Yao Qian's latest speech full text: Digital currency will definitely evolve into smart currency, and the dual-layer architecture does not have to exclude Ethereum and others

This article was published on Sina.com, author: Yao Qian, Director of the Technology Supervision Bureau of the China Securities Regulatory Commission.

On May 29-30, the International Financial Forum (IFF) 2021 Spring Meeting was held in Beijing. The theme of this meeting was "Post-Pandemic Era: Global Governance and International Cooperation." During the forum's session on "Digital Currency and Future Digital Transformation," Yao Qian, Director of the Technology Supervision Bureau of the China Securities Regulatory Commission, shared his insights.

The following is a transcript of the speech:

Hello everyone! I am very pleased to participate in this seminar.

In 2014, the People's Bank of China initiated the research and development of central bank digital currency. I am honored to have been part of it. Although I left the People's Bank of China to work at the China Securities Regulatory Commission at the end of 2018, I still pay attention to the development of central bank digital currency. Here, I would like to share my understanding and views on central bank digital currency from the perspective of a researcher, and I welcome your criticism and guidance.

Recently, everyone has noticed that Federal Reserve Chairman Powell commented on the digital renminbi during a press conference on April 28, stating, "Its real use is to help the government see all real-time transactions. Compared to dealing with international competition, this is more related to what happens within their own financial system."

I believe that "helping the government see all real-time transactions" is not the motivation behind China's central bank digital currency experiment. In our country, people have become accustomed to non-cash payment methods such as Alipay and WeChat Pay, and many no longer carry cash. In fact, third-party payment technologies have already made all real-time transactions transparent; of course, this has also raised issues regarding data privacy protection, anonymity, monopoly, and regulatory transparency. In the face of the digital wave, it is necessary for central banks to proactively innovate the issuance and circulation methods of legal tender, explore central bank digital currency to optimize the payment functions of legal tender, alleviate the impact of private digital payment tools, and enhance the status of legal tender and the effectiveness of monetary policy.

I have always referred to the "de-cashification" of private payment tools and the rise of "decentralized" private digital currencies as the "Morning Call." The People's Bank of China is one of the earliest central banks to respond to the "Morning Call" and take proactive action. What Powell referred to as "the government seeing" or "not seeing" may more relate to the balance between privacy protection and regulatory compliance, which Governor Zhou Xiaochuan has previously articulated well from the perspective of controllable anonymity.

During that press conference, Powell also commented on whether digital currencies would challenge the status of the U.S. dollar, generally believing that there is no need for excessive concern. There has been much discussion internationally about whether central bank digital currencies will replace the U.S. dollar. I believe that the international monetary status of the U.S. dollar has been historically formed, and international trade and cross-border payments are currently mostly conducted in U.S. dollars. Although some global stablecoins, such as Libra, aim to address the pain points of cross-border payments, weakening the international monetary status of the U.S. dollar is not necessarily the goal of CBDCs; the digitization of sovereign currencies has its own inherent logic. In the long run, the emergence of digital currencies or digital payment tools may indeed change the existing landscape, but that is a natural evolution resulting from the digitalization process and market choices.

I was particularly struck by another statement from Mr. Powell: "In a world where we already have a highly evolved payment system, we have FedNow and other instantly available funds. In this environment, what role will central bank digital currency play?" This actually discusses how to position central bank digital currency. In what scenarios should it be applied? What role should it play? Currently, there is considerable debate on this issue.

Next, I would like to discuss seven key considerations for the research and development of central bank digital currency.

1. Technical Route. Based on accounts or based on tokens? From public reports, the digital renminbi adopts an account-based approach, while some countries have chosen a cryptocurrency technology route represented by blockchain technology. My personal understanding is that the account-based and token-based technical routes are not mutually exclusive; in essence, a token is also a type of account, just a new type of account—encrypted account. Compared to traditional accounts, users have greater autonomy over encrypted accounts. As early as 2014, we conducted in-depth research on both centralized and decentralized cryptocurrencies, including E-Cash and Bitcoin. In a sense, the early digital currency experiments of the People's Bank of China are consistent with the ideas of cryptocurrencies, and we look forward to mastering the keys to cryptocurrencies rather than taking a detour. At that time, we developed a quasi-production-level prototype system for central bank digital currency based on the "central bank-commercial bank" dual system. However, after repeated considerations for implementation, we chose to start from the traditional account-based technical route, which is a pragmatic choice. I remember that during my time at the People's Bank, Governor Zhou always taught us to have a long-term perspective on technological evolution and to dynamically observe changes in technology. His guidance is enlightening, and I think we need to view the development of central bank digital currency with a dynamic perspective. As technology continues to develop and mature, central bank digital currency will also incorporate various advanced technologies and continuously improve its technical architecture.

