Amber World Interview Series | The Competition and Cooperation Behind the Digital RMB
The emergence of DCEP, the digital currency of the Central Bank of China, gives China the distinction of becoming the first country in the world to issue its own legal digital currency. China’s DCEP has been thoroughly tested, going through pilot projects in multiple big cities in China. China’s DCEP is essentially a digital and encrypted version of RMB (Yuan) banknotes and coins, with the same legal compensation as the RMB fiat currency, equipped with dual operation and a two-tier structure. In addition, it offers anonymity and controllability, & offline payment and loose coupling.
Recently, Zhou Yifan (Jeremy Zhou), CEO of RedBlock, was invited to participate in an interview series hosted by financial media outlet, Amber World. Together with Yu Lingqu, Deputy Director of the Financial Research Institute of the Shenzhen Comprehensive Development Institute, Zhou Yifan took part in a discussion on whether the era of digital currency has come and the impact of China’s DCEP on monetary and financial systems within the country and abroad.
Below are excerpts from the interview, entitled “The Competition and Cooperation Behind the Digital RMB”:
Q1: People who have tried out the “red envelope” (a common way for individuals to pay each other through online platforms in China) say that the use of digital currency feels similar to the usual online electronic payment. What is the difference between the two concepts?
Jeremy: We can understand the payment represented by WeChat and Alipay as electronic payment. The so-called electronic payment needs to first virtualize the entire currency, and then the payment can be completed through such media and network transmission channels. In principle, we can understand the process of electronic payment as the following process: we first turn the money we hold into a real number, and then pay through it as a centralized medium.
While the digital payment method of RMB involves some of the same facets such as being held in a wallet, it is fundamentally different from electronic payment. We can do business completely offline, without the Internet.
Q2: In this way, payment can be completed without a network, which is reminiscent of prominent digital currencies such as Ethereum and Bitcoin. So, what is the difference between digital RMB and these currencies?
Jeremy: Strictly speaking, the digital currencies present within the blockchain industry should not actually be called “digital currency,” but rather digital assets. At present, Bitcoin is defined as a valuable asset, which means that it can only represent the value you own. In actuality, it is an investment asset. For example, the price of the stocks we invest in also fluctuate. And these stocks are financial assets rather than currency in circulation. Because there is not a general equivalent, it cannot be used as a transaction certificate.
Before, some countries tried to use Bitcoin POS machines or use Bitcoin for payment and consumption. We can understand it’s development by comparing its trajectory to an initial concept of finance, bartering, which is to exchange one kind of asset for another. Over time, it will develop to have relatively hedged equivalents as a value it can be tied to.
Director Yu: Returning to the accurate definition of economics is helpful to our understanding. The so-called currency is a kind of equivalent that undertakes the functions of pricing, settlement, value storage and so on. The renminbi (RMB), the US dollar and other legal currencies are definitely equivalent, and they are currencies. But Bitcoin and the like do not perform the function of market equivalent pricing, so it cannot be called a currency.
Q3: From a technical point of view, electronic payment involves a lot of personal information. Is the use of digital yuan also regulated by the central bank?
Jeremy: When we use banknotes for consumption, the bank can actually monitor which machine the banknotes enter and exit from and by whom, but they cannot monitor the mid-end process. But if the digital yuan becomes widespread, the bank can record every node in the middle.
Q4: In the process of promoting the third round of the “Public Beta” of digital currency, what are the considerations that go into the selection of pilot cities?
Director Yu: I think the central bank’s selection of cities including Shenzhen, Suzhou, Shanghai, and Beijing for pilot projects involves deep consideration. Take Shenzhen as an example, where the digital economy is very active. Local residents have become accustomed to digital life. The second aspect is that the pilot cities are all technologically innovative cities, which fit the strong technical characteristics of digital currency. Third, the financial industry in Shenzhen is also relatively developed, which is conducive to the construction of a better banking interaction system and the gradual improvement of the risk management system. Thus, in the pilot process, the relevant attributes (feasibility, security) of digital RMB can be better tested.
Q5: The third round of the “Public eta” of the digital currency was completed in mid to late January. How long will the perfection cycle take in the future?
Director Yu: Officially, there is no specific implementation schedule, and personally, I believe that the testing period may be very long. Money can be used for a wide range of purposes, including financial transactions and cross-border trade, in addition to everyday consumption. If the function of money is limited to a small amount, such as sending red envelopes and making offline payments, then its significance is far from being realized. Therefore, I think the future application of digital RMB will be more and more widespread. However, only after its reliability and feasibility have been fully verified will it be fully promoted.
