Full Reserve Banking, “Narrowbanks” for Digital Currency and the China Model

The Bank of England’s Michael Kumhof will join us to discuss his work on Full Reserve banking and digital currency models. Shortly after the Great Recession of 2008, while working at the IMF, Michael published a groundbreaking research paper entitled The Chicago Plan Revisited, where he argued that had the US adopted a full reserve banking model, as proposed by the Chicago Plan during the Great Depression, the US would have seen both higher output, fewer recessions and lower levels of debt. Michael is also an expert on CBDCs and has published on the subject for the Bank of England. We will be asking Mr. Kumhof can we build a safer, lower-risk financial system built on digital currency?

We will then be joined by the IMF’s Tommaso Mancini-Griffoli, who serves as Deputy Division Chief in the Monetary and Capital Markets Department. Tommaso has been a global thought leader on models of digital currency and stablecoins and their impact on the banking sector, regulatory frameworks and the international monetary system. In particular, Tommaso and his IMF colleagues have proposed the creation of “narrow banks”, a new form of chartered national bank whose purpose would be to hold full reserve assets with central banks as part of a system of issuing stablecoins or central bank sponsored digital currency. We’ll explore these ideas, and ask if major G20 countries should be establishing ‘Digital Currency Banking Charters’ built on full reserve money.

Finally, many of these ideas are being explored not just in the private sector with new global stablecoin arrangements such as Centre and Libra, but also very much in the public sector, where in China their new CDEP digital currency initiative introduces the world’s largest real full reserve banking model applied in the digital realm. We will be joined by noted Chinese economist and Associate Research Fellow for the People's Bank of China, Dr. Chuanwei David Zou, Chief Economist at Wanxiang Blockchain, who has published extensively on DCEP and brings deep expertise from the Chinese financial ecosystem. What can we learn from this and what are the implications for how other leading reserve currencies will evolve their monetary forms?

[00:00:07] Good morning and welcome to the Money Movement, a show where we explore the issues and ideas driving this brave new world of digital currency and block chains. I'm really excited about this special edition we're having this morning. We're really privileged to be joined by a really distinguished group of guests. Michael, come off from the Bank of England and also previously with the International Monetary Fund. Tommaso Mansi Negra Foley, leading researcher and publisher and thought leader at the IMF, and David Joe, who is one of the more preeminent economists in the fintech world in China and has published extensively and very thoughtfully about China's new full reserve digital currency, DCP. So today we're really trying to continue some of these global macro themes. And I think there are a lot of ideas that we're trying to synthesize here, their ideas about what's happening in the current global economic crisis. What is the what is this doing to the role of major reserve currencies? What impact could this have on the banking sector or what can we learn from prior crises, the Great Depression and alternative models for how the financial system might be constructed and then synthesizing that with. Here in the now of breakthroughs in technology, digital currency, stable coins and imagining if we can see the reconstruction, the construction of a new international monetary system and what that might look like. [00:01:54][106.9]

[00:01:55] So kicking this off with our first guest, I'd like to welcome Michael Kumar, who is senior research adviser in the research hub at the Bank of England. [00:02:05][9.9]

[00:02:06] Welcome, Michael. Thanks for having me. [00:02:09][2.5]

[00:02:10] Appreciate you joining very much. You know, I think you'll be great just to start. [00:02:14][4.2]

[00:02:15] I mean, you've done you've done some very interesting work in this whole topic of full reserve banking, the Chicago plan, which we've touched on before on this program and also on digital currency and potential models for central bank digital currency, which I find all interesting and perhaps not coincidental, but I thought it'd be helpful just just to kick things off, to have you take us back to the 1930s for a moment. Take us back to Irving Phishers for principles of one hundred percent money. This idea that we could see fewer and shorter recessions, less public debt, less private debt, no bank runs a much different inflation situation. And you later argued higher output. So maybe maybe just start. Take us back to that set of ideas and we can kind of help the audience understand that. [00:03:10][55.1]

