"What the Heck is DCEP Currency?"

I originally wanted to write a light-hearted article, similar to "Never Raise a Cat," "The Top Ten Sins After Raising a Cat," or "What It's Like to Raise a Cat While in Debt," but a friend suggested that I write an article related to DCEP. So I switched to search mode to understand what DCEP is.

DCEP is a digital currency project by the central bank, fully named Digital Currency Electronic Payment, which refers to digital currency and electronic payment tools. As a project of the central bank, it has unlimited legal tender status, meaning that refusing to accept DCEP within China is illegal. Therefore, concerns like Alipay not accepting WeChat or WeChat not accepting Alipay do not exist.

Another digital currency? The retail investors clutch their pockets, trembling with the leftover money from being cut.

First of all, before we discuss this, we must mention the three brothers of money supply: M0, M1, and M2. First, M stands for money, which is easy to understand. So does money refer to cash? Does it refer to RMB or USD, and what’s the difference in face value? Actually, anything that allows you to buy things is our M (money), whether it’s credit cards, WeChat Wallet, Yu'ebao, etc. In simple terms, it has purchasing power.

For a country, the structural distribution of various currencies is also very important. For example, you need to look at how much cash you have, how much is in deposits, how much is demand deposits, how much is time deposits, etc. Whether in developed or developing countries, controlling the amount of money supply is always one of the important means for a country to regulate its economy.

The Essence of Money

First, everyone should know that the essence of money is a medium of exchange. In primitive society, it was barter, then later trading with gold and silver. However, gold and silver mines have a total quantity limit, which cannot meet trading needs, leading to the emergence of paper money. Paper money has no total quantity limit; it can be printed as much as desired, but if the amount of paper money issued exceeds trading demand, it causes inflation.

Here, we must mention the infamous Zimbabwe. In 1980, when Zimbabwe gained independence, one Zimbabwean dollar was approximately equal to 1.5 USD. Then, it experienced an annual inflation growth of about 10-15%. By 2000, it began to spiral out of control, reaching 55.22% in that year, and by 2008, it completely collapsed, hitting 231,000,000%. I can't even count that many zeros. In December 2008, the Zimbabwean government issued new banknotes with a denomination of 100 trillion, which could only be exchanged for 25 USD. For the soda everyone loves, a bottle cost 500 trillion. Carrying a sack of money for shopping was not a dream.

Another issue is deflation, where people start to hoard their money, making it more valuable, while the prices of goods keep falling. For example, if a piece of clothing is 30% off today, and you know it will drop to 40% off next week, would you buy it now? Deflation causes economic stagnation. Japan has been trapped in long-term deflation since the 1990s, only recently beginning to recover. Deflation greatly limits the central bank's ability to use monetary policy to regulate the economy. If interest rates remain low for a long time, it becomes a carnival for debtors, with various borrowing to buy, leading to continuously rising asset prices, pushing housing prices and the stock market to unprecedented heights, followed by a decline. Many companies and investors had made large investments, resulting in massive debts, and then asset prices plummeted, causing a lot of paper wealth to vanish in an instant. People then tightened their belts, and the economy began to decline, leading to a macroeconomic downturn.

It seems I’ve digressed; let’s return to the main topic.

The Concepts of M0, M1, and M2

These three types of money have three corresponding names: cash (M0), narrow money (M1), and broad money (M2).

(1) M0 (currency in circulation): cash in circulation (cash issued outside the scope of monetary supply statistics);

(2) M1 (narrow money) = M0 + corporate deposits (corporate deposits minus unit time deposits and self-raised infrastructure deposits) + deposits from government agencies, organizations, and military + rural deposits + credit card deposits (held by individuals);

(3) M2 (broad money) = M1 + urban and rural residents' savings deposits + time deposits of enterprises (unit time deposits and self-raised infrastructure deposits) + foreign currency deposits + trust deposits + client margin deposits from securities companies + housing provident fund center deposits + deposits from non-deposit financial institutions in deposit financial institutions + money market funds held by non-deposit institutions.

So what is the positioning of DCEP?

Because cash currently has the following issues.

