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How far will blockchain rise to national strategic central bank digital currency

Time : 26/10/2021 Author : jk21fe Click : + -
        On the afternoon of October 24, the Political Bureau of the CPC Central Committee conducted the 18th collective study on the current situation and trend of blockchain technology development. Collective learning emphasizes that blockchain should be taken as an important breakthrough for independent innovation of core technologies, the main direction of attack should be clarified, investment should be increased, efforts should be made to tackle a number of key core technologies, and the development of blockchain technology and industrial innovation should be accelerated. At present, the number of blockchain patent applications in China has ranked first in the world. In the future, blockchain technology is expected to have very broad development prospects in finance, people's livelihood, government affairs and other fields. On August 10 this year, at the third China finance 40 people Yichun forum, Mu Changchun, director of the payment and Settlement Department of the people's Bank of China, mentioned that "the research on the central bank's digital currency has been carried out for five years, and now it can be said that it is ready to come out.
 
        ”。 However, after thousands of years of changes, the currency has not yet separated from the physical form. Now, with the support of blockchain technology, the central bank's digital currency will greatly subvert the traditional physical currency system. Mu Changchun, deputy director of the payment and Settlement Department of the central bank, said that the central bank's digital currency design at this stage focuses on M0 substitution, rather than M1 and M2 substitution. Non financial readers may be unfamiliar with the concepts of M0, M1 and M2. The following is a brief introduction to the meanings of M0, M1 and M2. The first layer with the smallest scale and range is M0. M0 represents cash in circulation, which is the sum of the cash on hand of all units outside the banking system and the cash held by residents.
 
        The broader scope is m2, which refers to M1 plus quasi currency, which includes time deposits, residents' savings deposits and other forms of time deposits. In a popular sense, M0 is the cash in hand; M1 is cash plus bank demand deposits; M2 is the first two plus time deposits and other forms of money. This is mainly due to two reasons. First, based on the existing commercial bank account system, M1 and M2 have now realized electronic and digital. Second, there are many defects in traditional paper money, which may affect the central bank's centralized position. In recent years, the proportion of central bank currencies in the total monetary volume of many developed countries and emerging market countries has decreased.
 
        Since 2003, the ratio of China's central bank's money to M2 has decreased by 5%, India by 7%, and the euro zone by 3%. To a certain extent, this shows that the importance of central bank money in the social economy is declining. Part of the reason may be that the payment function of traditional central bank money cannot fully meet the needs of modern economy. From the slogan of "cashless society" put forward by some Payment institutions and the development of private digital currencies in recent years, we can feel that the position of central bank's currency is being challenged& mdash;& mdash; Yao Qian, the impact of legal digital currency on monetary policy and financial stability.
 
        The drug dealers in the European and American blockbusters are all carrying a large bag of cash. The corrupt officials in the name of the people are filled with cash. This is the characteristic that it is difficult to monitor the cash flow. Let me give you a more specific case. In the American TV series "the deadly poison master", the way the hero laundered the drug money is to open a car wash. The main reason is that the cash received by the car wash will not be suspected, and it is not as easy to be monitored as the credit card. The hero disguises a large amount of dollars obtained by selling drugs as the money received from the customer's car washing, which is injected into the revenue of the car washing shop in batches. Since the cash can not be traced, it is difficult for regulators to find out how the money was laundered.
 
        Since the central bank's digital currency is a substitute for M0, it should comply with all the current regulations on cash management, anti money laundering, anti-terrorism financing, etc., and report to the people's Bank of China large amount and suspicious transactions of the central bank's digital currency& mdash;& mdash; The original text of Mu Changchun's speech at the Yichun forum of 40 people in China's finance. Second, the traditional paper money is too homogeneous, and its only function is pricing. As a result, the traditional monetary policy can only affect the private sector's money supply and cost through aggregate adjustment, which will make it difficult to peg the money supply. Third, under the background of using traditional paper money, the central bank cannot determine the direction of money and whether the monetary policy objectives are achieved, which means that the central bank can only rely on historical information for its decision-making.
 
        In the face of these shortcomings of paper money, the Central Bank of China is actively advancing with the times in introducing digital currency. Zhou Xiaochuan, former governor of the people's Bank of China, stressed earlier that the essence of studying digital currency is to pursue the convenience, quickness and low cost of the retail payment system. Stefan & middot, governor of the Swedish central bank, who also supports digital currency; Ingalls once said, "about 350 years ago, we used paper money to replace large copper coins. Now paper money and coins can be replaced.". The two-tier operation system refers to that the people's Bank of China first exchanges digital currency to banks or other operating institutions, and then these institutions exchange it to the public. Because the central bank's digital currency is mainly used in small retail scenarios, and China's population base is huge, the retail scenario application requires high concurrency.
 