[00:03:11] OK. Very briefly, I will tell you about how I got back to that set of ideas myself. This started when I was working at the IMF run 2006. I was getting very concerned about what I was reading about what's happening in the US financial sector. I had previously worked with Barclays for five years and at that point I started reading a lot about the monetary systems and the history of monetary systems. And what I came across as a key reference is a very short booklet by Irving Fisher. One hundred percent Money and the Public Debt, which I then proceeded to to model because that is my full time job, is basically to devise, Mike, macroeconomic models that help us to think through the macroeconomic mechanisms. And so basically the key notion and that work by Fisher and his contemporaries was that the Great Depression. One of the key problems was a shortage of a medium of exchange. He called it the circulating medium. The fact that banks create that medium of exchange by making loans. And that is how the majority of the medium of exchange is created, especially today. But even at that time, and the idea that this could create financial instability first and an upturn because banks can make new loans by creating new deposits without having to worry about attracting new deposits from somebody else first, that can lead to lending. Bouzar can make lending booms easier to do to kick off by the banking system. And then in a downturn, bank loans start to default. Banks start to lend less because they are worried, more worried about the risk. Both of that destroys bank deposits and the destruction of bank deposits as the destruction of the medium of exchange precisely at the time when they are needed the most. That was one of the ideas official. But the other idea was that in order to create the money that we use and this is more true than ever, we need debt because the banks can only create money by somebody going into more debt, getting a loan so that the proceeds of the loan can be credited to his or her deposit account, meaning that if we want to create enough liquidity, that it has a flip side and that flip side is increasing debt. So their Chicago blind idea that Fisher laid out so well in that short booklet consists of separation of the monetary and credit functions of the banking system in that system. The central bank would be the sole creator of money and the banks would only be the intermediaries of money. They could no longer create deposits by making loans, but instead would have to attract sufficient deposits of money first before lending them out. And that plan, I should emphasize, was an idea of where, in essence, the founders of the Chicago School of Economics. Yes, they were very less a fare for industry, but at least in those days, they found that prerequisite for efficient, let's say, for an industry was that when it comes to money creation, there should not be that kind of less a fair and this should be handled by a central bank by. Authorities right now was able then to basically confirm phishers conclusions, the ones that you already outlined. A better ability to handle financial Cycos financial crisis, less debt, because when you issue money under the Chicago plan by the central bank, you'll issue it basically as a token that signifies this is something you can purchase something with. But there's no corresponding debt. So lower debt and the output gains that I came up with had something to do with the fact that this wouldn't be an economy where everybody would be less leveraged, far less leveraged than today, including governments. And lower leverage typically implies a lower real interest rate and a lower real interest rate implies more capital accumulation and more economic growth. [00:07:33][262.7]

[00:07:34] Right. So I think that's a fantastic summary. Thank you. I think it's really noteworthy. [00:07:40][6.0]

[00:07:41] You know, these ideas for a safer, if you will, and ultimately more effective financial system emerge following crises. You know, this is obviously emerged in the mid 1930s. You know, you're revisiting these ideas, you know, shortly after the financial crisis and I think an ongoing European financial crisis at the time. And, you know, I think once again, we're we're now needing to look at these questions again, where we're facing obviously an unprecedented amount of monetization of debt globally. But but also we're still in the early days of this economic crisis. And I think, you know, part of the underlying risk that people may be concerned about is this deeper set of solvency risks at the household level, at the level of the firm, at the level of commercial lending institutions and and ultimately even sovereigns. And we can look at each individual country in isolation. But these we have this very interconnected global financial system. I saw the European banking authorities actually yesterday, you know, published their view that they think most people, most banks will be OK right now with their stress tests. Maybe there's gonna be some that don't have quite as strong. Loan books. But that's still, it feels like built on rosy assumptions about whether there's cascading waves of of of the economic downturn here, but not so much looking for you to predict the future. But I think the interesting question is, you know, it feels like these ideas are more relevant and germane again today. [00:09:19][98.7]

[00:09:21] Yes, I would agree with you. Again, if you look back at Fisher, it was always saying the Great Depression is the main phenomenon, was that people were perfectly able to do work to do a real physical work and be productive, but they weren't able to pay each other because they weren't able to get there. And all hands on the medium of exchange, the circulating medium. So now today we're in a situation where, first of all, there is a risk that nobody would deny that, that more bank loans will go bad and that immediately destroys one. It's written off. It destroys part of the medium of exchange. There is the risk that banks will lend less because they're nervous. Obviously, central banks are trying to steer against that. But there there is that underlying risk that also destroys the medium of exchange. There's also a third one that I am exploring in a recent paper with Schwann, one one from the University of Oxford says that banks net interest margin so very compressed because of the low interest environment that we already have. And that is further reducing banks' incentives to lend because they can't make that much money on lending by land when it's not very profitable. [00:10:35][73.7]

