Li Lihui: Digital RMB will not replace WeChat and Alipay at least in the next ten years

Can the digital RMB replace Alipay and WeChat Pay and become the main electronic payment tool?

On November 25, Li Lihui, head of the Blockchain Working Group of the China Internet Finance Association and former president of the Bank of China, gave a detailed answer at the "2021 Caijing Annual Meeting".

Li Lihui predicts that at least in the next ten years, Alipay, WeChat Pay and bank cards will still be the main payment tools. WeChat Pay and Alipay are mobile payment and life service platforms built with digital technology and based on trust, breaking through the traditional payment model. The monthly active users of both exceed 700 million to 800 million, and its transaction amount and number of transactions rank first and second among the global mobile payment platforms. Whether the digital RMB can eventually replace WeChat Pay and Alipay and become the main payment tool, or even develop into a global digital currency through cross-border spillover, will be a process of market choice. There are several factors that affect market choice: whether the operation is more reliable, whether it is more convenient to use, whether the circulation cost is lower, and whether it can form an economic scale with commercial value.

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Li Lihui said that legal digital currency needs to be better, such as more efficient, lower cost, and reliable, so that more people will be willing to use it. China should further expand the pilot of the digital RMB. After mid-term testing, if it is successful, it may be introduced to the entire market. China is a super large market with a huge demand for high concurrency, so the digital RMB system must be able to technically guarantee the needs of large-scale and reliable applications.

Li Lihui also analyzed the following hot issues one by one: Will legal digital currency replace electronic payment tools? Will virtual currency enter the popular payment and transaction scenarios? Will super-sovereign digital currency reconstruct the global monetary system?

Question 1: Will legal digital currency replace electronic payment tools?

Li Lihui said that legal digital currency has three benefits. First, it can save costs, prevent counterfeit currency, and strengthen the public inclusive characteristics of the payment system. Second, it can grasp the structural currency circulation data in real time and can regulate the total money supply with particular precision. Third, it can observe and track the information of capital flow in real time, and can strengthen the control of anti-corruption, anti-money laundering, anti-terrorist financing, and anti-tax evasion.

At the same time, digital currency also has two major potential problems: the first problem is that the central bank can directly absorb deposits from the public, which may weaken the initial credit capacity and profitability of commercial banks. Secondly, if individual commercial banks encounter payment difficulties, it may easily cause an uncontrollable run on digital currency deposits, which is more likely to trigger systemic financial risks.

Li Lihui further stated that China has the largest population in the world and the largest payment market in the world. To issue legal digital currency in such a market, it is necessary to ensure the reliability and security of digital currency tools in this high-concurrency market.

Li Lihui concluded that China's digital RMB has the following main features: First, it adopts an indirect issuance model to maintain a two-tier operating and delivery system. Second, it adopts a centralized management model of the central bank to ensure the reliability of the monetary policy transmission mechanism and the efficiency of monetary regulation. Third, it maintains technical neutrality, and the underlying architecture does not rely on a single blockchain technology. Fourth, it adopts the "loosely coupled account + digital wallet" approach. The wallet of the legal digital currency can be unbound from the bank account, can be separated from the bank account, realize end-to-end transfer, reduce the transaction link's dependence on financial intermediaries, and can realize anonymous payment. Foreigners who do not open accounts in Chinese banks can also obtain digital RMB wallets for convenient payment.

Li Lihui said that the digital RMB is still in the early stage of technical verification and will not be widely promoted until it has undergone successful mid-term testing. Compared with other current payment tools, the digital RMB has two advantages: first, the advantage of the authoritative status of the voucher. Second, it has the technical advantage of offline transactions. It can replace cash in circulation, which will definitely accelerate the process of eliminating cash.

Question 2: Will virtual currency enter the popular payment and transaction scenarios?

