“National Development Institute of Peking University” News: On November 27, Zhou Xiaochuan, the former President of the People’s Bank of China, gave an excerpt from the speech at the seminar on “Digital Financial Innovation and New Patterns of Economic Development” hosted by the Digital Finance Research Center of Peking University. Ogawa’s most in-depth public interpretation to date.
Zhou Xiaochuan’s sharing mainly focused on the two major issues of DC/EP and e-CNY.
He first briefly reviewed the process of modernization of China’s payment system.
Before 2012, third-party payment, especially third-party payment using crypto and network technologies, had developed, but there was a lack of management and coordination entities. The discussion asked the People’s Bank of China to manage it, so it began to issue third-party payment licenses, and the first license was issued to Alipay.
In 2014, the People’s Bank of China began to establish a crypto currency project team. The project implementation plan did not have a clear direction, which included both blockchain technology and other possibilities.
In 2016, the People’s Bank of China established the Digital Currency Research Institute, borrowing the institutional establishment of the Banknote Printing Research Institute, which also shows that the design and research work of the next generation of banknotes has ceased since then.
In 2017, the People’s Bank of China began to develop crypto renminbi. At that time, I realized that we must not mix the crypto RMB DC/EP that belongs to the payment system with crypto asset transactions. Therefore, in 2017, the People’s Bank of China stopped ICO (Initial Coin Offering, named after IPO) and domestic transactions of Bitcoin.
In 2019, the People’s Bank of China announced the start of a pilot program and a closed test.
In 2020, we will start to promote the internal closed pilot tests of Shenzhen, Suzhou, Xiongan, and Chengdu, plus the “four places and one scene” in the future Winter Olympics scenes. The population of the four pilot cities is 13.4 million in Shenzhen, 10.75 million in Suzhou, 1.05 million in Xiong’an, and 16.5 million in Chengdu. In terms of size, they are all larger than those of other European countries.
Zhou Xiaochuan said that from a conceptual point of view, DC/EP is a two-tier R&D and pilot project plan, not a payment product. Of course, there may be people who have different understandings, and that doesn’t matter, because it is normal to have different understandings of new things in technological innovation. The DC/EP project plan may include several payment products that can be tried and promoted. These products were finally named e-CNY, or crypto RMB.
In the two-layer system of DC/EP, the People’s Bank of China is on the first layer, and on the second layer there are commercial banks, telecom operators, and Internet payment platforms. Understanding of the technical framework.
In addition, there are many concepts and scientific research organization content that need to be clarified, such as where should R&D and pilot projects be directed? With so many participants participating, how to divide the work? Especially after entering the pilot and promotion stages, what are the main responsibilities? If there is a risk in the design, how to control the risk? These are issues worthy of serious discussion.
The driving force and development opportunities of DC/EP
Zhou Xiaochuan used data to illustrate the development of mobile payment. In 2019, mobile payments accounted for more than 60% of personal consumption expenditures. In 2020, the number of mobile payment users in China will account for nearly 60% of the total population, which is already relatively high. At present, the large-amount micro-payment system composed of mobile payment, various electronic payments, and credit cards has already accounted for about 15% of the total.
Banking business began to be fully digitized 20 or 30 years ago. Accounts were all entered into computers and all were cryptoly processed. Later, all communications were also digitized. In this case, the banking business is largely a data processing business. Therefore, whether it is crypto currency or data processing, it should be regarded as digitization in a broad sense. Of course, there are also people in the world who want to put it in a narrower sense.
What are the driving factors for the R&D, piloting, and possible future promotion of the crypto RMB? What are the development opportunities? These are also the focus issues that the industry is most concerned about. In this regard, Zhou Xiaochuan also expressed his views.
First, the driving force mainly comes from the demand side, including the continuous improvement of the payment system, especially the efficiency requirements of the retail payment system, as well as reducing costs, improving convenience, and better serving users. Of course, this also provides the possibility for continuous technological advancement. Technological innovators will also promote their own technology, but the demand side is still the mainstay.
For example, in blockchain technology, the central bank has always reminded the demand side to have a clear head. Blockchain technology has the benefits of decentralization, but is decentralization really what we really need for the modernization of our payment system? In fact, it is not necessarily true, and it will bring a lot of drawbacks if it is not done properly. It may be that the blockchain technology has the immutability of records, which is also a very useful technology, but the existing systems, especially the account system, are actually very unlikely to be tampered with, and the probability of occurrence is also very low. In addition, we must also consider the issue of active modification in case of transaction errors.
