, consider the people's nature and serve the people. Secondly, considering marketization, we have designed a dual tier architecture that does not break the existing pattern of commercial banks and plays a decisive role in market resource allocation throughout the entire process. The entire digital RMB ecosystem is fully competitive. Thirdly, consider legalization, how to protect privacy, how to ensure security, and how to comply with the law. The Bank for International Settlements (BIS) has also proposed three principles for digital currency. Firstly, do not harm the existing infrastructure and currency issuance system by issuing digital currency. Secondly, Coexistence requires the coexistence of digital currency, existing paper currency, and cash. Thirdly, Innovation/Efficiency emphasizes innovation and improving efficiency. The three principles of BIS are consistent with our three principles of digital RMB.
In addition, the digital RMB emphasizes a balance between personal privacy protection and anti money laundering and anti-terrorism financing. In terms of anonymity, digital currency is controllable anonymity, that is, small anonymity, and large amounts can be traced according to the law. The People's Bank of China divides the authorization of digital currency wallets into four levels. The lowest authorized wallet in the fourth level is anonymous and can be opened using a mobile phone number. Both the mobile phone number and personal information are kept confidential, and no other personal information is required. If you need a larger wallet, you need some real name information. In practice, the People's Bank of China should protect personal information, while also executing reports on large and suspicious transactions, hierarchical authorization of internal management information, strict internal control, as well as big data analysis and intelligent risk control. It is theoretically feasible to comprehensively handle all of these, and the cost and effectiveness in the operation process are relatively good.
Double layered operational architecture
Operational architecture design is the most frequently discussed issue in global digital currency discussions, with the main focus on single layer or double layer? In a single-layer architecture system, the central bank directly issues digital currency to the public. The model adopted by the digital renminbi is a double-layer operational architecture to maximize the enthusiasm of market institutions such as commercial banks. The People's Bank of China issues digital currency, but the People's Bank of China does not directly target residents and enterprise customers. Instead, it issues digital currency to commercial banks, such as industry, agriculture, China, construction, transportation, and mobile operators and payment platforms, such as Alipay and WeChat, which serve customers directly as operators.
Double tier operation is conducive to fully utilizing the existing resources, talents, technology and other advantages of commercial institutions, promoting innovation and competition through market driven approaches. In terms of business resources, the IT facilities of commercial banks and technology companies are relatively mature, with a large user base. In terms of human resources, commercial banks and technology companies also have sufficient talent reserves. The People's Bank of China mainly carries out top-level design, as well as legal norms and regulatory standards. After the top-level structure, legal norms, and regulatory requirements are designed, services still need to be handed over to the market, playing a decisive role in resource allocation by the market. Double tier operation helps to diversify risks. The People's Bank of China does not preset technological paths and remains open. Different institutions can explore different technological paths and achieve system optimization through competition.
At the same time, in terms of management mode, the digital renminbi adheres to the concept of centralized management. Why adhere to a centralized management philosophy? Because the central bank's digital currency is a debt to the public, it is necessary to ensure and strengthen the central bank's macro prudential and monetary policy regulatory functions, and maintain the original transmission mode of monetary policy. In a two-layer operational architecture, the first layer is centralized management, similar to how much circulating cash has been issued by the People's Bank of China and how much digital currency has been issued. Transfers and transactions between customers are on the second floor, and a large amount of customer information is stored on the second floor, namely, Industrial, Agricultural, China, Construction, Communications, or WeChat Alipay. They are obligated to be responsible for privacy protection, anti money laundering, anti-terrorism financing, etc., and only report the necessary information to the People's Bank of China. In this sense, the centralized management model of the People's Bank of China has been achieved, as well as a dual level operation model.
Analysis of the impact on monetary policy and financial system
In the discussion of digital currency, a widely discussed concern is the so-called financial disintermediation issue, which means that the issuance of digital currency by the central bank may have a crowding out effect on the deposits of commercial banks. For example, ordinary people are concerned that in the event of a banking crisis, they may directly convert their deposits into central bank digital currency, as central bank digital currency is a direct liability of the central bank and theoretically the safest. In the single-layer operational architecture model, the central bank directly issues digital currency to the public, which may have a higher probability of financial disintermediation risk and may also lead to a "unified" situation where the central bank dominates the world, which we do not want to see.
The dual operation system can maximize the maintenance of the current currency supply and circulation system, without changing the dual account pattern of commercial banks opening accounts at the central bank and ordinary people and enterprises opening accounts at commercial banks, and without changing the debt relationship of currency in circulation. In addition, in order to further reduce the risk of financial disintermediation, the People's Bank of China has implemented some specific measures under the framework of double-layer operation to ensure it. One is to set transaction limits; The second is the mechanism of charging as needed; Thirdly, there is no interest payable on digital RMB. In addition, China's deposit insurance system provides protection for insured deposits, improves the safety of commercial bank deposits, and also helps to reduce the risk of financial disintermediation.