Li Lihui believes that there are economic reasons for the development of virtual currency. The first reason is that it has its own survival soil, especially in the community of public blockchain, where virtual currency is an equivalent and payment tool recognized by participants. Second, virtual currency has market demand. It can be anonymous and cross-border, and has become a tool for illegal flow of funds and a tool for speculative transactions. The technical defect of virtual currency is that under the decentralized public blockchain architecture, the verification of the entire network requires ultra-large-scale data synchronization, and the operating capacity of nodes needs to meet standards and balance. Therefore, there is no way to solve the problem of large-scale reliable transactions. The economic defect of virtual currency is that it lacks sufficient physical assets to support it, lacks sufficient trust endorsement, is unstable in value, and is too speculative. In 2018, the lowest price of Bitcoin was $3,158, a drop of 84% from the highest price. Now Bitcoin has reached a high point again. There is still a possibility of falling in the future.

Li Lihui pointed out that maintaining the stability of the financial market, protecting the interests of investors, and preventing systemic financial risks are the bottom line of financial supervision in mature countries. In many countries, including China and the West, the law prohibits illegal securities issuance, illegal fundraising, illegal financial transactions, and other illegal financial activities. Therefore, it is still difficult for virtual currencies to enter the popular trading and payment scenarios.

Question 3: Will super-sovereign digital currency reconstruct the global monetary system?

Li Lihui said that legal digital currency is trustworthy because of its legal status and the sovereign endorsement of the country. To be trustworthy, any other institution's digital currency must have these qualities: the trust endorsement of a public trust institution, a customer scale with commercial value, a reliable and efficient financial transaction and payment platform, auditable financial assets as support, and market access with administrative approval.

Li Lihui introduced that since 2017, digital currencies of multinational banks such as Goldman Sachs and JPMorgan Chase have begun to enter the financial market, but they are only used for limited financial transactions. The digital currency Libra led by Facebook has attracted much attention. It has several potential advantages. First, there are 21 founding institutions that can provide sufficient trust endorsement, and it has more than 2 billion customers worldwide; second, because of the distributed peer-to-peer architecture and privacy computing technology, it has established a point-to-point, end-to-end transaction and transfer platform covering every corner of the world; third, it is supported by hard assets to maintain the value of independent digital currencies. Libra is registered in Switzerland, but whether it can obtain the approval of financial regulators in developed countries depends on the United States.

Li Lihui further analyzed that Facebook released the 2.0 version of the Libra White Paper in April this year, which was a big step forward in meeting the requirements of the United States. The first is to strengthen the monetary hegemony of the US dollar. If Libra is issued, its digital currency system will still rely on the US dollar, and it may become a tool for the United States to continue to promote monetary hegemony in the digital economy era. The second is to strengthen the standards of financial compliance. Their new white paper stated that they will maintain a centralized technical architecture in the future, and they promised to formulate a strict framework and standards for financial compliance and full network risk management.

On October 13 this year, at a meeting of G7 finance ministers and central banks, Facebook made a statement that a global digital currency must meet all relevant legal and regulatory requirements before it can begin to operate. Whether Libra can meet these requirements remains to be seen.

Li Lihui believes that as long as Libra is approved by the United States, it is likely to be approved by other Western countries. Since it has a global user base, it is very likely to quickly develop into a global super-sovereign digital currency. We must be vigilant that super-sovereign digital currencies may reconstruct the global monetary system and financial system. First, currency substitution. The status of currency as a general equivalent essentially depends on public trust. If a weak country encounters major difficulties, its sovereign currency may lose the trust of its citizens and may be replaced by super-sovereign digital currencies. Second, it may surpass banks. It may gradually enter the fields of savings, financing, investment, insurance, and asset trading from payment and settlement, penetrate the economic life of the masses, no longer need commercial banks, no longer need third-party payment institutions, and fully compete for the market of the financial industry. Therefore, digital currency may reconstruct the global financial model and monetary system. This is a real challenge and an opportunity for the future.

Li Lihui emphasized that digital currency will occupy a core position in the future global competition. For countries that issue legal digital currency, the internationalization of digital currency will pose a challenge to monetary policy design and liquidity control. For countries that are replaced by digital currencies of other countries, the sovereign currency status of their own country will be threatened, and the transmission effect of monetary policy will be weakened. Therefore, it is necessary for China to further improve the path of legal digital currency and improve the underlying infrastructure. Second, the digitalization of finance calls for institutional innovation, and China should move faster in institutional innovation. In addition, digital finance will inevitably deepen the globalization of finance, so it is hoped that China should not be absent in the process of global rule-making and should play a role in its voice.