What to watch: In line with the development wave of the digital economy era and under the background of "de-dollarization", digital currency is coming.

The Ministry of Commerce recently issued the "Overall Plan for Comprehensively Deepening the Innovative Development of Service Trade", which announced the digital renminbi pilot areas: in the Beijing-Tianjin-Hebei, Yangtze River Delta, Guangdong-Hong Kong-Macao Greater Bay Area and the central and western regions that meet the conditions. Pilot areas carry out digital RMB pilot projects. According to Xinhuanet, the digital renminbi has completed top-level design, standard formulation, functional research and development, joint debugging and testing, etc., and will first conduct internal closed pilot tests in Shenzhen, Suzhou, Xiongan New Area, Chengdu and the future Tokyo Olympics scene. In other words, if everything goes well, we may be able to get a glimpse of the beauty at the 2022 Winter Olympics in Beijing.

In fact, the central bank established a digital currency research institute as early as 2014 to study the feasibility of issuing legal digital currency; at the end of 2017, with the approval of the State Council, the central bank organized commercial banks such as Industrial and Commercial Bank of China, Bank of China, and Shanghai Pudong Development Bank Worked with China Banknote Corporation, Shanghai Commercial Paper Exchange and other relevant institutions to carry out research and development of the digital renminbi system (DC/EP). In February 2018, the experimental production system of the Shanghai Commercial Paper Exchange’s digital bill platform was officially launched for trial operation. ; In 2019, when the central bank held a work conference call for the second half of the year, it requested to accelerate the research and development of my country’s legal digital currency (DC/EP).

So, what is the reason behind the launch of digital currency?

For the intelligent internal reference in this issue, we recommend two research reports on digital currency by Guohai Securities and New Era Securities, which reveal the past and present of digital currency and the logic behind the central bank’s launch of digital currency.

1. Principles of digital currency and development status of various countries

Digital currency is the inevitable result of the continuous evolution of the monetary system and belongs to the Currency 4.0 stage. Currency is another important human invention besides writing. After experiencing barter exchange and the gold and silver standard, credit currency has become an important leap in the history of currency.

Among them, the original barter was a decentralized institutional arrangement. However, due to extremely low transaction efficiency, difficulty in coupling supply and demand, and the lack of a unified value measurement standard, human beings were greatly restricted. The scope of economic activities and trade has been gradually replaced by precious metals such as gold and silver. This trading system has gone through a relatively long time in the history of currency development. Due to the existence of natural losses, insufficient currency prices, shortages, and shoddy goods, , bad currency drives out good currency and other phenomena, banknotes based on national credit - pure credit currency began to appear. Banknotes not only saved issuance costs, but also overcome problems such as the inconvenience of carrying precious metal currencies, which greatly promoted the development of trade in modern history. , the central bank’s monetary policy operations also become possible.

If paper money has achieved the first leap of credit currency from concrete items to abstract symbols, then digital currency based on blockchain, artificial intelligence, cloud computing and big data has achieved credit The second leap in the development of currency from paper to paperless. Digital currency does not change the credit endorsement behind the currency, but changes the existence form of currency. At this point, currency has completed the commodity currency - precious metals act as general equivalents. ——Credit currency——The evolution of digital currency. Therefore, the evolution of the form of currency means that the operating cost of the currency system is lower, safer, and more efficient. Digital currency is the inevitable result of the continuous evolution of the currency system from commodity currency to credit currency.

Digital currency is not a substitute for electronic currency. Depending on the issuer, digital currency can be divided into legal digital currency issued by the central bank and privately issued digital currency. Currently, there are no unified standards and definitions for digital currencies. According to the definition of the Central Bank's Digital Currency Research Institute, digital currency in the narrow sense mainly refers to currency that is purely digital and does not require a physical carrier; while digital currency in the broad sense is equivalent to electronic currency and generally refers to all currencies that exist in electronic form, including electronic currency. , virtual currency and digital currency.

