How to advance the digital currency process in a steady manner

People's Daily-International Finance News

Oriental IC Figure

Status of Digital Currencies

In 1983, David Chaum proposed the eCash (electronic cash) system and in 1998 WeiDai proposed the b-money (B-coin) constitute the world's earliest digital currency system. With the birth of Bitcoin in early 2009 and the hype, digital currencies are gradually entering the public eye.

In recent years, digital currencies have flourished, with projects such as Dogcoin, Yuanbao Coin, Ether, IOTA, Cosmos, Libra, and so on, and a number of large traditional financial institutions have also launched digital currencies, such as Goldman Sachs's SETLcoin, JP Morgan's JPMCoin, and so on, and as of now, there are more than 2,000 kinds of digital currencies on the market.

While these super-sovereign digital currencies are booming, central bank digital currencies with legal status and backed by national sovereignty have also emerged, and central banks are stepping up the layout and development of sovereign digital currencies. In a survey of 66 central banks, more than 80% of national central banks are currently exploring sovereign digital currencies, especially the global major currencies of the U.S. dollar, the euro, the Japanese yen, the British pound and the renminbi have been at the forefront of the exploration of countries.

With the global spread of the new coronavirus epidemic, the digital economy and digital technology are bucking the trend, and the world's major countries are seizing the opportunity to rapidly develop their sovereign digital currencies.

Such as the "digital dollar" was included in the latest U.S. fiscal stimulus bill, the U.S. Wenmo digital payment business grew 52% over last year; Russia proposed the establishment of a digital currency program anchored in gold; the Bank of France in May to complete the first digital euro test; the Bank of Japan in July to let its chief economist is responsible for researching digital currencies; three countries, including Ecuador, Ukraine and Uruguay, have completed retail central bank digital currency pilots, while six countries and organizations, including the Bahamas, Cambodia, China, the Eastern Caribbean Currency Union, South Korea and Sweden, are in the process of conducting retail central bank digital currency pilots.

Currently, traditional banks account for only 72% of global banking and payments equity market capitalization, down from 96% in 2010.

Six key features

The first is the dominance of binary account structures. In exploring sovereign digital currencies, soundness and reliability are important considerations. Therefore, in order to reduce the turbulence or uncertainty brought to the current monetary system, most central bank digital currency programs maintain a binary account structure from the central bank to commercial banks. In this way, central banks largely retain tight control over currency issuance and transaction processing, including the ability to alter and reverse transactions. In addition, the binary account structure continues the existing customer service model, which is not only easier to integrate with existing laws, but also easier for the public to accept.

Second, there are multiple technology paths. The digital currency, like other emerging technologies, does not have a single feasible technical path, so countries have used different technical approaches in their exploration. For example, in the construction of digital currency infrastructure, blockchain cryptography and traditional cryptography were used respectively. And in terms of access methods, for regulatory considerations, completely token-based anonymous access is not popular, and account-based access is relatively common, but there are also central banks that are using account token methods.

Third, the infrastructure configuration is high. Given the enormous potential, uncertainty, and importance of digital currencies, countries developing central bank digital currencies are placing a high priority on building a good infrastructure that is resilient, secure, high-performance, and has the potential to carry a large scale of users, guarantee security, and at the same time have a certain degree of flexibility to meet current needs and future demand for expansion.

Fourth, the impact on monetary policy is limited. Due to the relatively short period of time for the launch of digital currency, so whether the central bank digital currency retail business will have a significant impact on the monetary policy of the host country has not been a definitive answer, but in general, the issuance of digital currency will not change the credibility of the central bank, will not cover up the fiscal dominance and other factors affecting the value of the currency, so the impact of a country's monetary policy will not be very big at the moment, but the countries in the advancement of the process also maintains the The first step in the process is to make sure that you are careful in the process of promoting it.

Fifth, to step up international cooperation. Although the central bank digital currency program are currently focused on domestic use, but the developed countries in the West have begun to international consultations on its standards and rules. For example, the Bank for National Settlements and Canada, the United Kingdom, Japan, Sweden, Switzerland, the European Union six central banks to establish a digital currency research and development working group; the World Economic Forum initiated the creation of a "central bank digital currency policymakers toolkit"; G7 summit will also be digital currency as a fixed topic.

Sixth, it is not easy to change the international monetary system. The establishment of the international monetary system and the competition between currencies is essentially the national comprehensive strength, political and economic environment and national credit competition, only with a new technology, the probability is not enough to shake the dominant position of the dollar in the short and medium term. The United States by virtue of its technology, financial capabilities, national comprehensive strength and other advantages still in the future of digital currency competition in the field of the first opportunity, especially in even the United States regulators "organized" Facebook's Libra is to enhance its competitiveness.

Risks and challenges

First, the public participation is not active. For young people, digital currency is very popular because of its convenience. But older people are unfamiliar with digital currencies and the smartphones they rely on, making it more difficult to learn and apply them. According to statistics, the smartphone usage rate is only about 75% in the United States, and even lower in Europe.

In addition, the new concept of digital currency is not accepted by all, the European society is currently conservative, for the digital economy and digital society are relatively excluded, to promote and train the public to use digital currency is not difficult.

Second, there is a blurring of the boundaries between public and private power. Compared with the high degree of anonymity, secrecy, and freedom in the use of cash, the high degree of centrality and traceability of digital currencies, both subjectively and objectively, will strengthen the ability of the state or regulatory agencies to grasp the data and information of the people. According to media disclosure, the U.S. intelligence agency CIA has attempted to use digital currencies and electronic transactions not only for its own people but also for users in other countries to carry out intelligence gathering, triggering widespread concern in the international community.

