PBoC Digital Currency on the Way, Prototype Blockchain Completed

China is ready to roll out digital cash. It will be a two-tier system to protect the state banks, with digital cash issued through the banking system instead of directly by the PBoC. There's some question about the final technology, with the PBoC saying it remains technology neutral.

A public blockchain will give the PBoC (and the CCP)direct control over all economic activity in China and paving a way for full micro-implementation of the social credit reward/punishment system. It opens up new avenues for capital controls, direct stimulus for favored industries, negative interest rates and currency devaluation or direct inflation (mass money printing) into individual accounts.

CNStock: 穆长春:人民银行数字货币呼之欲出
Sogou: Mu Changchun: People's Bank of China digital cash Is Coming Soon
On August 10, Mu Changchun, a special member of CF40 and deputy director of the People's Bank of China's payment and settlement department of the Shanghai Stock Exchange China Securities Network News (reporter Zhang Jones), said at the 3rd "China Finance Forty-Person Yichun Forum" that the research on digital cash DC/EP of the People's Bank of China has been carried out for five years since 2014. "The People's Bank of China, digital cash, can now be said to be ready."

Mu Changchun said that the digital cash Research Group of the People's Bank of China has made a prototype and adopted a block chain architecture. Later, it was found that there was a problem, because the legal digital cash was replaced by M0. If we want to reach the retail level, high concurrency is an unavoidable problem. He said that in a large country like China issuing digital cash, adopting a pure block chain architecture cannot achieve the high concurrency required by retail. Therefore, it is finally decided that the People's Bank of China should maintain technological neutrality and not preset a technological route. In other words, it does not necessarily depend on a certain technological route.
I'm not sure what the technical argument is there. PBoC being technology neutral makes sense, but blockchain technology can scale.
In addition, according to his introduction, DC/EP adopts a two-tier operation system. The single-tier operation system is that the People's Bank of China issues digital cash directly to the public. The People's Bank of China first exchanged digital cash for banks or other operating institutions, and then these institutions exchanged for the public. This is a two-tier operating system.

There are several considerations for adopting a two-tier operation framework: First of all, China is a complex economy with a vast territory and a large population. The economic development, resource endowment, population education level and acceptance level for intelligent terminals are all different. If a single-tier operation framework is adopted, it means that the People's Bank of China has to face all the public alone. In this case, there will be great challenges. From the perspective of improving the availability and enhancing the public's willingness to use, a two-tier operational framework should be adopted to deal with such difficulties.

Second, the People's Bank of China has decided to adopt a two-tier structure in order to give full play to the resources, talents and technological advantages of commercial organizations, promote innovation and compete for the best.

Third, the two-tier operation system helps to resolve risks and avoid excessive concentration of risks.

Fourth, if a single-tier operating framework is used, it will lead to financial disintermediation.

Mu Changchun said that under the framework of single-tier deposit, the People's Bank of China will directly face the public to deposit money in digital cash. Compared with commercial banks' deposit money, digital cash's competitiveness is better than that of commercial banks' deposit money under the condition of credit endorsement of the People's Bank of China, which will have an crowding-out effect on commercial bank deposits, affect the lending capacity of commercial banks and increase the dependence of commercial banks on the interbank market. In this case, the price of capital will be raised, the cost of social financing will be increased, and the real economy will be damaged.

"To sum up, the People's Bank of China is the top tier and commercial banks are the second tier. This dual delivery system is suitable for our national conditions. It can not only use existing resources to mobilize the enthusiasm of commercial banks, but also smoothly enhance the acceptance of digital cash. "

Mu Changchun pointed out that the two-tier operation system will not change the relationship between the creditor's rights and debts of currency in circulation. In order to ensure that the digital cash of the People's Bank of China will not exceed the limit, commercial organizations will pay 100% of the reserve fund to the People's Bank of China. digital cash of the People's Bank of China is still a liability of the Central Bank, guaranteed by the credit of the Central Bank, and has unlimited legal repayment.

In addition, the two-tier operation system will not change the existing money delivery system and dual account structure, and will not compete with the deposit money of commercial banks. Since it will not affect the existing monetary policy transmission mechanism or strengthen the pro-cyclical effect under pressure, it will not have negative impact on the real economy.

Mu Changchun said that since digital cash of the People's Bank of China is a replacement for M0, no interest will be paid for cash, which will not lead to financial disintermediation and will not have a big impact on the existing real economy. In addition, all existing regulations on cash management, anti-money laundering, anti-terrorism financing, etc. should be observed, and large and suspicious transactions in digital cash of the People's Bank of China should be reported to the People's Bank of China.

Mu Changchun also pointed out that the digital cash of the People's Bank of China must have high scalability and concurrent performance, which is suitable for small retail high-frequency business scenarios. In order to guide the People's Bank of China's digital cash to be used in small retail scenarios, not to produce crowding-out effect on deposits, and to avoid arbitrage and pro-cyclical effect under pressure environment, transaction limits and balance limits can be set according to different levels of wallets. In addition, some exchange costs and friction can be increased to avoid pro-cyclical situations under pressure.
A currency crisis would be a great time to roll out the digital alternative.

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