Depending on the issuer, digital currencies can be divided into legal digital currencies issued by the central bank and privately issued digital currencies. Among them, the digital currency issued by the central bank refers to the legal currency issued by the central bank and expressed in the form of an encrypted digital string representing a specific amount. It is not a physical entity itself, nor does it use a physical entity as a carrier, but is used for network investment. , transaction and storage, digital information representing a certain amount of value; privately issued digital currency, also known as virtual currency, is a digital currency issued and controlled by developers, not subject to government supervision, and circulated among members of a virtual community, such as Bitcoin, etc.

Broad digital currencies can be roughly divided into three categories: one is a completely closed currency that has nothing to do with the real economy and can only be used in a specific virtual community, such as game currency in the virtual world; It can be purchased with real money but cannot be exchanged back to real money. It can be used to purchase virtual goods and services, such as Libra launched by Facebook; third, it can be exchanged and redeemed with real money at a certain ratio. It can not only purchase virtual goods and services, but also Real goods and services can be purchased, such as legal digital currencies issued by the central bank.

Digital currency is the currency development form of the digital economy. Since the outbreak of the epidemic in 2020, the digital economy, with its main characteristics of “new investment, new consumption, new models, and new business formats”, has become an important force in promoting the stable development of my country’s economy and society. According to data from the National Bureau of Statistics, although GDP fell by 6.8% year-on-year in the first quarter, the digital economy showed good development momentum. Among them, the output of electronic components and integrated circuits increased by 16% and 13.1% year-on-year, and information transmission, software and information technology The added value of the service industry increased by 13.2% year-on-year, and e-commerce service investment increased by 39.6% year-on-year.

After withstanding the test brought by the epidemic, my country's digital economy has entered a period of accelerated and rapid development. It is urgent to achieve the coordinated development of data, technology, industry, business, and institutions, and to build a new production relationship in the digital economy. , further stimulate digital productivity through factor market reform, and digital currency is based on node networks and digital encryption algorithms to cater to the development needs of the digital economy and is its specific currency development form.

Digital currency is based on complex network theory, with blockchain technology as the core, fully embodying the characteristics of non-tampering and encryption security, realizing the underlying digital currency and the middle layer digital financial account system, covering the central bank Payment systems, commercial banks, non-bank institutions and other vertical general account systems have also realized the interconnection of payment and settlement systems of central banks of various countries, top-level digital identity verification systems, etc., through big data and cloud computing, realizing the transformation of the traditional monetary system into a digital one. Transformation of the monetary system.

The earliest emergence of digital currency can be traced back to 1982, when American computer scientist and cryptographer David Chaum founded DigiCash and launched two digital currency systems: E-Cash and cyberbucks. Both systems Based on Chaum's blind signing contract, it can keep users anonymous and their identities difficult to trace. However, there was lack of sufficient technical support at the time and the inability to achieve complete anonymity, so it ultimately failed.

Launched in 1996 by renowned oncologist Douglas Jackson, E-gold, backed by real gold, became so popular that it was even hoped to attract more than 5 million users in hundreds of countries. Unfortunately, the company ran into trouble in 2009 after the platform continued to suffer hacks and attracted a large number of illegal money laundering transactions.

In 1998, a Moscow company launched Web Money, a universal digital currency that could provide a wide range of peer-to-peer payment solutions, covering Internet trading platforms. It is also one of the few surviving digital currencies that has not yet been encrypted. To this day, the currency is still widely used and accepted by millions of people. At the same time, it can also be converted into fiat currencies such as rubles, US dollars, British pounds, and even Bitcoin.

In November 2008, Satoshi Nakamoto proposed the concept of Bitcoin and published the famous paper "Bitcoin, a Peer-to-Peer Electronic Cash System". In the article, the blockchain appeared for the first time, which can be used in untrusted transactions. Based on this, establish a decentralized electronic trading system. Bitcoin was officially born on January 3, 2009. Bitcoin is a P2P form of virtual encrypted digital currency that uses open source blockchain technology to store transaction information in a distributed ledger, which makes it almost impossible to crack the network; in addition, its point-to-point transmission builds an Centralized payment system. Since then, the Bitcoin system has gradually matured, and officials have successively released new versions, adding many features.