For another example, there are also some technical claims that accounts can not be relied on. Is an account a bad thing? If you think about it, accounts in the financial system are actually good things. There is also an emphasis on crypto transaction encryption technology. Looking back on the progress of electronic payments in the past two to three decades, many things are indeed crypto, but the encryption links are different. Some are crypto during account access, and some are crypto during information transmission.
In the end, it is necessary to rely on the collision of technology and demand to arrive at a better development idea.
Second, Chinese people used to bring a lot of things when they traveled. Some people even made up the formula “we need money”, saying that you should bring your ID card, your mobile phone, and your house key. In addition, you should bring some cash. After the emergence of mobile phones as mobile Internet terminals, people found that they just need to bring their mobile phones when they go out. ID cards, bank cards, and health treasures are all in the mobile phones. Maybe car keys and door keys are also in the mobile phones. Mobile phones have many other functions, such as Watch news and entertainment. Therefore, people don’t necessarily want to bring cash, credit cards, etc., but hope that all these things can be integrated, which is also a big motivation.
After the further development of science and technology, there may be newer and more convenient things, but this is the case in China at this stage. These needs are in different countries, because the foundation is different, and the intensity of demand is also different.
Third, consumers accept new payments, what about retail stores? Before mobile payments, China could already use the Internet to acquire orders. To further develop Internet acquiring, shops can adopt different methods, such as entry payment, NFC, and QR code. Recently, DC/EP also introduced that transactions can be completed through the touch of a mobile phone through NFC, which is a kind of peer-to-peer P2P payment. With the improvement of network infrastructure, most places will be supported by the Internet, especially wireless networks. In case there is no internet, there are methods like NFC to complete the payment.
Fourth, the second-tier commercial institutions in the two-tier system, including commercial banks, mobile phone operators, and payment platforms, should encourage them to compete reasonably, provide services and innovate together. In Zhou Xiaochuan’s view, it is best not to pre-set or identify a certain technological route for the central bank, because technology is constantly being updated, and it is not easy to judge when this kind of technology is progressing very fast.
There have also been many discussions in the world, pointing out that special attention should be paid to the issue of financial disintermediation, especially the potential risks of financial disintermediation in the second-tier institutions. Another risk is to prevent excessive price fluctuations of some virtual assets, speculation, and separation from the real economy. China attaches great importance to finance to serve the real economy. If some financial transactions are separated from the real economy, people will often raise question marks.
Fifth, the protection of personal privacy should be highly emphasized to prevent telecommunications and payment fraud. In China, telecommunications fraud has attracted much attention. The proportion of fraud through mobile phones and other methods in China is very high, and people are also very dissatisfied with it. This is also the driving force for the development of crypto RMB.
DC/EP adopts a two-tier operating system with dynamic competition and multiple schemes
At the forum of the day, Zhou Xiaochuan also shared his views on China’s DC/EP strategy.
He said that around 2016, China began to propose a two-tier system of payment system and crypto currency internationally. The central bank is on the first tier, and the second tier is currently in operation. There are four major banks including Industry, Agriculture, China and Construction, as well as China Mobile, China Telecom, China Unicom, Ant Group and Tencent WeChat Pay. It is the second floor.
The motivation of the second-tier organization is still very strong, knowing that there will be great development opportunities, especially in terms of acquiring customers and acquiring business. At the same time, they should also bear more responsibilities. For example, they must have appropriate capital to reduce risks, especially in the payment system. If there is a risk, it may be very violent. The second is to fully understand customers as the main body of anti-money laundering. Third, we must protect customer privacy. If something goes wrong in this respect, a lawsuit should be filed, and the object of the lawsuit is these second-tier institutions. The fourth is to make a very large investment in technology, including equipment investment, operation and maintenance, etc. Of course, there will be bargaining in the middle. The second-tier organizations hope to get more benefits and take less responsibility. The first-tier institutions require these responsibilities.
In a large country like China, the second-tier institutions can develop and pilot multiple programs in parallel. The shortcomings of multiple schemes may end up with some troubles in interoperability, and may require coordination and switching devices. However, it is unlikely that there are many kinds of schemes in real implementation, because after the institutions have run-in, the understanding is relatively close, and their schemes may eventually merge.
Generally speaking, this is a two-tier system structure that can accommodate multiple solutions, and attaches great importance to the retail system, which is oriented, but not to promote a certain kind of project. Pay attention to the retail system because it is the foundation of the entire payment system. If this foundation is not well laid, other upper-level applications may become unstable.
Everyone will also ask many questions. For example, the relationship between the first and second levels in the two-tier system is considered to be a wholesale and retail relationship. In fact, it also involves some assessment of the current technology system.
Zhou Xiaochuan said that China’s current project structure is mainly based on the adoption of a dynamic, competitive, and multi-scheme two-tier management system for the crypto RMB.