        High concurrency means that a large number of different transactions are completed at the same time. Bitcoin can only complete 7 transactions per second, while Ethereum has 10 to 20 transactions per second, while Libra has only 1000 transactions per second. Mu Changchun said that the digital currency research group of the people's Bank of China has made a "pure blockchain architecture" model. However, if the legal digital currency is to reach the retail level, "high concurrency" is a barrier that can not be overcome. In a large country like China, issuing digital currency, the pure blockchain architecture cannot achieve the high concurrency performance required by retail. In addition, China is a complex economy with different economic development and education levels.
 
        If the single-layer operation structure is adopted, it means that the people's Bank of China has to face all the public alone, which will bring great challenges. Fourth, if we use a single-layer operation structure, it will lead to financial disintermediation. Under the single-layer release framework, the central bank directly releases digital currency to the public. Compared with the deposit currency of commercial banks, the former is more competitive than the deposit currency of commercial banks under the credit endorsement of the central bank, which will have a crowding out effect on the deposits of commercial banks, affect the loan release ability of commercial banks, and increase the dependence of commercial banks on the inter-bank 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. At that time, the central bank will have to subsidize commercial banks. In extreme cases, it may even subvert the existing financial system and return to the pattern of "great unification" of the central bank before 1984.
 
        —& mdash; The original text of Mu Changchun's speech at the Yichun forum of 40 people in China's finance. The credit of the central bank is obviously stronger than that of major commercial banks. If there is a central bank's digital currency to choose, who is willing to choose commercial bank deposits? This is the so-called extrusion effect. Facebook's Libra adopts a single-layer operation system, and its strong user resource advantage also makes some financial institutions worry that their deposits are taken away by Libra. In the white paper of Libra, it is also said that 100% reserve asset mortgage will be adopted, but Libra does not limit itself to M0. If Libra enters the credit market, it will generate currency derivatives and currency multipliers, which may lead to excessive issuance of money, and the central bank will control this situation well.
 
        Note: in the table, the category of traditional paper currency is added for the sake of clearer comparison. However, since the difference between traditional cash and central bank digital currency is too obvious, there is no need to separate it and it will not be repeated in the text. From the perspective of its monetary nature and its relationship with legal currency, the central bank's digital currency is officially issued legal currency. Libra is a "stable currency" issued by anchoring legal currency. Bitcoin, on the other hand, cannot be called a currency. Without credit endorsement and perfect legal protection, bitcoin can only be called a digital asset. From the perspective of issuing entities, the digital currency of the Central Bank of China is issued by the central bank with national credit endorsement. Libra is issued by the technology company Facebook, and its credit is far weaker than the central bank's digital currency.
 
        Bitcoin is produced by "mining" without issuing entity. From the perspective of main application scenarios, the main application scenarios of central bank digital currency and traditional electronic payment (UnionPay, Alipay, wechat, etc.) are online or offline retail payment, which are mainly used in China. Libra focuses on going global and cross-border transactions. The application scenarios of bitcoin are scattered, and the main application scenarios are not clear. Although the digital currency of the Central Bank of China uses the blockchain technology, it still adheres to centralized management, and the settlement is carried out by institutions authorized by the central bank. Centralized management is mainly to ensure and strengthen the central bank's macro Prudential and monetary control functions and avoid excessive monetary issuance.
 
        Under the guidance of operational principles, the Central Bank of China adopts a two-tier operational structure for digital currency. Bitcoin adopts distributed operation, that is, distributed ledger, that is, blockchain technology, so that each node can display the general ledger, modify and maintain the general ledger, and cannot be tampered with. In the white paper, Libra said that it would adopt a decentralized operation mode, adopt a distributed ledger and adopt a single-layer operation structure, but whether it can be realized remains to be considered. High degree of account coupling (account tight coupling) refers to one-to-one correspondence between funds and identities, and relatively weak anonymity. In the case of high account coupling, fund storage and transfer must be completed through the account. If you forget the bank card password, you can take the certificate that can prove your personal identity to the bank and other institutions to retrieve the password. If you lose your credit card, you can report the loss and freeze it in time.
 
        In the case of low account coupling (loose account coupling), the funds and personal identities do not correspond to each other. If you have a password, private key, etc., you can withdraw the funds, and the anonymity is relatively strong. For example, the locally generated bitcoin private key (a large string of characters that are difficult to remember) can use the funds in the wallet as long as the private key is stolen or informed to others. The digital currency of the people's Bank of China adopts the mode of "account loose coupling" to meet the users' requirements for transaction anonymity. However, it should be noted here that anonymity is only for both parties of the transaction. Traditional electronic payment, such as Alipay, is highly dependent on bank accounts. During fund transfer, the information of both parties to the transaction is also known to each other (the name of the other party needs to be verified for transfer), and it is difficult for both parties to achieve anonymity.
 