Jeremy: I don’t technology isn’t linked with any strict barriers, but rather we need to decide how to determine our standards based on the technology. That is, who decides the standard, for whom and for which industry the standard will be accepted. I think the current tests can be analyzed from several aspects: The first aspect is the application scenario. Most of the currently tested scenarios are high-frequency consumption, such as Didi Taxi and daily, retail consumption. This should be testing the ability of the digital renminbi to withstand pressure, testing whether it can carry high-frequency, high-speed, or multi-transaction volume transfer. Another level is to test whether there are technical defects between different scenarios. For example, some trade transactions, cross-border transactions or major currency transactions, because such transactions will cause immeasurable losses if there are problems. In addition, it is more important to test the entire design and development rules. At present, the digital RMB is pegged 1:1 with the value of the fiat currency RMB. Something to consider is whether the digital RMB may anchor other general equivalents or non-renewable resources in the future, such as gold or oil. For example, the U.S. dollar had previously anchored gold in the Bretton Woods system.
Q6: Money is not only the representative of wealth, but also illustrates how humans transact with each other for goods and services. If the digital RMB were ever fully launched, it would undoubtedly reshape the entire payment system. Why choose to launch digital currency at this point in time? What advantages does China’s digital RMB have in terms of technology and experience compared to other countries?
Director Yu: First of all, China’s national strategy attaches great importance to the development of a digital economy. In fact, the 14th Five-Year Plan clearly proposes the vigorous development of the digital economy. At present, we haven’t digitized the entire finance system like the U.S. has, and that’s a shortcoming. Secondly, we also face some competition. Many countries are exploring the issuance of digital fiat currencies. Because the health of the national currency represents the health of the national credit, there is a relationship between substitution and being substituted.
Jeremy: The speed of growth of our digital currency is the fastest in the world. We have analyzed the entire international market. There are currently less than 10 countries that have launched digital currencies recognized by the government, most of which are small and medium-sized countries, such as Venezuela and Angola. The big economies, on the other hand, are not active. They are still working on it. This is understandable. Take Venezuela as an example. Inflation there has reached incalculable levels and its own credibility is low. It could rebuild its financial system by digitizing its currency. In fact, the whole process of digitization offers an opportunity for many countries to rebuild their credit systems and international linkages. It’s also important for our country. We have always wanted to establish the dominant role of the RMB in the international community, and digitization is undoubtedly the best and fastest way. Our current technological and experiential leadership also helps us to have a voice advantage in the future.
Q7: What will the digitization of money do to the old financial system centered in the United States?
Jeremy: The core of the issue is who controls the rules. Pure resistance to digitization is unrealistic, because the infrastructure and history of the whole world has come to a point where it has to change. In the past 20 years, we have experienced many changes, including the spread of mobile phones and the development of 5G Internet technology. Now everything offline can be expressed digitally, to trade and to price, which is an irreversible process. I think the most important thing is who sets the standards and rules, not useless resistance. European countries, led by the old financial powerhouse Switzerland, and the United States are pushing for a say in rule-making. Switzerland has positioned Zug as a digital crypto valley, vigorously planning to develop the digital economy; Given the current epidemic, the United States has little time to focus on the study of the digital economy. China has achieved a sort of prominence at this point in time.
Director Yu: I believe acceptance and integration is the only path to development. But the process will no doubt be cautious, as there is much debate on the Internet over who actually owns the assets. We need to solve these disputes and improve them one by one so as to create better conditions and more possibilities.
Q8: With the development of the One Belt, One Road strategy, how long will it take for digital RMB to reach a significant scale?
Director Yu: Digital RMB also needs to “make up a missed lesson”. When it comes to financial digitization, it’s top-down in China, bottom-up in the US. The demand for digital money in the United States came after the digitization of their physical assets. For us, however, there’s a lot of room to digitize all kinds of assets.
Jeremy: Throughout the history of monetary development, the financial system has been constructed in a pyramid structure. In terms of digital RMB, it is necessary to first develop settlement tools, and then gradually improve the financial system and underlying facilities, including digital banks, custodian institutions and securities firms, to facilitate the circulation of digital RMB. As we’ve mentioned before, digital RMB anchors other equivalents, which, if possible, will be more widely accepted, more widely used. In this case, the whole foundation still needs to be built. That is to say, the further development of digital RMB needs to improve the underlying infrastructure and regulatory system of our existing entities, and expand and enrich its use case scenarios. In addition, basic security facilities, including firewalls, also need to be built.
New things have a long way to go, and the digital RMB is no exception. Its development needs see support from the whole country’s financial and legal systems, with applications and regulations facilitating its growth! We are looking forward to it!
For a full video transcript of the interview, check out the following video link: https://v.qq.com/x/page/x3238su6p58.html
About Amber World “Amber World” is the flagship outlet of Amber Finance, whose full name is Shenzhen Qianhai Amber New Media Technology Co., Ltd. Formally established in November 2020, the team comprises senior professionals from well-known domestic media organizations and financial institutions such as China Business News Group, 330 Media and so on, aiming to create new financial media with international influence.
At present, the company has two major sub-companies, Amber New Media Shanghai Branch and Shenzhen 330 Culture Media. Its business is divided into four major sectors, including short and medium financial videos, political and economic columns, financial and economic MCN, and integrated marketing of new media. Its IP includes “Change” and “Dr. Crisis” with millions of fans, with total network traffic exceeding 60 million. It also runs video platform, Xigua Video, as well as Ximalaya FM.
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