[00:10:37] Yes, exactly. And so the question the question then is how do we deal with this situation? And when you realize that the main function of bank lending is to create liquidity by means of which people can pay each other. And if you realize that banks have all these headwinds, then you can ask the question, is there any other way in which we can create this liquidity? And that's where the whole issue of public money comes and potentially comes into the equation. [00:11:06][29.0]

[00:11:06] Yes. And so I think it's a good touch point on the other theme that we're going to talk about here in the show today, which is these ideas of stable coins, central bank money, digital currencies. [00:11:19][12.6]

[00:11:21] And I know you've touched on some of that in your research at the Bank of England. And we have some other guests who are going to speak to that more as well. But I think this idea of a full reserve digital money that has, you know, the utility value of the Internet, which we all now know and understand. But this idea that this digital currency must be full reserve and it must be backed by or the underlying issuance based on something like government securities. You know, we have a U.S. dollar coin, which is sort of fundamentally based on short term U.S. government securities. I think in the in the paper you wrote for the Bank of England, you spoke about a model where, you know, a central bank, digital currency would exclusively be based on, you know, essentially sovereign securities issuance. [00:12:14][53.2]

[00:12:16] Not sovereign securities is literally central bank reserves, just which is different because the world is one way, essentially the central bank issues, the money that we use potentially via an intermediary. You know, the Bank of England issued a discussion paper in Monterey. It lays all that out very nicely. Whether that's the central bank would be these. You are. But the private sector could provide the customer facing account, but the account would ultimately represent a liability off the central bank or, you know, one item on the liability side of the central bank. [00:12:58][41.8]

[00:12:58] Right. Right. I think part of that part of the notion was that a a commercial bank that wanted to possess or an intermediary, they wanted to purchase, in a sense, central bank. You know, digital currency like this. There is certain eligible assets that would be allowed to do that. You could have used fractional reserve commercial bank electronic money to do that. Is it sort of defeats the purpose? [00:13:22][24.0]

[00:13:23] Yes. In fact, I've written a paper with Clear Known was not the Reserve Bank of Australia in 2018, where we're talking about this and this is it has a big bearing on financial stability and the ability of the private sector to potentially run on bank deposits and into CBD. See where there are various ways off of preventing that and therefore making the financial stability side of this much, much safer than what might might expect. One is by having an interest bank CBD seat where you can make it as attractive or unattractive as you want. And the other one is by basically saying, if you want to have this form of central bank money, you need to come with the central bank to the central bank with an eligible asset and then eligible asset. What is typically in today's world, a government security. [00:14:13][49.4]

[00:14:14] Right. Right. That makes a lot of sense. Very interesting. I think the convergence of both this different currency world and ideas of full reserve banking and potential ways to restructure, reconstruct elements. The international monetary system are with us. What do you see in the next in the next few years? [00:14:32][18.7]

[00:14:35] What I see in the next few years where we've talked a lot about the Chicago plan, we didn't really delineate it very clearly against central bank digital currency a little bit. But let me let me say a few things about that, because that's that's critical. And going for what is that? The sharp Chicago. But it's not on the drawing board. That's a very. That would be a pretty radical reform central bank. Digital currencies are now on the drawing board at a number of central banks. And the Chinese are among the ones that are this ahead. It looks like. But for example, in Europe, Sweden has looked into it really closely. Canada is looking into it very closely, et cetera, et cetera. Central bank digital currency is a world where you have the fractional reserve banking system and central bank digital currency existing side by side. And that's a paper we wrote in 2016. And, you know, the intellectual history is interesting. When I wrote the Chicago plan in 2012. This was sort of like a bolt out of the room and people thought, what the hell are you talking about? And this is this is way too extreme. And then it's sort of interesting that in just a few years since then, the little Kozloff, the Chicago Bulletin, which is what central bank does, what currency is all it is, is being debated a lot. So you could see that it's sometimes the debates seem glacial to me. But I think in historical terms, it's actually pretty quick. [00:16:02][86.6]

