China's digital currency (II): Q&As
The following are several articles that cover some hot-button questions about the digital RMB.
Digital currency will take up the market share of private payment services, such as Alipay or WeChat Pay, but both will likely coexist.
Digital currency poses risks to traditional business models for banks but opens up new opportunities.
Digital currency is anonymous for daily use, but still traceable, especially for large transactions.
Experts believe the digital RMB can boost the yuan’s internationalization.
Here is an interview with Huang Yiping, the director of the digital finance research center, Peking University
Q: Will digital RMB squeeze Alipay and Wechat Pay out of the market?
This concern is actually somewhat justified. Because the central bank digital currency is circulated through electronic payment…which may have a great overlap with WeChat Pay and Alipay. So, will there be some substitution in the future? I believe there will be. But it's hard to say how much substitution there will be.
However, will the current mobile payment method be completely replaced? I think it's not that simple, now we use mobile payment, using WeChat Pay and Alipay, to a large extent is actually dependent on the whole set of ecosystem it has built…Will there be such a system after the central bank's digital currency comes into use? This is something we should consider. The attraction of WeChat Pay and Alipay to us is not only its low cost, universality, convenience and high popularity, which can be realized by the central bank's digital currency in the future, but also its whole ecosystem, which is the biggest attraction to us.
Another change, because the central bank can now authorize many institutions to build their own electronic wallets, for example, the four major banks (BoC, ABC, ICBC, CBC) can also start to build their own electronic wallets, this time there will be a new opportunity to compete with mobile payments, because the authorized institutions can also design a set of wallets, the same as Alipay, WeChat Pay, but the challenge is whether they can build a set of the same (perfect, convenient) ecosystem. The challenge is to build an ecosystem that is as (well-developed and convenient) as as the current one is, so that it can be competitive. So, in general, I'm not worried that mobile payment will be replaced in the future, I think mobile payment will be improved and enriched by competition.
Q: Fake digital RMB and wallets have appeared in the market, what should we do in face of this challenge?
Central bank digital currency is very safe, but is there no risk in the future? Will there be hackers? Will there be tampering? All of the current set of what is considered the most secure design, there are definitely potential risks to it. This is actually one part of our testing, hoping to bring the system online and then see what problems there are. What we can do is actually try to raise the technical barriers so that in case there are risks, there are means and ways to control those risks.
I believe that the central bank and the various authorized institutions have been trying to do nothing more than improve their technical capabilities. In fact, WeChat Pay and Alipay have accumulated very good experience in this area. According to the figures I have seen, their loss rate is much lower than that of foreign financial institutions. This is also what the central bank digital currency needs to do in the future.
Q: Many people worry that after the digital Rmb comes into circulation, the functions of commercial banks will be weakened, and even face the risk of financial disintermediation, what do you think?
For commercial banks, the risk of disintermediation may exist. But the central bank designed this set of central bank digital currency, we call DCEP mechanism, only to replace the cash in circulation, not M1 (narrow sense currency), M2 (broad sense currency), not to pay interest on the central bank digital currency.
Also the two-tier operation mechanism was designed to reduce or even avoid the disintermediation of commercial banks.
But the question of whether commercial banks will be disintermediated in the future is also worth analyzing. I think a partial replacement is possible. I think disintermediation is difficult to avoid to a certain extent. In the short term, I think this may not be a particular problem to worry about, but in the long term it does (may) be problematic, because I believe DCEP is just the first step, and if that's all we do, maybe we don't need to put so much effort into launching a central bank digital currency.
The future financial system will definitely change a lot and we should be prepared for it. I personally think that if the central bank digital currency can be successful, it will be a big thing, not just for daily life payments, but it will have an impact on our payment system, commercial banking system and even on the operation of the capital market. Of course, what is more important now is also the most expected, that is, it may help RMB internationalization in the future.
Q: How will the digital RMB help with RMB internationalization?
My view includes two points. The first point is not to think that once the central bank digital currency is landed, the internationalization of the RMB is achieved, which is actually not the case. Although you can just wire a central bank digital currency to some random person in London, if the currency is not internationalized, it is not accepted abroad, so it is important to internationalize the RMB first. The U.S. dollar has basically done that, and we certainly have some distance to go. So, just because the central bank digital RMB has been rolled out doesn't mean the currency is internationalized, this is something we need to do extra work to achieve.
But in the process, the central bank's digital currency is actually helpful in promoting the internationalization of the RMB. For example, if we do cross-border trade and investment settlement, (if) the original settlement is in RMB, it requires bank transfer or cash, but now it will be convenient and low cost to use the central bank digital currency. In the future, it will be quickly (accepted) in the border trade, because the other side is supposed to accept RMB, and then the efficiency will be greatly improved. So in cases like this, I think it is helpful to promote the internationalization of the RMB, but it is not the same as internationalizing the RMB itself.
On the question of anonymity, Xinhua released a story that specifically explained how anonymous the digital yuan will be.
According to Mu Changchun, the director of DCRI, the digital wallet is linked to a phonecard, instead of a bank account. Though a phone card can only be purchased with a personal ID, telecommunication companies are prohibited by law to reveal users’ personal info to the PBoC or any other third parties.