In 2013, Ethereum (ether) was born. It is a virtual cryptocurrency derived from Ethereum technology and is currently the second-highest cryptocurrency in market value after Bitcoin. Ethereum is based on the blockchain, which is similar to Bitcoin, but uses completely different technology. It is a public blockchain platform with an open source smart contract function, and the contract terms can be executed by both parties. Between 2010 and 2014, Bitcoin multi-node mining and PPcoin were born, which played a role in mining. In August 2013, Germany legalized Bitcoin.

Although private digital currencies represented by Bitcoin do not have monetary functions in essence, they have posed a huge challenge to the current monetary and financial system. To cope with this challenge, central banks of various countries are actively developing Or promote legal digital currency. As early as 2013, Shoaib et al. proposed the concept of official digital currency. The report issued by the Bank of England (BOE) in 2014 clearly used Distributed Ledger Technology (DLT) as the classification standard for digital currencies. One category is encryption. Digital currency is a digital currency generated using distributed ledger technology, and pointed out that Bitcoin is the first encrypted digital currency in history;

The other type is non-encrypted digital currency, with Ripple as a typical representative; subsequently The Committee on Payments and Market Infrastructures (CPMI) under the Bank for International Settlements defines legal digital currencies as cryptocurrencies. According to whether the form of existence is based on central bank accounts, legal digital currencies are divided into central bank digital accounts and central bank digital currencies. According to the "Flower of Money" model proposed by the Bank for International Settlements (BIS), the concept of central bank digital currency is clarified, that is, central bank digital currency is a digital form of central bank currency, and is different from the central bank margin accounts and central bank margin accounts of traditional financial institutions. Clear the digital funds stored in the account.

▲"Flower of Money" Model

The relationship between digital currency and governments is quite complicated, and governments around the world are both afraid and curious. Discussions, experiments and pilots of digital currencies in various countries will continue, because if an economy starts to use digital currencies, it will have a spillover effect around the world, so economies of all countries will pay more and more attention to this new phenomenon and trend. .

1. Federal Reserve Fedcoin project. This is a retail central bank digital currency that is equivalently exchangeable with the U.S. dollar (i.e. the exchange rate is 1:1). This currency protocol has many similarities with Bitcoin, and the differences are mainly reflected in two aspects. First, in Fedcoin, there is a user (the Federal Reserve) who has special permissions and can create and revoke the right to use the account book at will. Second, the issuance quantity does not have a predetermined rule like Bitcoin, but the issuance quantity can be adjusted like cash.

2. The Bank of Canada’s CADcoin project. This is a wholesale central bank digital currency. The Bank of Canada has built a large-value payment system based on distributed ledgers, and CADcoin is the currency used in this system. At a recent internal briefing in Calgary, the Bank of Canada demonstrated the electronic version of the Canadian dollar they are developing - CAD-Coin.

The original intention of this innovation, codenamed "Jasper", is to help central banks issue, transfer or dispose of central bank assets through distributed ledger technology. Several major Canadian banks, including Royal Bank of Canada, TD Bank and Canadian Imperial Bank of Commerce, are participating in the project.

3. Swedish Central Bank’s eKrona project. Currently, Sweden is gradually transforming into a "cashless society." Data show that the number of banknotes and coins in Sweden has dropped by 40% since 2009, with residents more likely to use bank cards, smartphones and e-wallets to handle various daily transactions. As the use of cash continues to decline, the Swedish central bank is trying to provide people with a way to pay without going through intermediaries such as retail banks. The Riksbank requires that eKrona must be able to be used for small purchases. Since it has not yet been determined which technology will be used, eKrona has two possible forms, one is a deposit currency unit (that is, an individual opens an account directly with the central bank, rather than opening an account at a commercial bank), and the other is a retail central bank digital currency.

▲The latest developments in the digital currency of overseas countries or organizations

Each country’s financial system and monetary policy system are different. Whether it is necessary to use the central bank’s digital currency interest rate as a new monetary policy tool? It must be analyzed on a case-by-case basis. Overseas countries do not want to lose the opportunity to gain a foothold in digital currency, so the policies and regulations introduced are often changing, sometimes lenient and sometimes strict.