[00:16:03] Yeah, I would agree. [00:16:04][0.8]

[00:16:04] I mean, I think many of the underlying motivations for the digital currency movement, if you want to think of it that way, is how do we build a safer financial system? And I think that's that's the route that animates a lot of things as well. But well, Michael, this has been a wonderful and fascinating discussion. I really greatly appreciate you joining us on the program and look forward to your continued research and work and hope to stay in touch. [00:16:34][30.6]

[00:16:36] Yeah. Thanks very much again for having me on the show. Thank you, Michael. [00:16:39][2.9]

[00:16:40] So I think stepping back here, obviously there's this fundamental disruption of digital money of of these new new forms of medium of exchange. We have these breakthroughs of digital currency itself. We have non sovereign digital currency. We have stable coins. We have emerging ideas for how governments or leading central banks could deal with this. There's a lot of questions being raised about what does this mean for central banks and what does this mean in terms of the potential for new types of digital currency banks. And so joining us now to discuss all of this is Tomasso Lentini, gratefully, who is the deputy division chief of the Monitor and Capital Markets Department at the International Monetary Fund. Welcome to MASSO. Yes, hi. Thanks very much, Jeremy. Delighted to be here. Yes, wonderful. So, you know, you've you're you're also a prolific thinker and writer and researcher on a lot of these topics have have enjoyed everything that you've done over the years. But you've touched on stable coins and global stable coins. You've you've written extensively about, you know, approaching central banks might take to this. And then I think this really critical idea that you and others at the fund have put forward for a synthetic or what I like to call a hybrid central bank digital currency model that leads us down this path to the idea of narrow banks. And so I want to start there. You know, maybe maybe first just help us understand what is a narrow bank. How does it fit with this idea of full reserve money? How does it fit with this idea of digital currency? [00:18:32][112.1]

[00:18:34] Sure. Thanks, Jeremy. Maybe I should introduce also the concept of synthetic central bank digital currency so that our listeners can follow more easily every friend. And so it's a synthetic central bank. Digital currency is essentially a private public partnership where the private sector issues a liability that is used by you and I to purchase assets for. Payments and liabilities fully backed with central bank reserves. And that liabilities issued under license license of the central bank would extend. And in exchange for the central bank to obviously supervise and regulate the business and the institution. So this is different from what people originally called central bank digital currency, which would entail the central bank issuing a liability directly to the public. So either we hold an account of the central bank or we hold a little digital token on our wallet issued by the central bank and we trade that. So there's a fundamental difference here because the private sector is an important player. And when we spoke to central banks about central bank digital currency, they would all say that, well, there are advantages and disadvantages as well, but there are advantages. So it's interesting to consider this, but of course, it's very costly. It's very risky to the central bank and it might deter innovation. So this private public partnership is intended to conserve the comparative advantages of the private sector, to interface with clients and innovate and the competitive advantage of the central bank to regulate and provide trust. Now, of course, this is. Similar to a narrow band. Because this is a payment, the specialized payment institution that issues liability that are fully backed with central bank reserves. But I would like to avoid the term narrow bank because it's so charged. This is not a narrow banking license that the central bank would issue. This is a special synthetic CBC license that the central bank would issue and they would have all sorts of limitations in order to avoid problems of financial stability. And I guess we'll speak about that later in the program. [00:20:58][143.7]

[00:20:59] Yeah. So I think it's fascinating. It is something that we have very much gravitated to. And I think in the absence of these types of charters and supervision, you know, private sector actors are sort of driving ahead in the space. [00:21:16][17.6]

[00:21:17] You're familiar, obviously, with the work that we do and and others. But, you know, it's moving fast, right? So we see these kind of global stable coin arrangements that have, you know, reserve models that have a hundred percent reserve models that are backed by, you know, sort of, you know, sovereign securities typically. But it's not yet, you know, hey, there's an account with the Federal Reserve or there's an account of the European Central Bank and it has a set of supervisory relationships. And I think that this idea of public private partnership I think is really, really critical. And, you know, the sort of private sector in technology has shown incredible capacity for innovation and reach and distribution. And if you can marry that to the you know, the safety and soundness and kind of supervisory rigor of a leading central bank, you essentially have something quite, quite powerful with that, you know, emerging. [00:22:19][62.0]