First of all, for competitive and multi-scheme research and development, the question is whether the central bank has the ability to judge and choose the best technological route. The existing technologies seem to be diverse, and each will say that their own technology is the most useful. This situation will be encountered repeatedly in the process of bank electronicization. Different people may have different tendencies. However, as an institution, it is not easy for the central bank to choose an optimal technology and optimal development route, and the risks are relatively high. What if I make a wrong choice? With a population of 1.4 billion, China has a very large market and can accommodate or implement a variety of technical solutions. Each technical solution must have sufficient rationale to compare its advantages and disadvantages.
Small countries are more daring to innovate, and the pilots find that there are problems, or in the end they find that this is not the optimal solution, and it is relatively easy to switch. For a large country, it is very difficult, the time is very long, and various risks may arise during this period.
It can be seen from the past paper currency experience that in some small European countries, when one generation of banknotes is updated to another generation, the material and anti-counterfeiting signs may be completely different, but the switch can be completed in one year. For example, in the first 3 months, the old currency and the new currency are parallel, and then all retail stores do not accept the old currency in the first 3 months, and can only use the new currency. The old currency can be exchanged into the new currency at any bank branch. For the remaining 6 months, only Can exchange for new currency with a central bank. In the future, unless there is a special reason, old currencies can only be used as collectibles. China’s third-generation renminbi is switched to the fourth-generation renminbi, and the fourth-generation is switched to the fifth-generation. It takes about ten years for each generation to switch. There are still many remaining problems, so it is not easy for a big country. The advantage of a large country is that it can accommodate multiple programs in parallel.
Second, the adoption of a dynamic evolution system stems from the rapid development of financial technology, and the payment industry must also adapt to this continuous evolution. Our payment system hopes to establish such a framework that can accommodate different solutions and is a dynamic evolution system in which one can replace one in the process.
In the process of evolution, users must be the center to evaluate technology, and at the same time monopoly must be opposed, because monopoly sometimes hinders the choice of the next new technology route. Blockchain and distributed accounting technology have always been one of the two-tier crypto renminbi system solutions, and are currently still under development. Technical problems, especially processing capacity issues, are constantly being solved. How many transactions per second are still being developed Improve. As the application of retail system, it can not occupy the mainstream temporarily.
The third is the role of the central bank.
First, the central bank must maintain the currency stability of the crypto people. There are various specific methods, such as capital or issuance preparation requirements for second-tier institutions, and there may also be other means. In theory, in the two-tier system, the central bank’s own R&D focus is not on the crypto currency product itself. Of course, it is also the foundation. There must be many people inside who are actively engaged in related R&D.
Second, the central bank should pay more attention to the construction of reliable settlement and clearing infrastructure. They involve not only the retail system, but also the broader payment infrastructure, as well as the infrastructure of the financial market. The new book “Financial Infrastructure, Technological Innovation and Policy Response” compiled by Zhou Xiaochuan’s past lectures lists the scope of infrastructure, which is still very broad.
Third, the central bank can do some work to promote the interconnection of different payment products. These interconnections, if sometimes used standards or parameters are inconsistent, we can strive for coordination. The product has good versatility and is more beneficial to the market and consumers, but it must also tolerate individual time or stage differences.
Finally, the central bank must prepare emergency and alternative solutions in the dynamic evolution system. If the central bank itself develops a crypto currency, and it can also do a good job in retail, it can undoubtedly serve as an emergency and as an alternative. In the process of market application, system errors and problems that were not anticipated in advance may occur. At this time, the payment system cannot be stopped, otherwise the entire economic consumption will be affected, and alternative solutions can quickly keep up. In the past, many checks and money orders were used in the front line in the West. In case of problems, cash can be topped. This is also based on the need for substitution.
Moreover, since the future technology may be a dynamically evolving system, upgrades will occur during the evolution process. The process of upgrading is sometimes very complicated. Some systems have to be stopped when they are upgraded, and finally have to be returned. Therefore, replacements and emergency solutions are also needed when switching. In short, it is necessary to design the role of the central bank well, and give full play to the enthusiasm and strengths of all aspects of the two-tier system.
The main technical route of DC/EP and the difference with CBDC
Zhou Xiaochuan also introduced the current technical solutions for crypto currency electronic payment. In his opinion, there are mainly the following:
One is an account-based electronic wallet.
The second is the QR code used by merchants. Two-dimensional codes are constantly being upgraded. For example, standardized and dynamic two-dimensional codes have appeared. The technical content of the QR code itself is not too high, so some people say that the QR code may be out of the stage soon, but it is still a technology that can be widely used.
