Abstract: When it comes to constructing a new digital financial ecosystem, there are several key considerations. First, digitalizing payment systems and currency should go hand in hand; emphasize the broad concept of digital payment systems while being cautious about narrow views of digital currency. Second, the digital currency landscape is evolving, with both account-based and token-based digital currencies. Decisions need to be made regarding centralization and decentralization, and interoperability should be a priority. Third, a dual-layer operational system should be maintained, allowing for competition to improve services and foster innovation. Policies should support the independence of digital payment systems and establish pricing structures. Fourth, it's essential to prioritize security, convenience, cost-effectiveness, and misuse prevention in the development of digital currency. Fifth, cross-border transactions are a significant focus for central banks exploring digital currencies.
Distinguished guests, ladies and gentlemen, friends,
Good morning. I am delighted to be here at the 3rd China (Beijing) Digital Finance Forum, where we can discuss how digital finance can serve the real economy, with a special focus on the prospects of central bank digital currencies (CBDC) and digital payments.
The theme is "Integration and Evolution: To Build a New Ecology of Digital Finance". We can see that the Lize Financial Business District, where we are currently situated, has made many innovative attempts to construct a digital financial ecosystem. These efforts aim to enhance the efficiency of economic activities and serve a wide range of financial consumers through digital finance. We are also seeing the exciting launch of new products and systems.
I've worked with digital currencies before and would like to share some observations, though I'm approaching this as an observer.
There are several critical topics to discuss regarding the creation of a new digital financial ecosystem. In the competitive dual-layer operating system, we've seen a lot of effort to promote the digital economy, including that of the PBC’s Digital Currency Research Institute. Within this ecosystem, some systems have succeeded, while others have faced challenges. Even successful systems require continuous upgrades. Therefore, it makes perfect sense for us to discuss "integration" and "evolution".
I've recently given a lecture on digital currencies at ShanghaiTech University, and I'd like to share a few key points from that lecture with you.
First, the digitization of payments and currencies are interconnected in an ecosystem.
Payment systems are evolving through various technologies, shifting from traditional physical currency to digital money. This digitalization has led to the creation of various digital payment products, and as they mature, they require interoperability and integration, resulting in a natural selection process.
Because technology advances rapidly, digital payment systems need frequent updates. In the realm of digital currencies, some inventors and system developers believe that only their own digital currencies are genuine, not recognizing digital currencies that employ different technologies and models, an inclusive approach that has been widely disapproved. Some digital currencies claim to be “stablecoins”, but true stability depends on the system design and asset backing, subject to evaluation by customers and the market.
China's CBDC was initially known as DCEP, or "Digital Currency and Electronic Payment System" (the internal system continued to use this name). The line between electronic and digital is quite blurred. Early electronic systems may not have been entirely digital, but later in the process, they essentially became intertwined with digitization, and therefore, most electronic processes are essentially digital ones. New technologies have made previously impossible things possible over time. Therefore, when discussing digital finance and digital currencies, it's essential to focus on broad concepts like payment system digitization and digital currencies rather than narrowly defining digital currency.
Second, as the digital currency ecosystem grows, we're clarifying concepts which are also evolving and merging.
Currently, digital currencies, like the digital RMB, are mainly account-based. Although token-based digital currencies are also a potential path for development, but the mainstream is still account based digital currencies.
There's a choice between decentralization and a centralized approach in this development. Technology-wise, digital currencies and payment systems heavily rely on internet tech, and advancements there will significantly impact digital finance and digital currencies. Payment terminals come in various forms like desktop, mobile, and prepaid cards, and some use IC card tech, which can work well with digital payment systems.
All of these rely on financial infrastructure, and many concepts related to this infrastructure are being debated and discussed, which is a good thing. For instance, Real Time Gross Settlement, or RTG, doesn't mean every transaction has to be instant; some slightly delayed arrangements may be better for specific market needs.
When it comes to infrastructure, achieving system connectivity and universality is crucial. For cross-border and cross-currency transactions, market institutions provide front-end services, while central bank-supported clearing systems in the background offer the necessary support.
Third, it's crucial to understand deeply and apply consistently the dual-layer operating system.
In this system, the central bank is the first layer, and commercial institutions like banks, internet platforms, and telecom operators make up the second layer. This system is dynamic and encourages competition and innovation. It's diverse, which is especially crucial for a big nation.
In essence, it's hard to say one system or technology is better than others definitively, so we should allow diverse solutions to coexist and let competition determine the best ones.
We should also focus on making these diverse systems work together, which relates to the theme of "integration." Systems evolve and need upgrades to stay compatible with newer and more efficient technologies.
Internationally, there's a notion that only central bank-issued currencies are true CBDCs, and others from commercial institutions are not CBDCs, nor are they legal tender and, therefore, carry risks. This argument can be misleading because funds (M1) in commercial bank accounts are generally safe under central bank supervision; they are not the so-called commercial currencies, nor should they be compared to the fintech-created stablecoins and cryptocurrencies.
Within this dual-layer system, policymakers should ensure that digital payment systems can operate independently. They should set up pricing to allow these systems to charge for their services, even if the fees are minimal for customers. Without charging fees, it could lead to improper cross-subsidization and cross-selling, where payment system service providers focus on aspects they shouldn't.
For instance, some service providers use payment systems as gateways and, in the end, make money by reselling data or developing other businesses using that data, posing risks of data misuse. Others view the payment system as a traffic funnel rather than an independently profitable financial service product, which can lead to distortions. We believe that these issues can be addressed and improved over time as the dual-layer system evolves through integration and upgrades.
I want to stress the principles of safety, convenience, low costs, and preventing misuse. Safety is crucial in the world of finance, especially for currencies. As technology gets cheaper and more accessible, the risks of misuse also decrease. Preventing misuse includes fighting against money laundering and illegal arms trading. Many arms deals in military conflicts, as well as the trade of drugs like fentanyl, often involve encrypted assets and stablecoins for payments. This is an area that needs significant prevention measures.
Furthermore, we need to address issues like cross-border gambling and fraud. China’s Ministry of Public Security has made considerable progress in combating fraud, with many cases involving cross-border payments using encrypted assets. This is a constantly evolving challenge.
New technologies have the potential to benefit the public, but they can also be misused. We need to be vigilant in managing this aspect throughout the development of digital currencies.
Lastly, cross-border transactions are an important aspect of CBDC, involving technology, systems, and policies. However, due to time constraints, I won't go into further detail on this topic.
This article is a speech made by the author at the 2023 China (Beijing) Digital Finance Forum on October 12. It is translated by CF40 and has not been reviewed by the author. The views expressed herewith are the author’s own and do not represent those of CF40 or other organizations.