[00:22:21] Yes, so that's precisely the idea. Jeremy, is that, you know, we shouldn't stop. We shouldn't stop the innovation. We shouldn't rein in the innovation, but we should make sure that it happens within the confines of a regulated environment. I mean, it's great that we have new innovations and payments. We have stable coins that are backed with relatively safe assets. But, you know, there's a bunch of different stable coins that are available. It's hard for consumers to know which ones are really fully backed. Which ones really offer a claim on the underlying reserves and how liquid and safe are those reserves? And are they liquid and safe in all states of the world? It might work now, but not during a crisis. So all these questions that emerge and that pose fundamental risks to users and to the safety of the financial system. And so the idea is to address those head on, to provide a regulatory environment, an equal playing field for all the innovators, but to allow them to continue to innovate on the technological front and to allow them to continue to interface with customers, since that's what they do well. So that's very much I mean, you described it very well. That's very much our idea. Now, there are differences, of course, as to how you might design this. And there's a debate as to whether the liability would be issued by the central bank or by the private sector. And so I think that, you know, people used to think about central bank digital currency as something that the central bank would run entirely. That idea is kind of out the door. We've we've warmed up to the idea of a public private partnership. And the question is how to design that partnership. So along the value chain, from interacting with customers to undertaking customer due diligence, screening customers, essentially to building the interface with which customers trade the tokens to picking the technology. And that's essentially issuing the token to conserving data, et cetera. All these steps are necessary. The question is, where do you draw the line of what is what the public sector does and what the private sector does? Right. And the fundamental question is about issuance. Is does the public sector issue and the private sector distribute or do we also allow the private sector to issue? And I mean, it might. This is still up for debate. And, you know, your views will be essential for this, because I think one of the objectives is to spur innovation. And the question is, if the public sector creates issues, the tokens and decides on the technology, how much room will there be left of the private sector to debate? So what we should have a discussion about how to either encourage innovation, real discussions happening as we speak. [00:25:07][165.6]

[00:25:07] I think, you know, in the absence of a specific regulatory framework, right. [00:25:13][5.2]

[00:25:13] We've seen these sort of self-regulatory arrangements like Center Consortium, Liebert Association, other things merging, you know, establishing technical standards, compliance standards, other things. And I do expect, you know, we're gonna see the issuance of these types of global stable coins go from the kind of low billions to maybe the tens or hundreds of billions. It's not yet at the scale of a trillion dollars of of assets. But I think you can imagine whether with a public private partnership model and new rules of the road that are put in place or, you know, just the sort of vector that private sector actors are on right now, you can certainly see a world where there is a dramatic amount of these digital currency tokens in circulation. [00:25:56][43.4]

[00:25:58] And I'm curious to hear your view on whether this relates to the last discussion we had with with Michael. Was does this gradually change the nature of banking? Is this sort of the green shoots of the Chicago plan? Does it reduce risk? Do we find that these digital currency units, combined with things like smart contracts, you know, create new forms of lending? But on these four reserve assets, I'm very curious in your view on on you know, zoom out a few years. Does this. Does it start to change some of the fundamental risk taking and operational dimensions of how banking works? [00:26:43][45.0]

[00:26:44] Yeah. So I think, first of all, the intention here is not to rock the boat in the banking world. We have the fractional banking system that has served countries well, that has created risks and has moral hazard for sure. But we should tighten regulation in those cases, make sure regulation is applied consistently and forcefully, and not necessarily use new technologies to change what is wrong in banking, because, of course, that would get rid of what works well and bank. That is maturity, transformation, extension of credit, etc.. So I think that this is the intention is that these new schemes would be limited to retail payments. At least to start. The intention is actually to build in certain design elements so as to limit the amount of disintermediation of the banking sector, to limit the amount of deposits that might migrate from the banks to the synthetic CBC or stable coin providers. So this might be in the form of limits on accounts, tokens held in these wallets. It could be in the in the way of increasing fees on these wallets as amounts grow. That's an idea of a benzyl, I think originally. There are all sorts of design elements that could be built in to limit the amount of disintermediation of the banking sector. I think we should also as as revolutionary and interesting and useful as these new ideas are, we should keep in mind that the banking sector is funded essentially by wholesale funding. I mean, retail funding is a relatively small part of banking sector liabilities. It varies by country and it varies considerably by country. But we run back of the envelope calculations based on the types of elasticities of substitution away from bank deposits. And in our baseline is that there wouldn't be an enormous move of deposits away from banks towards these new systems of payments. [00:29:04][140.0]

