Former Deputy Governor of the People's Bank of China, Wang Yongli: DCEP's short-term impact is limited, dual offline payments may carry a risk of "overspending".

Former Deputy Governor of the People's Bank of China, Wang Yongli, believes that the central bank digital currency (DCEP) serves as a substitute for cash, with limited short-term impact on payments and banks. The extension of DCEP to bank deposits may be its true development direction.

Recommended reading: "ChainNews Featured Article | In-depth Analysis of DCEP and the Structure and Impact of Central Bank Digital Currencies Worldwide"

Original Article Title: "Wang Yongli | Several Views on the Central Bank's DCEP"
Author: Wang Yongli, Former Deputy Governor of the People's Bank of China

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On the evening of April 14th, a picture of the central bank digital currency DCEP "wallet" app undergoing internal testing at the Agricultural Bank of China was widely circulated online. Reports indicated that DCEP will soon undergo trials in Shenzhen, Suzhou, Xiong'an, and Chengdu. Additionally, in May, transportation subsidies for employees of district-level government agencies, public institutions, and directly affiliated enterprises in the Xiangcheng District of Suzhou will be partially distributed in digital currency form to their digital wallets. Subsequently, the Central Bank Digital Currency Research Institute issued a statement confirming these reports, sparking a new round of discussions on central bank digital currencies.

Some have written articles stating: Farewell to paper money, the renminbi will undergo an epic transformation; the central bank digital currency will reconstruct the traditional financial industry; the renminbi's significant upgrade will lead China in the digital currency world; China's digital currency aims to challenge the dominance of the US dollar, bypassing the US-controlled SWIFT system to establish its own global clearing system, thereby promoting the internationalization of the renminbi, and more.

Many friends have asked for my opinion on this matter.

I believe that the central bank's DCEP involves many aspects such as currency form, issuance method, account management, quota control, bank functions, privacy protection, payment instruments, settlement methods, and more. Its specific applications cover a wide range, with high requirements for settlement speed and security management. It needs to be formally published by the central bank with management regulations and implementation details. Relevant laws such as the People's Bank of China Law and the Regulations on the Administration of the Renminbi will need to be amended accordingly. There will be a trial period and an official launch date, providing a preparation process for banks, payment companies, operating institutions, and various participants in the digital currency payment and receipt scenarios. People need not be overly anxious about this, nor should they be too concerned about various unrealistic speculations and interpretations.

Based on the relevant information disclosed by central bank officials and the basic logic of currency and payment settlement, I will share several views on the central bank's DCEP for reference.

In recent years, the concept of "digital currency" has been surging. From completely decentralized internet-native encrypted digital currencies like Bitcoin, Ethereum, etc., to network digital "stablecoins" pegged to certain fiat currencies but operating using blockchain technology, such as USDT, GUSD, etc.; and further to envisioning a network "composite coin" without borders (beyond sovereign) structurally linked to multiple fiat currencies, utilizing blockchain technology, like the envisioned Libra, eSDR, and more. Many believe that this will have a profound impact on national fiat currencies and even the international monetary system, potentially overturning or replacing them.

Since 2013, many central banks worldwide have been paying close attention to digital currencies and have even started researching and designing "central bank digital currencies" (CBDCs). Among them, the People's Bank of China (PBOC) established a digital currency research team as early as 2014; in January 2016, it announced its intention to "strive to launch a central bank-led digital currency at an early date"; starting from July 2019, PBOC officials have successively stated that the State Council has approved the development of a central bank digital currency, and currently, they are organizing market institutions to participate in system development and testing work. The central bank digital currency, known as DCEP, is on the verge of being introduced; with digital currency testing now officially underway, China may become the first country in the world to launch a central bank digital currency.