Bank for International Settlements . In November 2015, the Bank for International Settlements released the "Digital Currencies" report, which detailed the impact of digital currency as a means of retail payment; in March 2018, the Bank for International Settlements released the "Central Bank Digital Currency on Payment, Monetary Policy and Financial Stability" "The Impact" report analyzes the issuance of central bank digital currencies.

International Monetary Fund. In June 2017, the International Monetary Fund (IMF) released a report on the development of the financial technology industry "Fintech and Financial Services: Initial Considerations", focusing on how to effectively supervise distributed ledger technology (DLT) and the technologies based on it. Digital Currency made recommendations. In 2018, the Organization for Economic Cooperation and Development and the G20 *** jointly released a mid-term report "Tax Challenges Brought by Digitalization", proposing the supervision of digital asset transaction information formed by cryptocurrency and blockchain technology. .

United Kingdom. The UK’s Treasury Committee has assessed crypto algorithms and concluded that they do not currently pose a risk to the UK’s currency or financial stability. However, cryptos do pose risks to investors, and anyone who buys them should be prepared to lose all their money.

Japan. As the world's largest Bitcoin trading market, Japan's government has a very positive attitude towards digital currencies. Since last year, Japan has exempted digital currency transactions from consumption tax and recognized the legality and monetary attributes of digital currencies. In 2017, Japan began to implement the Fund Settlement Act, recognizing the legality of digital currencies as a means of payment. Afterwards, the Japan Financial Services Agency (FSA) promulgated the "Payment Services Act" to implement comprehensive supervision of digital currency exchanges. All exchanges operating in Japan must obtain licenses from the Ministry of Finance and the FSA.

Singapore. Under the guidance of the Singapore government's principle of "not seeking zero risk and not stifling technological innovation" in financial technology, Singapore actively develops blockchain technology and actively promotes the development of digital currency. Singapore is one of the countries in Asia that supports the development of digital currency most. one. Due to Singapore's positive and good institutional environment, many exchanges have chosen to operate in Singapore. For example, WBF EXCHANGE cooperates closely with the Singapore government.

In March 2020, the Monetary Authority of Singapore (MAS) officially announced the list of exempted companies from the payment service operating license. The entities on the list have obtained specific payment services or digital currency-related payment services during the exemption period. Singapore entities including Alibaba, Alipay, Amazon and other large institutions are on the list.

Regarding the exemption of digital currency-related payment services, nearly 200 companies including Binance, OKCoin, BitStamp, Bixin, Coinbase, CoinCola, TenX, Upbit, ZB, etc. can all use Operates legally in exempt status.

Thailand. In order to better supervise the digital currency industry, in June 2018, Thailand promulgated the "Digital Assets Law", announced the issuance of licenses for compliant cryptocurrency exchanges, and began to implement license management.

Australia . Due to the increasing number of financial crimes, Australia passed the Finance Bill 2017 Amendment (2017 Measure 6) in October 2017. At the end of 2017, it officially passed the Anti-Money Laundering and Counter-Terrorism Financing Bill 2017 Amendment, clarifying that Digital currency is not a monetary asset, but an electronic representation of value. Institutions that provide digital currency trading business must submit an application to the Australian Transaction Reports and Analysis Center (AUSTRAC) and obtain the corresponding regulatory license and access permit. Exchanges should conduct anti-money laundering and anti-terrorist financing assessments on their businesses based on the institutional standards under the anti-money laundering/CTF framework. Offenders will be jailed for two years or fined ￡500, or in more serious cases to seven years in jail or fined ￡2,000.

Enlightenment from the digital currency practice of overseas central banks:

1) Central banks should strengthen their supervision of digital currencies. Digital currency rides on the infrastructure that serves the broader financial system, gaining the appearance of legitimacy from its link to the existing financial system, which is its obvious characteristic. In terms of laws and regulations, the central bank's supervision should be strengthened to separate digital currency from physical currency and ensure that digital currency is not parasitic on physical currency.