The third is NFC near-field contact transactions, such as Apple Pay and Huawei Pay. These are all tools with great potential in the near future.
The fourth is bank cards in mobile phones, including credit cards and UnionPay QuickPass paid through POS machines, QR codes or NFC. They can be used for cloud QuickPass, Apple Pay, Huawei Pay and other NFC payments, as well as other forms Paid.
Fifth, prepaid cards are still considered by many institutions. One of the sources is Hong Kong’s Octopus electronic toll collection system, which is a very good product based on IC cards and has been successfully promoted and applied in Hong Kong. Carrying a card is lighter than carrying a mobile phone. Therefore, even if mobile terminals become the mainstream configuration of travel in the future, there may be payment tools such as prepaid cards. At the same time, prepaid cards can also be used in mobile phones.
The above-mentioned DC/EP technology development ideas are not exactly the same as the current CBDC issued by the United States, the United Kingdom, France, Germany, Japan, Italy and Canada, and it is not an idea in the CBDC system. The difference between the two is:
First, the second-tier organization of DC/EP actually owns the ownership of the e-CNY, guarantees that it can pay, and also owns the corresponding systems, technologies and equipment. Before formulating the ideas, the central bank had studied the situation of three note-issuing banks in Hong Kong. The Hong Kong Monetary Authority commissioned three note-issuing banks to print banknotes. In the mid-1990s, before BOCHK joined in, there were mainly two note-issuing banks, HSBC and Standard Chartered. For every 7 yuan of 8 Hong Kong dollars issued by the issuing banks, they had to be handed over to the gold tube. The bureau will pay $1, and the HKMA will issue a 100% payment certificate. From the perspective of the balance sheet, each debt is to issue banknotes, assets are reserves, and the central bank issues certificates of liabilities as liabilities. This is different from the central bank’s assumption of currency ownership and liability for liabilities.
Second, in order to support currency stability, the People’s Bank of China does not engage in products such as Bitcoin. Instead, it adopts different methods, such as requiring 100% cash reserves, or issuing certificates like the Hong Kong Monetary Authority. In addition, it is not impossible for the central bank to issue a comfort letter, but the degree of support is different. The common people are willing to make 100% preparations for the institution and believe that the funds are safer. In the actual system, it is not that simple, because the 100% reserve is only for cash, which is M0 in China. Other quasi-cash types are not included, let alone M1 and M2. Therefore, the reserve certificate can only deal with cash, which is different from the system where banknotes are owned by the central bank.
Third, China’s central bank and second-tier institutions are not simply a wholesale and retail relationship. The responsibilities of the second-tier institutions include understanding customers, anti-money laundering, and protection of users’ private data. These compliance responsibilities are all held by the second-tier institutions. If you simply compare the CBDC, everyone feels that the responsibility lies with the central bank, which is not the case. In order to better maintain the stability of the system, and also for anti-money laundering, the central bank should control all transaction data, but it is only a backup and has no direct commercial interests.
Zhou Xiaochuan said that when he was at the central bank, a colleague also suggested that when a commercial bank issued crypto currency, it seemed to be an envelope. The banknotes inside were still banknotes of the central bank. Different banks may have different envelopes designed, such as anti-counterfeiting and other aspects. It’s different, but in essence, the envelope is filled with central bank currency.
This analogy is very interesting, but he thinks it is not exactly the case: the envelope can be central bank currency, it can also be the central bank’s certificate of provision, or it can be the central bank’s comfort letter, with different degrees of assurance. If the degree of assurance is lower, the bank may be required to strictly monitor the capital adequacy rate and liquidity of the bank, and the possibility of problems is relatively small. This envelope can also put things designed by the agency itself, the general requirement is to maintain stability and effectiveness.
In short, the first responsible person in the two-tier system is still the second-tier institution. If a bank has a run or withdrawal problem, the responsibilities of the central bank will vary according to different design schemes.
According to the flow chart of the concept of crypto currency, Bitcoin appeared in some early international organizations or the mainstream definition of the West. The central bank discussed that this is an unstablecoin. The central bank wants to develop a stablecoin, so it proposed a stablecoin. concept. Later, the private cryptocurrency Libra appeared, and everyone proposed that private currency should not be used, because there may be unexpected problems. It will become a central bank crypto currency, so it is CBDC. Others pointed out that CBDC may be disintermediated, and it may not be easy to imagine in advance, so they began to accept the two-tier system of CBDC.