Since the PBOC announced its intention to strive for the early launch of a central bank-led digital currency in 2016, I have repeatedly emphasized that completely decentralized internet-native encrypted digital currencies like Bitcoin, Ethereum violate the logic and rules of currency development and cannot become true circulating currencies coexisting with national fiat currencies. At most, they can only be considered "virtual currencies" or virtual assets used within a certain internet virtual environment. A "central bank-led digital currency" is inevitably centralized and cannot follow the model of Bitcoin or Ethereum, being a decentralized central bank currency built using blockchain technology. A country cannot operate two sets of fiat currency systems simultaneously (traditional fiat currency and a new type of digital currency); otherwise, it would also violate the essence and logic of currency. Therefore, a central bank digital currency can only be the digitalization (electronic version) of fiat currency, focusing on improving currency management and payment settlement methods, enhancing currency circulation efficiency, reducing operating costs, and strengthening compliance supervision. (For reference, please see my related articles on "Accurate Understanding and Effective Regulation of Digital Currencies," as well as the article "Challenges of Implementing Central Bank Digital Currency" published on August 24, 2019, in Economic Observer, and the "Analysis of Credit Currency" series published on February 4 this year on the public account, especially the third one: "Basic Judgment of Various Digital Currencies")

Now, the central bank has made it clear that the central bank digital currency is the digitalization of the renminbi. It is the renminbi itself, not equivalent to the renminbi, let alone a new currency outside the renminbi. It is fundamentally different from internet encrypted digital currencies, internet stablecoins, internet composite coins, etc. The main change brought about by the central bank digital currency is in the form of currency, distribution method, and payment settlement method. There is no radical change in the currency itself; the biggest change is in the payment settlement method. Consequently, the central bank has officially named it "DCEP," where "DC" stands for "Digital Currency," and "EP" stands for "Electronic Payment," indicating that the central bank's digital currency is more about digitizing currency and electronic payments.

As a digital renminbi, DCEP has no investment or collectible value.

PBOC officials revealed that DCEP will focus on replacing M0 (cash) rather than M1 and M2 (bank deposits) and will adopt a "two-tier operating system." The central bank will first exchange DCEP with banks or other operating institutions, which will then exchange it with the public to avoid affecting bank deposits and potentially causing significant disruptions to the entire financial system.

Strictly speaking, DCEP is actually the digitalization of physical renminbi, not the digitalization of all renminbi. Therefore, it is more appropriate to call it "digital cash" instead of "digital renminbi."

To achieve DCEP as a substitute for cash rather than bank deposits, the overall scale of "digital cash" and "physical cash" needs to be controlled, continuously reducing the proportion of physical cash while expanding the scale of digital cash. It should also encourage individuals to first exchange physical cash for digital cash through operating institutions, with operating institutions then exchanging digital cash with the central bank. There should be limits on transferring deposits into digital cash "wallets," but no restrictions on converting digital currency back to bank deposits.

It is important to note that DCEP is digital cash that replaces physical cash. It possesses many characteristics of physical cash in terms of functionality and usage but should not be equated entirely with physical cash. For example, physical cash has physical carriers, different denominations, designs, issuance years, and each banknote has its own serial number, while digital currency does not require these physical attributes and only needs to record the monetary amount (up to two decimal places, from "yuan" to "jiao" and "fen").

What is surprising is that recently, images of the Agricultural Bank of China testing the central bank's digital currency wallet app have surfaced online, displaying patterns labeled with "People's Bank of China," denomination "¥1.00," serial number "20200414191111," and the image of Mao Zedong's head (see image below). It appears that the central bank's digital cash intends to mimic physical cash, with different denominations, designs, serial numbers, etc., a concept that far exceeds my imagination. I believe this is the biggest misunderstanding of digital currency; digital currency should only be digital and should not deliberately mimic the specific form of physical cash!

At the same time, as a form of digital renminbi, DCEP may not be reflected in the regulations governing renminbi management, and corresponding modifications to these regulations may be necessary before the launch of DCEP.

The evolution of currency from natural commodity money to regulated metallic currency, further to paper money under the gold standard, and then to purely fiat currency, is primarily driven by the need to enhance operational efficiency, reduce operational costs, and enforce strict compliance supervision. Due to the high production and circulation costs, low efficiency, and regulatory loopholes associated with physical cash, as well as advancements in information technology and increased compliance requirements, countries worldwide are striving to promote the digitization of currency (de-cashing), shifting more funds through clearing institutions for transfer settlement instead of cash settlement. As a result, the proportion of cash in the total money supply has been continuously decreasing, now reduced to below 5%, with China already below 4%.

However, a high level of de-cashing has led many to believe that every financial transaction leaves a traceable record with clearing institutions, significantly impacting personal privacy and potentially causing unnecessary trouble. Therefore, some believe that a balance must be sought in currency design to enhance currency supervision while protecting individual privacy.