The central bank should cooperate with commercial banks to play the supervisory role of "digital frontline" and prohibit commercial banks from engaging in unethical behavior of acting as "Bitcoin ATMs". At the same time, these digital currencies should not be allowed to interact with The existing infrastructure of the entire financial system is maintained to ensure the normal operation of the payment system.

2) Technical aspects need to be strengthened. The new technology of digital currencies should be appropriately adopted to improve the country’s financial services, especially in terms of payments in some emerging market economies. Central banks in emerging countries are likely to gain the most from blockchain and distributed ledger technology implementations, primarily because existing financial processes and technology systems are not very efficient and could benefit from implementing digital currencies or other blockchain-based applications. To achieve greater financial inclusion, the use of distributed ledger technology can improve efficiency and reduce friction in cross-border payments at both the consumer (retail) and interbank (wholesale) levels. After the cash business is completely electronic and users switch to online channels such as mobile banking apps, the bank's previous hardware channel construction will also face the test of transformation.

3) Be prepared to deal with shocks. Due to its own shortcomings, digital currency cannot replace traditional currency, but once it is fully issued, the impact and impact it will bring are difficult to predict. Therefore, the central bank must actively prepare for the financial impact of technological progress. At the same time, digital currencies disguised as legal are carried on institutions and infrastructure that serve the broader financial system, which may cause serious financial risks and threaten the stability of the financial system. The central bank must do a good job in the public interest. In response to various risks brought about by digital currencies, we must adhere to the principle of fair competition, strengthen the supervision of digital currencies, and standardize and guide the development of digital currencies and related technologies.

2. The development history of domestic digital currency

The RMB has been the central bank currency in circulation in China for 71 years. With the rapid development of computer and Internet technology, RMB has gradually become electronic and entered the 2.0 era. Cash and deposits circulating in banks and other financial systems have long been digitized through electronic systems, and the large-scale popularity of third-party mobile payments such as Alipay and WeChat Pay has gradually reduced the proportion of cash in circulation. Nowadays, Chinese people almost do not need to use cash for daily consumption. Mobile payment has changed every aspect of people's lives, bringing a fast and convenient payment experience. People are beginning to imagine a future "cashless society", and China has become one of the countries closest to a cashless society.

However, China's mobile payment is more commercially driven and is an electronic payment method of currency, rather than a true digital "RMB". From precious metals to banknotes replacing precious metals as currency, to future digital currency, it is an inevitable product of economic and technological development to a certain stage; and as network communication technology becomes increasingly developed, social transaction activities become more frequent and active, and people shop and consume With changes in habits and concerns about the safety of currency circulation, people are increasingly inclined to use electronic banking and electronic payments rather than carrying banknotes. Therefore, it is in line with the central bank to provide digital currency media tools that are faster and lower-cost than banknotes. Necessary for the development of the times.

It has been five years since the People's Bank of China established a special research group to study central bank digital currencies in 2014. The current central bank digital currency (DC/EP) is a test content in the technology research and development process. The digital RMB system is completed under the premise of adhering to the dual-layer operation of "central bank-commercial bank/-currency user", M0 replacement, and controllable anonymity. Top-level design, standard formulation, functional research and development, joint debugging and testing, etc., and follow the principles of stability, safety, controllability, innovation and practicality, and first conduct internal closed pilot tests in Shenzhen, Suzhou, Xiongan, Chengdu and future Winter Olympics scenes , to continuously optimize and improve functions.

▲The development history of my country’s digital currency

Currently, my country’s legal digital currency is in the internal testing stage. DC/EP adopts the binary investment system of “central bank-commercial bank” and “one "Coin, two treasury, three centers" operating framework

"One currency" refers to the DC/EP issued under the guarantee of the central bank, and "two treasury" refers to the issuance treasury of the central bank and the bank treasury of commercial banks: DC /EP first transfers between the central bank and commercial banks, that is, the issuance and withdrawal of DC/EP, and then is transferred from commercial banks to residents and enterprises. The “Three Centers” are the technical guarantee for DC/EP issuance and circulation, including the registration center, certification center and big data analysis center.