China started relatively early, and the above concepts have been studied in advance, and there are preliminary opinions. When many people are obsessed with blockchain technology, the Central Bank of China has realized that things are not so simple, so in 2017, ICOs and domestic transactions of Bitcoin were banned . At the same time, the banking system does not support Bitcoin to provide services for retail payments. When everyone envisioned the wholesale and retail relationship between the central bank and the second-tier institutions, the People’s Bank has also begun to consider a structure that goes beyond the wholesale and retail relationship.
Data privacy protection in DC/EP, as well as blockchain and distributed accounting technology
Zhou Xiaochuan also introduced the issue of data privacy protection and controllable anonymity. He said that transactions must be anonymous, but not 100%. Authoritative institutions, especially anti-money laundering institutions, must be able to grasp these data while protecting customer privacy to the utmost extent. The transaction data reported to the central bank should be mainly used for anti-money laundering, anti-terrorist financing, combating telecommunication fraud and correcting operational errors.
He himself has always advocated that it is necessary to fully study and absorb some rules of the European General Data Protection Regulation (GDPR).
Previously, when big data exchanges were popular, a lot of personal private data was actually leaked, and many customers still didn’t know that their data had been leaked or even bought and sold. If all the leaked information must be erased, the ones that should be erased must be erased. For some users, the passwords should be changed, and the accounts should be changed when the accounts are changed. This is very complicated and time-consuming, and it is not necessarily effective.
In this case, security still requires some means, such as:
1. Use an encryption mechanism to upload transaction data to the central bank. The central bank backs up and tracks the data for the above regulatory purposes while ensuring the security of data privacy.
2. Similar to credit card refunds according to corresponding regulations and procedures, operational errors must be considered and corrected.
3. The payment operator cannot copy, transfer (excluding the data transmitted to the central bank for backup) and sell the data. If the user requests it, the relevant data must be deleted.
4. Consumers manage account limits for different purposes to ensure safety. Of course, this approach appears to some people to be complicated and inconvenient, but it is based on the judgment that a large amount of private data has already flowed into the market.
Regarding blockchain and distributed accounting technology DLT, as one of the technical directions of DC/EP, research and development are also being stepped up. Related technologies are also applied in non-payment fields in the financial system, and some have made good progress.
In the payment field, due to throughput issues, it is currently unable to play a central role in the retail payment system, but the future development of technology can be expected. In addition, there are occasional errors in the payment field that need to be corrected, including credit cards. If they are wrong, they must be changed. Not only do a negative transaction and flush out the original transaction, but the original transaction record must be changed or erased. Otherwise, the information may be misused, including entering the credit information system. At present, blockchain emphasizes that it cannot be tampered with, which is in contradiction with this reality.
In short, blockchain technology has to wait for further development.
Digital RMB and cross-border payment
Regarding cross-border payment, Zhou Xiaochuan said that when Libra proposed to use cross-border remittance as the main application target, he suggested not to do it in a hurry, because there are many untrusted or suspected practices. In his view, the real difficulty of cross-border remittance is not technical, but may also involve exchange, inward and outward management, etc. For example, there are some Mexican workers in the United States. If they send money back home, Libra is very convenient, but Libra cannot be easily used in the retail market and needs to be converted into Mexican pesos. Therefore, there are still some problems with Libra’s focus on remittance, and more attention should be paid to the application of the retail system. Libra 2.0 is said to be backed up by the U.S. dollar, but even if Libra is backed up by the currency basket, as developing countries are worried about the dollarization of their currencies or other problems, things are not simple, and it is not just the obstacles in the technical system.
Other obstacles to the application of crypto currency, anti-money laundering, anti-terrorist financing, and drug transactions that are of international concern deserve China’s attention. In addition, China has one more concern: the issue of gambling transactions.
Based on the above research and analysis, Zhou Xiaochuan believes that if crypto currency is to engage in cross-border transactions, it should be based on retail. In the case of retail-based, respect the policies and legal regulations of each country, respect the currency sovereignty of each country, the exchange rate system, and the relevant exchange and remittance regulations. Relying on technical measures, many problems can be solved at the moment of payment, which is also very convenient. For example, in the payment link, there may be smart contracts or payment conditions control regardless of whether blockchain technology is used or not.
In the field of crypto currency, Asia is more active in East Asia, and in addition to ASEAN, where the conditions of each country are relatively large, the differences in policies and regulations are relatively large, and the level of development is also different. In this case, China’s crypto currency development can move forward steadily and slowly. First establish a solid retail payment system. On this basis, first focus on the payment of current items such as cross-border tourism, while respecting the psychology of some countries to prevent dollarization. In this process, the internationalization of the renminbi must not be based on coercion. Don’t let people worry about the renminbiization of the currency. The central bank should focus its energy on the settlement of cross-border payment cooperation.