[00:29:06] It's interesting. I mean, there's a lot to see evolve, obviously, with, you know, sort of stable coin growth. And, you know, you sort of have with stable coins, you have the ability to transact in a digital form with final settlement. Now, with with some of the new block chain infrastructure, public botching infrastructure in milliseconds with with with global reach, with, you know, irreversibility and very high levels of security. It's very, very attractive, even at a wholesale level, for transacting among corporations, among financial institutions, not just at the retail level. But it's fundamentally the same building blocks that are there. So it'll be interesting to see sort of organically the innovation curve that that happens in this in this world versus a sort of various prescriptive, designed set of rules. [00:30:01][55.6]

[00:30:03] No, I. Of course. And I understand what you mean. And but that brings up the possibility or the likelihood that banks themselves will adopt a lot of these technologies and evolve themselves. This is not necessarily banks vs. innovators, just it's not banks versus table coins, et cetera. What is good of the stable coin world will likely be adopted by the banks relatively quickly or by the more innovative banks at least. And we will see a merge between those two and we'll probably see also a partnership between the two. In fact, in many countries where banking sector penetration is low. Many of our member countries. We've we've seen the take-up of new digital means of payment is enormous. And in those cases, these these new means of payment have enabled customers to come online to participate in payments and then slowly they migrate towards banking services. And so, in fact, you've seen a partnership between the payment providers and the banks. So it's it's not an either or. [00:31:14][71.1]

[00:31:15] Yeah, yeah. I mean, I think I'm having having watched the the Internet evolve over. [00:31:20][4.9]

[00:31:21] Now, you know, 30 years. In particular, you know, you have sort of these layers of public Internet technology that gradually come out of ties and make widely and globally accessible certain things that where there were no public utilities or large private sector utilities that provided them in the past. And then they just become commodity free services on the Internet. And it strikes me that this particular technological vector is leading us towards, you know, sort of payment and settlement being, you know, the equivalent of the free video communications we're having now, or are the ability to, you know, share content data widely with anyone without intermediaries. So I can see that future. And then that relationship between that ubiquitous payment, its element infrastructure and, you know, the let's just call the risk taking side of the financial system and how those work. A lot of questions. Well, Tomaso, this has been a really wonderful conversation. Is really nice to see you. And. Speciate, you join in the money moving here today. [00:32:22][61.4]

[00:32:23] It's a pleasure and congratulations on putting the show together. I should just end by saying that, of course, my views, these were my personal views and didn't necessarily represent the views of the fund or its executive board. But it's really been a pleasure to participate. Jeremy. Thanks very much. [00:32:37][13.1]

[00:32:37] Thank you. Tomasso. We'll see you soon. [00:32:39][1.6]

[00:32:40] Very good. I like. Excellent. [00:32:42][2.5]

[00:32:43] Well, lots of lots of talk about these major themes around, you know, Centra Bank as a currency, stable coins for reserve money, et cetera. But we have real world implementations now today. On the one hand, we have real world implementations of models like the US dollar coin, which is growing rapidly and which has a governance model around it, which is one of these emerging stable current arrangements. But probably one of the largest laboratories for these models is happening in China and in China. [00:33:20][36.4]

[00:33:20] Of course, many people are aware of the announcement and now the gradual rollout of the Chinese digital currency, the digital currency, electronic payment system. [00:33:31][10.6]

[00:33:32] This is a huge experiment. It's one of the most advanced experiments in an advanced economies in the world. It has, in my view, deeply significant implications for the future of the international monetary system and not just around, you know, models that other people might learn from. But the projection of the Chinese economy and the relationship between firms and nations and the Chinese economy. So really deep and significant implications. And I'm really pleased to be joined here by Associate Research Fellow for the People's Bank of China and chief economist at One Tang Block Chain. Dr Shawn Wei. David Zo. Welcome, David. [00:34:16][44.6]