Once again, there is a lack of appropriate legal regulation. Current laws or regulations governing financial behavior are not fully applicable to digital currencies. The legal process is not only long, but also has a lag, and needs to be improved step by step in practice. How to ensure the safety and control of digital currencies when the legal system has not yet been fully established has become a major challenge, especially because money is the foundation and blood of economic activities, which starts the whole body, so it is urgent to enhance the foresight of the legislative work in related areas. In addition, the excessive legislation in some countries has seriously restricted the effective exploration of digital currency, which has become the main culprit in limiting its development.

Fourth, the security risks to the financial system. The issuance of digital currencies is very simple, which may further worsen the inflation level of some countries that already have loose fiscal discipline, thus threatening the security of the financial system. In addition, in the event of a financial crisis, digital currencies are most likely to be sold off by people in large quantities, increasing the risk of a run on banks and undermining financial stability. Given that central banks can issue digital currencies directly to individuals and the two subjects can complete transactions without the need for commercial banks, the risk of disintermediation cannot be ignored. Finally, digital currencies have the potential to crowd out bank deposits and partially erode bank credit channels.

Fifth, there is a risk of fragmentation of the global financial system. Although countries are also strengthening the international coordination of digital currencies, but at present all parties in the technical standards, privacy protection, data circulation and other aspects of regulation and rules are different. Behind this reflects the different economic strength and values of countries, but also the result of comprehensive consideration of their own monetary sovereignty, financial sovereignty and even national security. The differentiation of digital currencies will accelerate the already unstable international financial system, and does not rule out the emergence of fragmentation in the future.

Sixth, data security is a concern. The use of digital currencies relies heavily on data, and the security of the data itself is widely questioned. In particular, in recent years, frequent data leaks, hacking attacks, malicious trading of customer data and other incidents have exacerbated the public's concerns. In addition, the storage of data is also a challenge, although the storage facilities are usually located in central banks or large data platforms in specialized places and often have backups, but even so, in the event of extreme challenges such as war or disaster, how to protect the data is still an important issue.

Seventh, the impact on traditional financial institutions. With the rise of digital currencies, a large number of fintech companies are flocking to this lucrative area of the industry, and traditional lenders will face even tougher competition due to outdated information technology, already low lending rates, and expensive compliance costs. Fintech giants are skillfully combining finance and technology to reduce costs to lower levels while still managing risk, thus shifting low returns and high risk to traditional institutions.

Revelations and recommendations

We need to strengthen the regulation of clear boundaries, forward-looking legislation, improve the relevant systems, not only to regulate the behavior of the issuer, but also to protect the rights and interests of users and investors. During the legislative process, specific regions can be selected for pilot projects, local regulations can be introduced, and special licenses can be issued to continuously explore what can be done and what can't be done. In the legislation, policy space should be set aside for combating money laundering, illegal fundraising and other difficult problems through due diligence, identity verification and transaction tracking, so as to give full play to the advantages of digital currencies. Special attention needs to be paid to the protection of privacy and personal data security, the legislation must not be too regulated, to leave space for the subsequent development of the business.

The central bank's sovereign digital currency because of its transparency and traceability can provide a more intuitive and objective perspective for the government to observe the operation of the national economy, thus providing an important basis for scientific governance. In addition, the central bank's digital currency supports smart contracts, which if utilized well can strengthen monetary policy leverage, including the central bank's ability to set negative nominal interest rates, create time-limited or with other spending conditions, in order to more accurately intervene monetarily in the national economy and amplify the impact of monetary policy.

In addition, the author believes that strengthening international financial cooperation is also very important. First, to promote the RMB cross-border payment system and other infrastructure construction, especially with my free trade and development zone strategy, the central bank digital currency cross-border settlement experiments in the gradual maturity of the conditions; second, to actively carry out bilateral and multilateral cooperation between countries, focus on accelerating the process of RMB internationalization, and try to set up a payment and settlement system centered on the central bank's digital currency. By actively participating in the formulation of international standards, we are committed to establishing a standardized, unified and mutually beneficial international norm, so as to guarantee the stability and order of the international financial system in the digital currency era. However, it is also necessary to prevent individual countries from monopolizing the rules and the right to speak, further strengthening their financial hegemony, and avoiding the use of financial methods to sanction other countries at every turn.

The central bank sovereign digital currency both internationally and domestically belongs to the new things, especially people in the acceptance of the new currency way and gradually replace the use of hundreds of years of paper currency, inevitably there will be mistrust and resistance mentality, in the use of the process there will also be a lot of technical problems. In view of this, it is necessary to carry out extensive publicity and popularization activities, vivid, comprehensive, objective introduction of the central bank digital currency in all aspects of the situation, to facilitate the people to increase the confidence of the doubt, in advance to clear the obstacles for the future promotion of the full lay a good foundation for the people.

To give full play to the unique advantages of the government, enterprises, universities, associations and other subjects, mobilize the positive factors of all parties, and widely attract the input of talents from all walks of life, to create an innovative and friendly policy and social atmosphere, *** with the commitment to explore the field of sovereign digital currency to form a synergy. In the process of exploration, we should not only be proactive, but also set up boundaries and bottom lines; we should not pursue profits without principles, and we should pay attention to morality and social customs on the basis of compliance with the law, so as to effectively serve users. In addition, we should actively carry out academic research to explore the impact of digital currency on the theory of money, legal tender mechanism, pricing theory, corporate governance and other theories and practices.

(The author is a master of business administration at the China University of Political Science and Law)