Text/Zhang Tao, Vice President of the International Monetary Fund (IMF)
Editor's note:
Recently, news about digital currency, the central bank, has emerged in an endless stream, indicating that the work related to DC/EP expected to be issued by the People's Bank of China is accelerating.
On August 6th, there were media reports, and many people in state-owned banks said that the four major banks were testing digital wallet applications on a large scale in Shenzhen and other places to prepare for the official landing of digital currency. At present, some internal employees of big banks have begun to use it for scenarios such as transfer and payment.
this article is based on the keynote speech delivered by Zhang Tao, vice president of the International Monetary Fund (IMF) at the London School of Economics on March 19th, 22 and the contents published in the June issue of Tsinghua Financial Review.
digital currency (CBDC), the central bank, is "legal tender in digital form that can be widely used". The latest survey of the central bank by the Bank for International Settlements shows that 8% of banks are exploring CBDC.
Benefits of CBDC
First, a more effective payment system. In some countries/regions, due to geographical location, the cost of managing cash may be very high, and rural people or poor people in areas without banking services may not be able to use the payment system. CBDC can reduce costs and improve efficiency.
second, strengthen financial inclusion. CBDC can provide public digital payment methods without individuals holding bank accounts.
Third, the payment system is more stable and the entry threshold for new companies is lower. In some countries (such as Sweden and China), more and more payment systems are concentrated in the hands of some very large companies. In this case, some central banks regard owning their own digital currency as a means to enhance the flexibility of the payment system and enhance the competition in this industry.
fourth, strengthen monetary policy. Some scholars believe that CBDC can also enhance the transmission of monetary policy by promoting financial inclusion. In addition, CBDC can be used to charge negative interest rates to the extent that the cost of using cash is high, thus helping to alleviate the restrictions of the "effective lower limit" on the transmission of monetary policy.
fifth, a means to fight against the new digital currency. Digital currency, which is issued in China and supported by a trusted government, is based on its own account, which may help to restrict the use of privately issued currencies (such as stable currency). These stable currencies may be difficult to supervise and may pose risks to financial stability and monetary policy transmission.
risks of CBDC
Although there are potential benefits, risks from CBDC will still appear, and measures need to be taken to reduce the risks by correctly designing CBDC.
first, the risk of disintermediation between banking departments. Individuals can transfer money from deposits in commercial banks to accounts held by CBDC; Conversely, banks may feel pressure to increase deposit interest rates or obtain more expensive (and volatile) wholesale funds, which will put pressure on banks' profitability and may lead to higher costs or less credit to the real economy. This disintermediation risk can be alleviated by CBDC which does not pay interest (at least in the environment of positive deposit interest rate) and by limiting the holding amount of CBDC.
The change of related assets and liabilities under the DECP mode of the central bank indicates
The second is the so-called "run risk". In times of crisis, bank customers may switch from holding deposits to holding CBDC, which may be regarded as a safer method and more liquid. However, reliable deposit insurance can continue to prevent bank runs. In addition, if there is a bank run, it will be easier for the central bank to meet the liquidity needs of banks through CBDC. In addition, in many countries in the world, bank runs are usually consistent with currency runs. Therefore, regardless of the existence of local currency CBDC, depositors may seek refuge in foreign currencies.
Third, CBDC will have an impact on the balance sheet and credit allocation of the central bank. If the demand for CBDC is high, the balance sheet of the central bank may increase substantially. In addition, the central bank may need to provide liquidity to banks experiencing rapid and large capital outflows. As a result, the central bank will bear the credit risk and must decide how to allocate funds among banks, thus opening the door for political intervention.
Fourth, CBDC also implies the costs and risks of the central bank. The cost of providing CBDC by the central bank may be high, and it may cause risks to its reputation. To provide a complete CBDC, the central bank is required to remain active in many steps of the payment value chain, which may include interacting with customers, building front-end wallets, selecting and maintaining technologies, monitoring transactions, and dealing with Anti-Money Laundering (AML) and Counter Financing of Terrorism (CFT). Failure to meet any of these functions due to technical failure, cyber attack or just human error may damage the reputation of the central bank.