In light of this, the PBOC has adopted a principle of limited anonymity in the design of DCEP. Possible approaches may include: the exchange information of digital currency transactions within operating institutions is very limited, mainly involving wallet account names and transaction amounts, but within the central bank, it is complete and authentic.

This implies that the DCEP wallet within operating institutions can only be a "shadow account," serving as a channel connecting the central bank and all DCEP users, solely handling recharges, usage deductions, receipt posting, deposit returns, etc., without knowledge of specific usage details, especially transaction counterparts and transaction information. The "real account" for all DCEP users is within the central bank, where the central bank can request complete identity and transaction information of account holders for anti-money laundering and currency supervision purposes.

Consequently, when a DCEP transaction occurs, the relevant information needs to be simultaneously sent to both the operating institution managing the receiving and paying wallets and the central bank. The paying wallet managing the operating institution uses this information to deduct the wallet balance and increase the payable amount to the central bank, while the receiving wallet managing the operating institution uses it to increase the wallet balance and the receivable amount from the central bank. The operating institution can aggregate daily transactions and reconcile them with the central bank for DCEP, with the central bank adjusting the DCEP transactions with the operating institution and the relevant accounts of DCEP users.

Thus, operating institutions can only track changes in wallet balances through their DCEP wallets and cannot access information about transaction counterparts. Only the central bank can have access to the complete transaction details.

As a result, the central bank would break the traditional constraints that only financial institutions and government departments outside the treasury can open accounts and conduct specific business, which may require appropriate modifications to the "People's Bank of China Law."

It should be emphasized that both the central bank's DCEP account and the operating institution's DCEP wallet, as cash accounts, can only handle receipts and payments and cannot engage in lending, overdrafts, or interest payments. Therefore, DCEP should not have an impact on monetary policy.

It is important to point out that the statement that "DCEP is issued by the central bank, is a liability of the central bank, and has higher credit than bank deposit currency, wallet currency of payment institutions" is actually inappropriate. This is because: under the gold standard, banknotes are indeed debt certificates issued by the issuer, which can be unconditionally redeemed for metallic currency by the issuer at any time. Therefore, it is accurate to say that currency is a liability of the issuer (central bank). However, in a fiat currency system, currency is issued through indirect financing methods such as purchasing reserves or lending. For the issuing institution, currency is no longer a liability because the issuing institution no longer promises that people can exchange the currency they issue for anything. There is no longer a legal debt attribute. Bank loans and other currency issuance are the bank's assets, not liabilities.

Essentially, fiat currency is backed by tradable wealth within the sovereign territory that can be protected by law and used for transactions, and is protected by sovereignty and law for circulation, hence also known as "sovereign currency" or "legal tender." The "credit" of fiat currency refers to the overall credit of the country, not of the central bank or the treasury itself. Describing currency as a liability of the central bank or as guaranteed by national tax revenue is inaccurate.

Some refer to currency issued by the central bank (cash) as "central bank currency," bank loan-converted deposits as "bank currency," and money in payment institution e-wallets as "wallet currency." However, all these terms are inaccurate. Cash, deposits, wallets, etc., are manifestations of currency, not currency itself. From a currency perspective, they are all part of the same legal tender currency. It is only when money is held by the central bank, commercial banks, or payment institutions that it becomes a liability of the central bank, commercial banks, or payment institutions. From a liability perspective, they differ.

For a long time, many have promoted the feature of DCEP enabling "touch and go" transactions without the need for an internet connection as a unique selling point separate from bank online banking and payment institution mobile payments. This implies that DCEP, like physical cash, can be transacted by simply "touching" two mobile phones with DCEP wallets when internet signals are poor or unavailable, completing the payment transfer.

This "touch and go," or "dual offline payment," feature is not a new technological innovation. Additionally, due to the potential for errors in reconciliation between wallet management by operating institutions and the central bank, there is a risk of overspending in transactions. Its use is subject to strict conditions and rigorous management, typically limited to small amounts, and must transmit transaction information within a specified time, not unconditionally and widely available. Hence, it is not advisable to overly exaggerate the offline payment feature.

It must be emphasized that, apart from physical cash, all other forms of currency are based on accounts and must ensure the continuity and accuracy of account transaction records. Even as digital renminbi, DCEP is no longer physical cash and must also be based on accounts, unable to transact directly without an account.