Here we need to mention the concept of 'Narrow bank'. We know that currency creation has a multiplier effect, and the reason for this is because there is a reserve requirement system. For example, the average statutory reserve requirement ratio in China is 8%, and banks need to deposit 8 yuan with the People's Bank of China when they receive 100 yuan of deposits. The partial reserve arrangement allows the base currency to create more credit currencies through the banking system, known as the currency multiplier effect. Narrow bank refers to a 100% reserve requirement, which means that 100% of commercial bank deposits must be deposited with the central bank. Therefore, under Narrow bank, the currency multiplier is 1, and there is no currency creation.
In fact, China's centralized custody of customer reserves of third-party payment institutions is a very successful case of Narrow Bank. Since 2017, the People's Bank of China has standardized the customer reserves of payment institutions such as Alipay WeChat, and has increased the proportion of its centralized deposit in the central bank by several times. By 2019, 100% of the deposits have been in the central bank. This measure effectively ensures the financial security of payment institution customers, namely the people and enterprises. Third party payment institutions may fail or go bankrupt, and centralized custody can effectively ensure the balance in people's wallets. On the other hand, in an economic sense, this is a relatively successful Narrow bank case where the reserve size of payment institutions is relatively small compared to the entire monetary banking system, and centralized custody has not had a significant impact on the currency creation mechanism and currency multiplier. This successful case has also been fully recognized by international organizations and other central banks.
In summary, digital RMB is a legal tender issued by the People's Bank of China in digital form, with designated operators participating in the operation. It supports loose coupling of bank accounts based on a broad account, and is exchanged 1:1 with RMB cash to form the legal tender system. It has value characteristics and legal compensation, and supports controllable anonymity. The broad account system includes both bank account systems and other account systems after tokenization. With just one ID card and one mobile phone, one can identify individuals, personal property or tokens, which is an account system. The digital RMB also supports the loose coupling process of bank accounts. Loose coupling is a concept borrowed from IT, and now digital renminbi can rely on bank accounts or not. When not relying on bank accounts, some are like hard wallets or prepaid cards. Wallets are not related to accounts, but are loosely coupled to bank accounts. Digital RMB has value and value characteristics; It has legal compensation and must accept payment; Simultaneously supports controllable anonymity.
Related Practice of Digital RMB
In terms of pilot projects, the People's Bank of China began developing digital currencies in 2014, and the first batch of digital RMB city pilot projects were launched in 2019. Currently, the pilot projects are being carried out in 17 provinces, and the overall situation is relatively smooth. As of March 2023, the total balance of digital RMB wallets in the pilot areas was 8.67 billion yuan, with a cumulative transaction amount of 891.86 billion yuan and a total of 750 million transactions. 100 million personal wallets were opened through digital RMB apps. The balance of digital RMB wallets accounts for only one thousandth of over 100000 billion RMB, but due to faster circulation, the transaction scale it supports is still relatively large.
In terms of products, digital wallets are managed in layers based on the strength of customer identification. The carriers are divided into soft wallets and hard wallets. Soft wallets include mobile apps and software development toolkits, while hard wallets include IC cards, wearable devices, IoT devices, etc. The ownership of wallet permissions can be divided into mother wallet, sub wallet, and there can be several sub wallets under the mother wallet. Moreover, digital RMB can be used for electricity free payments. In addition, the digital RMB smart contract has powerful functions. Whether it is serving consumers on the C-end, serving enterprises on the B-end, or serving the government on the G-end, digital currency connectivity has strong functions, and there is also a connection between these three ends, such as wage agency that connects both the C-end and the B-end, and government subsidies that connect both the C-end and the G-end. In terms of scenario construction, it can better combine services to the government, the people, and enterprises. In addition, digital RMB can support a green and low-carbon lifestyle, and the People's Bank of China has many successful cases.
In terms of cross-border payment, the cross-border payment designed by the People's Bank of China follows the principles of non-destructive, compliant, and interconnected. Non destructive refers to not compromising the monetary sovereignty and monetary policy independence of other central banks. Compliance refers to compliance with the law. Connectivity refers to the ability of infrastructure to be fully interconnected. The People's Bank of China has also piloted cross-border business and launched a multilateral currency bridge project with the Bank for International Settlements, with partners including the Hong Kong Monetary Authority, the Bank of Thailand, and the Bank of the United Arab Emirates. In multilateral currency bridge projects, central bank currency can be used for cross-border payments, achieving modularity, scalability, balance, and interoperability, providing convenient and efficient services. This arrangement has enabled the interconnection of digital currencies among multilateral central banks, enabling funds to be bridged and traded on the bridge at the central bank level, transitioning from one country's digital currency to another country's digital currency, and then down the bridge, converting the digital currency into the currency that customers need. At the same time, the People's Bank of China is actively promoting bilateral cooperation in digital currencies, such as cooperation with the Hong Kong Monetary Authority. Existing practice has shown that digital currency can play a positive role in improving cross-border payment efficiency and reducing cross-border payment costs.
The above content comes from the WeChat official account of "Tsinghua Research Institute of Service Economy and Digital Governance". The article only represents the author's personal views and does not represent the position of the Golden Hair Academy
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