Among them, the registration center is responsible for recording the registration of the entire process of issuance, transfer and withdrawal; the certification center is responsible for centralized management of the identity of DC/EP users, which is the key for DC/EP to ensure the anonymity of transactions; DC A key to /EP is to make major improvements in anti-money laundering, anti-tax evasion and anti-terrorist financing. The big data center achieves regulatory purposes through big data analysis of payment behavior and the use of indicator monitoring:

▲ "One currency, two repositories, three centers" operating framework

my country's central bank's choice to launch digital currency has important breakthrough significance. It can be said that the central bank's choice to launch digital currency is not only an inevitable necessity to comply with the laws of currency evolution. Choice is also an important measure to protect the sovereign status of the RMB. Specifically:

1. Comply with the development wave of the digital economy era. Since the issuance, transportation, storage and other processes of banknotes consume manpower and material resources, and with the advent of the mobile Internet era, paperless currency can save the cost of currency issuance and circulation, and bring convenience to people's production and lifestyle.

In addition, the anonymous nature of traditional banknotes makes it impossible for regulatory agencies to grasp the use and circulation of banknotes. The use of banknotes to commit tax evasion, money laundering and other economic crimes is an unavoidable black hole in reality. The central bank's digital currency can implement controllable anonymity. While ensuring that citizens' legal private property is not infringed, when illegal crimes occur, the source of the digital currency can be traced. Therefore, it can effectively combat illegal activities such as money laundering and tax evasion, and improve the transparency of economic transactions.

The rapid circulation, convenience, high security and other characteristics of digital currency are incomparable to traditional banknotes. Just as paper currency eventually replaced metal currency, paperless currency is also a general trend and an inevitable result of the continuous evolution of currency. At present, Alipay, WeChat, UnionPay, etc. have achieved paperless currency in the M2 category, and the central bank's introduction of digital currency to replace traditional banknotes can achieve paperless currency in the M0 category, conforming to the development wave of the digital economy era. Of course, the development of everything does not happen overnight, and paperless currency will also be a long process of gradual development. This is also an important reason why the central bank may only choose to launch some digital currencies at the beginning to replace some paper currencies.

2. Reduce the adverse impact of the global U.S. dollar monetary system. After the collapse of the Bretton Woods system in the 1970s, currency issuance was based on national credit. The United States relied on its strong military and economic capabilities to make the U.S. dollar the world's leading reserve currency. However, in the process of the U.S. dollar performing its functions as the world's currency, while the U.S. has gained many economic benefits, it may also have various negative impacts on the economies of other countries. The most obvious example is that the U.S. can levy an inflation tax on the world by issuing U.S. dollars.

Moreover, the three major financial systems in the world today, SWIFT, CHIPS, and Fedwire, are all controlled by the United States. Whether it is the U.S. dollar, euro, Japanese yen or RMB, the United States can obtain real-time financial transaction information of various currencies. It is not uncommon for the United States to use this financial system to impose sanctions on many countries and companies, and Europe and other countries have complained. Currently, in addition to China, the European Union, Japan, Russia and other countries are studying how to build digital currency payment networks to promote the "de-dollarization" process.

3. Protect monetary sovereignty and promote the internationalization of the RMB. In June 2019, Facebook released the Libra white paper in an attempt to create a super-sovereign “world currency.” Libra is based on blockchain technology and uses a basket of bank deposits and short-term government bonds as reserve assets to increase credit for the Libra stable currency and minimize the risk of currency fluctuations. Its mission is to "build a simple, borderless currencies and financial infrastructure that serve billions of people.” Among them, the US dollar accounts for 50, the euro accounts for 18, the Japanese yen, the British pound and the Singapore dollar account for 14, 11 and 7 respectively in the basket of currencies, but there is no RMB.

Since Facebook has 2.3 billion users around the world, if Libra is successfully used widely, Libra's cross-border capital flows will not be restricted, which also means that Libra can be used for payments in non-reserve countries. Then , the monetary sovereignty status of non-reserve currency countries is bound to be affected. For China, both the RMB and foreign exchange management will be impacted, and the process of RMB internationalization will also be hindered. Therefore, China must prepare for a rainy day, and the issuance of digital currency by my country's central bank is an important measure to deal with Libra.