[00:34:18] Hi, buddy. Jeremy, thanks for inviting us. [00:34:20][2.7]

[00:34:21] Yeah, it's very kind of you to join us today. Appreciate it very, very much. I think, you know, maybe maybe to start. You've done so much broader work on FinTech in China and you've been obviously in this block chain space as a chief economist in your current role and previously with that Maine, which is one of the very largest companies in the botching space. And that early work as well. What led you to important national prize in China? So you've been following the breakthroughs in fintech in China for some time, which, as we all know, far exceed the adoption of fintech in really any other part of the world. And so your perspective obviously is is is is tremendous. With all that in mind, I think it'd be great if we could just start for our audience with just a basic overview of the Chinese DCP, the Chinese central bank, digital currency. Its basic setup. Its basic function. [00:35:25][63.4]

[00:35:26] OK, yeah. So that makes the cars in China is called DCP. Is short for digital currency, electronic payment. So the Central Bank of China has been studying this issue for about six years. [00:35:43][16.6]

[00:35:45] So as far as I know, is far beyond the prototype stage. Now you signed the experiment in several cities seen in China and in their retail use case. [00:35:56][11.5]

[00:36:00] But China still working on to finalize these DCP plans. [00:36:04][4.5]

[00:36:05] So it has no committee or time table and for for when this appeal will be fully implemented. [00:36:11][6.6]

[00:36:13] But as far as the bus from there, it is catching all of this in San Antonio. So the central bank so is working here to see who was this ECPA looks like. So basically, you saw a new form of zero. That's my base. And the liability is the liability of the central bank. But it is backed by one 100 percent by deposit the reserve. On its pace, pace. No interest. And the issue as the redemption of DCP will have no impact at home, the amount Hovis in her bank, Marley. So so if you look at them, a monetary policy, that issuance and the redemption of DCP is Neutra. Yeah. On the circulation of the DCP, follow the so-called toot toot highlight system of the central bank and the commercial banks. That means so when it has the wholesale layer and then the retail layer. So first, the central bank, the Pibil see Central Bank of China will issue the TCAP to commercial banks in a wholesale approach and then commercial banks will distribute USCAP to. To the public for retail use and. A DCP is essential in marriage. It's not like Newborough or other stable coyte. It doesn't use in the same sentence as LIBOR. Yeah. [00:37:48][95.3]

[00:37:50] So you're in the in the in the corner of this DCP plan. There will be a registration center and the certification center. So basically the registration center will record all DCP is and the ownership and the transactions. And you two will manage the whole life cycle, the insurance speculation on the redemption of DCP under such a fake certification center, we'll manage there KYC process. So this is central management. What do you. Follow the the people see code DCP follow their laws. I can't culpably model DCP transactions almost don't relate or account. So you two can circulate as easily as cash. So this is a very tricky point. It's very important to us to understand to the point how it is related to Toubro, Chen and other Brokamp basis in her back in a currency. So. So so because this is central Madison. So you thought it's possible? Is the daughter relied on distributed ledger technology? But if you look at a key feature of the DCP, you see things that are similar to try Pokey's that approaching, for example, it has no Adolfo's spending and security and transferability its ability. And along Allami mutate. Yeah. So it's very similar to a of here by another reliable chart using. [00:39:28][98.8]

[00:39:29] It's using some of the same underlying technical primitives of cryptocurrency to achieve that cash like usage and security and privacy. So it is in some ways a cryptocurrency. It's just a centralized cryptocurrency. Yeah. Guys to built on it on a decentralized network. One of the things I wanted to ask you about in in this is, you know, as you've heard on the program today, you know, we're really interested in these full reserve models. And, you know, this the nature of the Chinese digital currency is it's a it is a full reserve, guys, for that. Yeah. And it's and it's very different than traditional electronic money in some respects. And I'm interested in your perspective on what the implications are for this in a variety of areas, including monetary policy transmission. You know, how how it interacts with commercial bank deposits and then how does that translate to broader benefits for society and the economy? [00:40:34][65.0]