Of course, friends might say, but now China is a cashless society, with WeChat and Alipay everywhere. DCEP is a central bank liability focusing on replacing M0 (cash), adopting a dual-layer operational system of "central bank - commercial banks/other institutions." It seems similar to WeChat and Alipay, but there are differences:

On August 10, the Deputy Director of the Payment and Settlement Department of the People's Bank of China (hereinafter referred to as "the central bank"), Mu Changchun, stated at the China Financial Forty Forum that relevant personnel from the central bank had begun developing related systems in a 996 work schedule since last year, and "now it can be said that it is on the verge of being released." See, even at the national level, they are working 996; what right do you have not to work hard? In fact, the central bank has been active in digital currency since 2014, and as of August 4, 2019, the central bank's Digital Currency Research Institute had applied for a total of 74 patents related to digital currency.

As mentioned earlier regarding interest rate adjustments, during economic downturns, when economic growth momentum weakens, the effects of tax cuts diminish, or the local currency faces appreciation pressure, lowering interest rates can stimulate consumption or stabilize the exchange rate. Through negative interest rate policies, commercial banks can be charged fees for deposits at the central bank, encouraging them to lend, thus preventing the funds released by the central bank through quantitative easing from flowing back into the central bank and instead flowing into the real economy.

Currently, WeChat and Alipay have achieved cash digitization, but in terms of supporting M1 and M2 circulation in interbank payment and clearing systems, commercial banks' internal systems, and various online payments from non-bank payment institutions, DCEP can enhance efficiency. DCEP does not preset a technical route; its target application scenario is in high-concurrency retail business areas (with at least 300,000 transactions per second), so blockchain technology may not necessarily be adopted and could be improved based on existing technologies.

The central bank digital currency adopts a centralized operational model. Under the loosely coupled account system adopted by the central bank digital currency, operating institutions are required to asynchronously transmit transaction data to the central bank daily, which facilitates the central bank's grasp of necessary data to ensure prudent management and the achievement of regulatory goals such as anti-money laundering. Additionally, transaction data is disclosed only to the central bank as a third party.

DCEP and Libra

Libra is a digital currency initiated by Facebook. Interested friends can look up Mark Zuckerberg's hearing.

According to the Libra white paper, Libra is a digital currency built on the open-source Libra blockchain. Unlike most cryptocurrencies, Libra is fully backed by real asset reserves. Users can exchange Libra for fiat currency with dealers at a 1:1 ratio (the underlying assets of Libra consist of a basket of five fiat currencies, with the USD accounting for 50%, the Euro for 18%, the Yen for 14%, the Pound for 11%, and the Singapore Dollar for 7%). For each newly created Libra cryptocurrency, there is a corresponding value in a basket of fiat currencies and government bonds in the Libra reserve, which the Libra Association uses to establish trust in its intrinsic value, ensuring it does not fluctuate wildly over time.

After the public release of the Libra blockchain and ecosystem, it will begin transitioning from a permissioned blockchain to a permissionless blockchain within five years. This means that Libra is committed to achieving true decentralization. Therefore, Libra may eventually become unregulated, and even the dark web no longer uses BTC for transactions.

The biggest difference is that DCEP is centrally operated by the central bank, while the debtor of Libra is the Libra Association, which means that holders face dual credit risks from the Libra Association and its distribution institutions.

Conclusion

It seems that a large part of the discourse surrounding DCEP comes from the article "An Initial Exploration of China's Central Bank Digital Currency: Goals, Positioning, Mechanisms, and Impacts." From Sanvi's perspective, DCEP resembles an official WeChat and Alipay from the central bank. For the central bank, issuing DCEP addresses the need to reduce money laundering and counter-terrorism financing, among other requirements.

Moreover, DCEP is not necessarily based on blockchain technology at present. Complete decentralization is certainly not feasible in terms of efficiency and regulation, and the data is only disclosed to the unique third-party central bank. Therefore, I am more inclined to believe that DCEP will improve upon existing payment systems, reducing the current multi-layer structure, and possibly leading to a future with only a two-layer structure, which would represent a qualitative leap in the operational efficiency of the central bank. As it stands, each third party has its own balance wallet, requiring repeated reconciliation in the flow of funds. Is it possible that the emergence of DCEP could allow everyone to share a wallet balance within the central bank system? But all of this remains uncertain.

Finally, as usual, double happiness today. The second and third ones together to celebrate.