There is no need to tie any bank card to use digital RMB. This reflects the "anonymity" of the digital RMB. ...... According to current laws, telecom operators are not allowed to disclose user information to third parties such as the central bank. Therefore, the digital RMB wallet opened with a cell phone number is completely anonymous to the central bank and the operators.
BUT, Mu added that only “small amounts” that sustains “daily use” are offered the shield of anonymity, but he did not specify the exact amount.
Digital RMB can be technically anonymous in small amounts, and wallets can be opened using only a cell phone number. Of course, these wallets have low daily transaction limits and can only meet daily micro-payment needs.
This limited anonymity is called “controllable anonymity”, Mu says the reason that digital RMB is not given full anonymity is the fear that it may be used in illegal transactions.
As an important feature of digital RMB, "controlled anonymity" is necessary to protect the public's reasonable needs for anonymous transactions and personal information protection, and to prevent, control, and combat money laundering, terrorist financing, tax evasion, and other illegal and criminal acts, and to maintain financial security.
How will consumer data privacy be protected? The report says digital wallets will only push encrypted data to e-commerce platforms, or other receivers, to prevent the payee from acquiring the payer’s personal information.
User payment information will be packaged and encrypted, and then pushed to the e-commerce platform in the form of a sub-wallet. The platform has no direct access to users' personal information, which strongly ensures the privacy protection of users' core information.
In fact, not only e-commerce platforms, but also banks providing services, merchants receiving offline payments, and individuals receiving transfers will not have access to the personal information of payment users, as transactions between digital RMB wallets have been anonymized through technology and systems.
Mu Changchun says that digital RMB has the highest level of protection for user privacy among current payment tools.
The report also touched on the issue of stolen money, can they be recovered?
In the situation of a possible crime, law enforcement may obtain relevant evidence from financial and telecom businesses, to piece together the puzzle. Furthermore, for big transactions, more methods of verification will be needed to prevent dubious actions.
Although a digital RMB wallet can be opened with a cell phone number, it is not impossible to fight crime. The financial sector and telecom operators hold a portion of the data separately, and once they encounter a crime, they can hand over the relevant evidence clues to the judiciary, and law enforcement can follow the crumb.
In addition, the digital RMB wallet itself is designed with a hierarchical classification, and different levels of digital wallets can be opened according to the level of customer identification. Small payments can be made completely anonymously, but for large payments, you need to upgrade your "wallet" and provide relevant information elements as required to prevent the risk of large suspicious transactions.
Mu said that the digital RMB is designed to be "anonymous for small amounts and traceable for large amounts", which can help people recover their money and guard their property if telecom fraud occurs using the digital RMB.
What changes will China’s digital RMB bring about? Li Lihui, former president of the Bank of China outlined four changes: the structure of the payment market, the competition landscape of commercial banks, how the currency market is regulated, and the global currency structure.
1、Changing the landscape of the payments market
The digital RMB will change the payment market landscape in two ways. The first is to add official payment instruments to the market dominated by market-based payment instruments. It is expected that in the next 5-10 years, digital RMB will be parallel to payment instruments such as WeChat Pay, Alipay, Cloud Flash, and bank cards; the second is to add digital RMB to the legal tender form. Digital RMB will replace RMB banknotes in certain scenarios, but RMB banknotes will not be completely withdrawn from the market.
2、Changing the landscape of competition in the banking industry
The central bank digital currency can technically perform value transfer without the internet, the bank, or an account. This will result in the "unbundling" of bank accounts, even eliminating the need for commercial bank accounts and commercial bank intermediaries. Once financial consumers are less dependent on bank accounts, they will be freer to choose their financial services and financial institutions, and financial competition will be more adequate. The advantages of cost management and customer acquisition capabilities that financial institutions used to rely on scale operations to gain will depend largely on the ability to innovate and apply digital technologies in the future. This will rewrite the landscape of financial market competition.
3、Changing the landscape of money market regulation
The central bank can have real-time, complete, and structured data on the circulation of the central bank's digital currency, which is conducive to the precise regulation of the total money supply. Central bank digital money information flow can be observed in real-time and tracked throughout the process, which can achieve better control effects from the perspective of anti-corruption, anti-money laundering, anti-terrorist financing, and anti-tax evasion.
The central banks have more direct power to regulate the money market, but may thus assume more direct responsibility. In the event of an economic crisis, commercial banks with lower credit ratings may experience a run on digital currency deposits that is difficult to control and causes a ripple effect. Central banks must provide more liquidity support to commercial banks.
4、Changing the landscape of the global monetary system
Digital currencies will be at the heart of the global digital economy competition in the future. For countries issuing central bank digital currencies, the internationalization of digital currencies will pose a challenge to monetary policy design and liquidity control; while for countries where other countries' digital currencies dominate, their currency sovereignty will be threatened, the effect of monetary policy transmission will be weakened, and the risk of financial stability will be amplified.
China's overall strength currently lags behind that of the United States, but the quality and speed of economic development are ahead of the United States and other Western countries. A global digital RMB is conducive to maintaining our monetary sovereignty, protecting our financial security, and further enhancing our national strength.
This newsletter is penned by Yang Liu, with contributions by Wencai Zhao.