2. Value Attributes. Direct liability of the central bank or liability of operating institutions? The essential difference lies in whether the central bank's balance sheet records the central bank digital currency of end users or the reserves of the operating institutions. If the operating institution deposits 100% reserve with the central bank to issue digital currency, this type of central bank digital currency is internationally referred to as synthetic CBDC, similar to the currency issuance system in Hong Kong. This model has attracted research attention from many institutions, including the People's Bank of China and the International Monetary Fund. Of course, some countries still adopt the traditional direct liability model of central banks.

3. Operational Architecture. Two-tier or single-tier? In my 2017 article "Digital Currency and Bank Accounts," I proposed a "traditional bank account + digital currency wallet" architecture to avoid the impact of central bank digital currency on commercial banks. Currently, a two-tier architecture is gradually forming a consensus among countries. The digital renminbi also adopts a two-tier operating system. I personally believe that two-tier and single-tier operations are not mutually exclusive, just like taxis and buses, both can coexist and be compatible for user choice. We can imagine that if central bank digital currency operates directly on blockchain networks like Ethereum or Diem, then the central bank could leverage their BaaS services to provide central bank digital currency directly to users without relying on intermediary institutions. Single-tier operations could better benefit unbanked populations, achieving financial inclusion.

4. Interest Bearing. Some people have concerns about whether central bank digital currency should bear interest, fearing it may lead to deposits moving from commercial banks to the central bank, resulting in a shrinkage of the entire banking system's credit capacity, becoming a "narrow bank." In recent years, central banks around the world seem to be less "afraid" of the narrow banking impact of CBDCs. For example, the European Central Bank's digital euro report proposed a so-called tiered remuneration system, which applies variable interest rates to different holdings of digital euros to mitigate the potential impact of digital euros on the banking industry, financial stability, and monetary policy transmission. Currently, the digital renminbi does not consider bearing interest.

5. Issuance Model. Issuance or exchange? The difference between currency issuance and exchange is that the former is initiated by the central bank and is a proactive supply; the latter is initiated by currency users and is an on-demand exchange. Is the generation of central bank digital currency issuance or exchange? It depends on its positioning and the needs of monetary policy. If it is merely a replacement for M0, then it is like cash and is an on-demand exchange; if the central bank actively issues digital currency to the market through asset purchases to achieve monetary policy goals, then it is an expansionary issuance. Expansionary issuance must define the types of eligible assets and operate at appropriate quantities and prices.

6. Smart Contracts. Some people worry that loading smart contracts beyond the functions of legal tender itself will affect its legal payment function, and therefore suggest a cautious approach to loading smart contracts onto central bank digital currency. However, research projects on central bank digital currency conducted by Canada, Singapore, the European Central Bank, and the Bank of Japan have all experimented with smart contracts. My personal view is that digital currency cannot simply be a straightforward simulation of physical currency; to leverage the advantages of "digital," future digital currencies will certainly move towards smart currency. Of course, we have also observed some system disasters caused by security vulnerabilities in smart contracts, indicating that the maturity of this technology still needs improvement. Therefore, central bank digital currency should start with simple smart contracts, gradually expanding its potential while fully considering security.

7. Regulatory Considerations. As mentioned earlier, we need to strike a balance between privacy protection and regulatory compliance. On one hand, KYC, anti-money laundering, anti-terrorist financing, and anti-tax evasion are basic principles that central bank digital currency should follow; on the other hand, we must fully consider the protection of users' personal privacy. The design of the privacy mechanism for central bank digital currency is currently a research hotspot. Recently, the results of the European Central Bank's public consultation on the digital euro also showed that residents and professionals participating in the consultation believe that privacy is the most critical design feature of the digital euro. Personally, I believe that in the digital world, issues of digital identity authenticity, privacy, and security may involve larger social governance propositions, which require in-depth research.

In summary, the research and development of central bank digital currency is a complex systemic project that involves not only technical issues but also broader fields such as legal regulations, financial stability, monetary policy, financial supervision, and international finance. Many issues still require in-depth study. In particular, with the current digital dollar, digital euro, and digital yen seemingly poised for launch, what is the competitiveness of the digital renminbi compared to them? This is worth our deep reflection and discussion.

These are some of my basic views, purely based on experience, and they still need to be tested in practice. I would like to emphasize that I have left the People's Bank of China, and what I say only represents my personal academic views, not those of the People's Bank or the institution I currently belong to.

Thank you, everyone!