        If the central bank's digital currency is used, the user can keep his name confidential to the counterparty when making payment. However, this information can still be found by the regulatory authority. If abnormal and large-scale transfers are detected, they will still be targeted by the anti money laundering agency. This is the reason why the digital currency of the Central Bank of China can still be effectively regulated while meeting the anonymity. Libra white paper says that it will not link the account with the identity of the real world. Users can freely create multiple accounts by generating multiple key pairs. Accounts controlled by the same user will not have inherent connection with each other, and the account coupling is low. However, many financial institutions questioned the difficulty of Libra's supervision.
 
        Although the Central Bank of China has not experimented with digital currency, it has been studying it for five years. The patent inquiry system of the State Intellectual Property Office shows that as of August 4, 2019, the digital currency Research Institute of the central bank has applied for a total of 74 patents involving digital currency. The pbctfp blockchain platform piloted by the central bank in a small scale also provides a lot of technical support for the issuance of digital currency by the central bank. Pbctfp is a trade finance blockchain platform. Four blockchain applications have been built on this platform, with the participation of 26 banks, achieving 17000 transactions and a business volume of more than 4 billion yuan. Libra is still in the stage of white paper, and many technical arguments are still controversial. Facebook's blockchain department was only established in May 2018 (the central bank officially started the research on digital currency in 2014). The user data leakage incident also makes people very worried about Facebook's privacy protection.
 
        In terms of transaction efficiency, Mu Changchun said in his speech that "last year's double 11, the transaction peak of China Netcom reached 92771 transactions per second, compared with 7 transactions per second for bitcoin, 10 to 20 transactions per second for ether, and 1000 transactions per second for Libra according to the white paper it just issued.". It may surprise many people that the transaction efficiency of traditional electronic payment is the highest. This is mainly because the traditional electronic payment adopts the centralized ledger mode, and the transaction data only needs to be modified at the center, while the distributed ledger needs to be modified at all nodes, so the efficiency is not so high. While the digital currency of the Central Bank of China uses the blockchain technology, it remains technically neutral and does not depend on the technical route of the blockchain, so its efficiency is higher than that of Libra and bitcoin.
 
        The reason why the pure blockchain architecture is not adopted is that the pure blockchain architecture is difficult to meet the high concurrency performance required by the retail scenario in China. The author summarizes the attitude of some countries towards the central bank's digital currency, as shown in Table 3 below. It should be noted here that the three tables summarize the attitudes of countries towards central banks (issuing) digital currencies, not towards digital currencies. Some countries are very friendly to digital currencies, but they are very cautious about central bank digital currencies, such as Japan. Note: the implementation of digital currency is an extremely complex project involving multiple interests, which is subject to many disputes. The phenomenon that the high-level officials of the same country have different attitudes towards digital currency often occurs. The attitude of a country towards digital currency varies greatly in different news reports.
 
        The attitudes of countries to digital currency sorted out in the table in this article are subject to the official statements of central banks or statements of authoritative persons. Many countries with a cautious attitude towards central bank digital currency are very active in the research of digital currency technology, such as Japan and the European Central Bank. Some reports report that these countries support the central bank's digital currency because of their active research and development. This is very one-sided. From the above three tables, we can see that the countries that have launched the central bank digital currency are all small countries with weak economic strength, while the economically developed countries that have the intention to launch the central bank digital currency have many difficulties in practice, such as China, Britain, the United States and Russia.
 
        While Japan, Australia and the euro zone countries have been active in the research, they are very cautious about the implementation of the central bank's digital currency. Digital currency has a great impact on the existing financial system, while the financial system of large countries is very complex. The adaptation of the system and digital currency requires a large and long project, and the actual implementation and application are very slow. While the financial system of small countries is relatively simple and more friendly to digital currency. The financial system will not cause too many obstacles to the issuance of digital currency by the central bank. Therefore, although with the support of strong technology and funds, the technological research and development speed of digital currency in large countries is far faster than that in small countries, it has encountered many obstacles in practical application.
 
        For countries facing economic collapse, issuing digital currency is a helpless move under extreme circumstances. Take Venezuela as an example. Before the issuance of petroleum currency, the inflation rate exceeded 1000000%, and the French currency Bolivar was almost worthless. The phenomenon of not paying for vegetables but weighing occurs from time to time. Many people even choose to return to the original trading mode of barter. So Maduro created petro (PTR), which is said to be supported by the country's oil reserves. Although the oil currency is controversial, it is also a helpless move. For poorer countries, it can not only cope with the crisis, but also bring opportunities for their economic development, such as improving the efficiency of these countries in international trade.
 
        Issuing central bank digital currency also helps some countries resist US sanctions and US dollar hegemony. Venezuela is an example. Iran, Turkey and other countries subject to US sanctions are also promoting the process of central bank digital currency. Facebook, with 2.7 billion active users,
 
        
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