A comprehensive version of CBDC
Considering the national conditions, decision makers all over the world are actively considering the best ways to solve these problems. Among all the options, a potential way for the central bank to reduce some costs and risks while providing a safe alternative to cash is to establish a partnership with the private sector to provide a comprehensive version of CBDC (or Synthetic Version of CBDC, abbreviated as sCBDC). Under the supervision of the central bank, the private sector will issue digital currency, which is fully supported by the central bank's reserves.
compared with the complete CBDC, the advantages of SCBDDC include retaining the comparative advantages of the private sector and the public sector. The private sector can innovate and interact with customers, and the public sector can supervise and provide settlement services and trust. This will be a two-tier system, which is different from the current arrangement, that is, banks provide payment services to customers, but settle in the currency of the central bank.
in addition, sCBDC may have lower cost and lower risk for the central bank. Considering that the central bank does not have to conduct customer due diligence and is not directly responsible for AML/CFT compliance. Moreover, the central bank will not be responsible for technical failures, designing user interfaces or answering customers' questions.
However, sCBDC will need additional supervision from the central bank and establish clear criteria to obtain sCBDC licenses and access the reserves of the central bank.
compared with privately issued stable coins (including global stable coins), sCBDC also has advantages. Stable currency seeks to minimize price fluctuations by using assets (including legal tender used around the world) as reserve support or by using algorithms to manage its supply in the market. Global stable currencies are those that can be rapidly expanded by providing other services or commodities by using the existing customer network. Backed by the central bank's reserves and directly supervised by the central bank, sCBDC may be safer than stable currency.
CBDC and its international influence
The above are all related to the domestic influence of CBDC, but they also have important international influence, and the International Monetary Fund (IMF) is also very interested in it. On the one hand, using CBDC as an international exchange means can improve the efficiency of cross-border payment, which is expensive, slow and opaque at present. On the other hand, cross-border CBDC may increase the possibility of currency substitution (dollarization) in countries/regions with high inflation rate and large exchange rate fluctuations, thus reducing the ability of the central bank to implement independent monetary policy. In addition, the cross-border use of CBDC may also have an impact on the effectiveness of capital flows and management measures and the international monetary system.
CBDC exploration
Throughout the world, there are great differences in the degree of exploring digital currency and the distance of issuing such currency.
Some countries have recently started experiments to explore the experience of CBDC. Some countries have run or are preparing pilot projects to explore the feasibility and impact of CBDC. To this end, they have increased the resources allocated to CBDC and financial technology research in the central bank, sometimes in cooperation with private sector consultants. Several other countries are reviewing and revising their legislation to support the issuance of CBDC. They are actively studying the potential impact of competitive CBDC design. Some authorities are also cooperating with the public and their legislatures to discuss the possibility of issuing CBDC. Finally, some countries do not need to release CBDC immediately. Instead, they focus on improving existing payment design and strengthening supervision. Some people are exploring synthetic CBDC, while others are considering other ways to improve the payment system by not issuing CBDC at all (such as fast payment).
Summary
CBDC has formed a trend, and countries represented by China and the United States are actively promoting the landing of CBDC and exploring its possible impact on the future global financial system. At the same time, some domestic private enterprises and organizations are also actively participating in the pilot work of the central bank's landing in digital currency. Hangzhou recently released ten demonstration scenarios of "six new" development, encouraging Hangzhou enterprises to actively strive for and take the lead in launching the settlement pilot of the central bank digital currency, which provides support for blockchain enterprises in Hangzhou to participate in derivative scenarios related to the central bank digital currency in the future.
About Complex Beauty
Complex Beauty was established in 28, and it has the core technology of low latency and high concurrency in matching trading system. In 213, it started the research and development and innovation of blockchain and smart contracts. In 214, it applied for the first blockchain invention patent: wallet retrieval function, and was authorized in December 217. In the past five years, Complex Beauty has always attached importance to the self-research and innovation of technology. According to the patent retrieval system of China National Intellectual Property Administration, Complex Beauty has applied for more than 4 invention patents of blockchain technology, and 13 of them have been authorized. According to the statistics of the number of patent families in derwent, an international authoritative intellectual property organization, Complex Beauty ranks among the top five in the world with Alibaba and IBM.