Written by Guo Dexin (published by Xinhua News Agency)
The rapid popularity of mobile payment has given people rich imagination about a "cashless society". China is the country with the most extensive mobile payment applications in the world and is also one of the countries closest to a "cashless society." However, mobile payment alone cannot meet the changing requirements of the digital financial era, and the concept of "digital currency" focusing on a deeper level has emerged.
Recently, the relevant person in charge of the People's Bank of China (hereinafter referred to as the central bank) stated in public that the development of a digital currency system is underway and that the "digital RMB era" is coming. Why does the central bank launch digital currency? What are the connections and differences between central bank digital currency, online payment and so-called “virtual currency”?
How are digital currencies different?
At the third China Financial Forty Yichun Forum held recently, Mu Changchun, deputy director of the Central Bank's Payment and Settlement Department, said that the Digital Currency Research Institute under the Central Bank had begun the development of a digital currency system as early as 2018, and the Central Bank's digital currency was "ready to come out." This subsequently triggered widespread heated discussions in the Internet and financial circles.
The central bank’s research into issuing digital currency is not a temporary move. It is reported that from 2014 to the present, the research on central bank digital currency has been carried out for 5 years. In 2017, the Central Bank Digital Currency Research Institute was officially established. Currently, the institute has applied for 74 patents involving digital currency technology.
In recent years, with the development of Internet technology, especially blockchain technology, many so-called "virtual currencies" have emerged around the world, such as Bitcoin and Litecoin, which have been controversial in recent years. So, how is the digital currency proposed by the central bank different from these commercial “virtual currencies”?
From the perspective of currency attributes, “virtual currencies” such as Bitcoin are not currencies in nature. Unlike state-issued legal tender, "virtual currency" is not supported by national credit. Its speculative nature is affected by factors such as tightening supervision and technical problems. Its price often fluctuates and it interferes with the normal order of the country's and even the global monetary and financial systems to a large extent.
From the perspective of currency circulation principles, in order to ensure the orderly operation of the financial system and macro-control, only the state can exercise the supreme power of currency issuance. Therefore, central bank digital currency is a legal digital currency based on national credit and issued by the central bank. It is essentially different from "virtual currencies" such as Bitcoin.
Can it really replace cash in circulation?
China’s electronic payment is already very developed. Why does the central bank still launch a legal digital currency? "For ordinary people, the boundaries between electronic payment and central bank digital currency in basic payment functions are relatively blurred, but the central bank digital currency released by the central bank in the future is very different from electronic payment in the implementation of some functions." Mu Changchun said that in the past, fund transfers of electronic payment tools had to be completed through traditional bank accounts, while central bank digital currency can achieve value transfer without traditional bank accounts, greatly reducing the dependence on accounts in the transaction process. In layman's terms, the central bank's digital currency can be as easy to circulate as cash, which is conducive to the circulation and internationalization of the renminbi, and can also achieve controllable anonymity.
It is understood that existing cash in circulation is easy to be counterfeited anonymously, and electronic payment tools such as bank cards and Internet payments cannot fully meet the public's demand for anonymous payments. Therefore, the design of the central bank's digital currency is mainly aimed at the substitution of cash in circulation, which not only maintains the attributes and main characteristics of cash, but also meets people's needs for portability and anonymity.
Wang Xin, director of the Central Bank’s Research Bureau and Monetary and Bullion Bureau, said that the central bank’s digital currency in China mainly replaces cash to a certain extent and will help optimize the central bank’s currency payment function and improve the central bank’s monetary status and the effectiveness of monetary policy.
From this point of view, the central bank's launch of digital currency is neither the currently popular electronic wallet or online payment, nor is it a complete "replacement of the existing RMB system", but a new encrypted electronic currency system that has a certain degree of substitution for cash in circulation.
Shao Fujun, chairman of China UnionPay Co., Ltd., said that the central bank’s legal digital currency will have a great positive impact and can improve the efficiency of currency operation monitoring and enrich monetary policy tools.
It is reported that the central bank’s digital currency is mainly used in small retail high-frequency business scenarios. Zhou Xiaochuan, former governor of the Central Bank, once pointed out that research on digital currencies is essentially about pursuing the convenience, speed and low cost of retail payment systems.
Research and development is in a "horse race" state
In recent years, commercial virtual currencies have been controversial, and people are increasingly realizing that the future development trend of digital currencies will still be legal digital currencies based on national credit and issued by central banks of various countries.
It is understood that no central bank in the world has officially launched a legal digital currency. Many central banks, including the Bank of England, the Bank of Canada and the Riksbank, are developing legal digital currencies. The International Monetary Fund stated that it plans to launch a global digital currency-International Monetary Fund Currency (IMFCoin) based on the Special Drawing Rights mechanism.
At present, China is still in the stage of accelerating research and development of digital currency. For example, the central bank held a video conference on work for the second half of 2019 on August 2, calling for “accelerating the pace of research and development of my country’s legal digital currency.” The recently released "Opinions of the Central Committee of the Communist Party of China and the State Council on Supporting Shenzhen in Building a Pioneer Demonstration Zone of Socialism with Chinese Characteristics" clearly states that it "supports the development of innovative applications such as digital currency research and mobile payments in Shenzhen."
It is understood that in the future, the central bank will not directly issue digital currency to the public, but will adopt a two-tier operating system, that is, the central bank will first exchange the digital currency to banks or other operating institutions, and then these institutions will exchange it to the public. The central bank's legal digital currency may be piloted in some scenarios in the early stage, and then further promoted when it is more mature. For prudent reasons, the pilot exit mechanism will be designed.
Mu Changchun revealed that the development of the central bank’s digital currency is currently in a “horse race” state, with several designated operating agencies adopting different technical routes for research and development. "It doesn't have to be blockchain, any technology will do. Whether it's blockchain or a centralized account system, electronic payment or so-called mobile money, whatever technical route you take, the central bank can adapt."