[00:40:35] OK, so. So. So to talk. So to me, two minutes of fruitier reserve. [00:40:42][7.1]

[00:40:44] For example, for a DCP, the full of full reserve means the ratio between DCP to the deposes reserve that's on the balance sheet of the central bank. So that's how this if he had low impact on the amount of central bank money. Other means of reserve fees. Is that through the narrow banking and design so that it ingests this scenario, it means the ratio between the deposit and the deposit in reserve. So I for this, if he saw a different kind of foods, are actually basically a sale. You kind of curse. Cash is a digital form of cash. Right. So people, we are on the transfer. [00:41:31][46.9]

[00:41:31] I'll move some of the money from bank deposits into this new DCP. And the basic reason is that people will have higher Ravelli and preference for cash. [00:41:42][10.1]

[00:41:42] As I said before, Liow Cash included are both physical and the digital form, and they use this process as it will yield to monetary contraction. That means. Deposit a bank deposit. Well, we are four and I'm zero where rice and if you look has a monetary multiplier. It will fall to go on. Just we have some. And do it impact the founding funding source of banks. Because with the DCP Bank, we all rely them on wholesale funding. A lot of that retail banking. And so the funding quota will rise. Right. So I think the Chinese central bank has take this factor into considerations. So are you a sound monetary policy to to neutralize or mitigate, as you said, a contract curlew fact, hold the DCP and therefore the benefit for the for the society and the economy is so we have too many three benefits. First, we are your hands financially. Kruth inclusiveness because it's very easy for people to have DCP wallet. Why lot the Chinese bank account competitive for foreigners. So you're foreign to foreigners and the foreign companies can have this if you're worried. Yes, we are improving the cross-border payment and we are. Yeah. [00:43:14][91.8]

[00:43:15] One of the most important things I wanted to touch on, actually, which is, you know, as we move into this world of these token based currencies, you know, the obviously the potential here is that the Chinese digital currency would be broadly available on the Internet and around the world. And in a sense, you know, any any any person or firm that has a digital wallet that's compatible with this could directly transact with the Chinese economy, directly transact with, you know, essentially using these liabilities of the of the Chinese central bank. And that could be very transformative to the growing role of China in the world economy and in how trade happens with China. And so, in some respects, as a technological innovation, this is sort of the synthesis of the monetary system and the Internet and the reach of the Internet. And I think it's quite profound because we've obviously the multilateral financial system that was built up after World War Two, that was anchored in dollars and built on things like Swift, we're seeing, you know, new infrastructure bill that goes over the Internet. And that really changes the nature of economic relationships with China in a profound way. [00:44:39][84.0]

[00:44:40] Yes. Yeah, I agree with your point. So I think this so Conrad Pibil, she has no plan to protest DCP in the cross-border payments scenarios. But I think that we have this in mind. And the people also will use GCP as I put on a pot of just chariot's to internationalize the New Deal. So I see me in the near future when I see that foreign foreign people on foreign companies will have this if you want it. And there we are. So I transact that directly with the Chinese economy. And this is how this if you become to settle international trade. [00:45:22][42.7]

[00:45:24] And we also look forward for the DCP to settle cross-border financial transactions. Telling you how high the Chinese government has experimented the use of DCP in poster child processing. Yeah. And this just where you promote the statehouse or the renminbi in on the international stage. But I think the Chinese government that we all work very close with a foreign foreign governments to respect their currency, monetary sovereignty. So, for example, gives us a fairly huge demand, a foreign country for the DCP, which has a government that we'll work with a foreign government to, was maybe I know, you know, to lay out his FDCPA infrastructure. Yeah. Yeah. [00:46:14][49.7]

[00:46:15] Well, I. I look forward to the day when someone can have a digital wallet and they can swap us D.C. for Chinese DCP. Maybe that's not so far off in the future. But yeah, this has been very, very helpful, very insightful of all of us and really connecting a lot of the dots from the, you know, these major big ideas into what's happening now on the ground in places like Shanghai and Sands and in and clearly eventually around the world. So once again, I appreciate you joining and very nice to see you again. And we'll see you then. OK. [00:46:48][33.3]

[00:46:49] You're welcome. Seeing the future. Thank you so much, David. Bye. [00:46:52][3.3]

[00:46:54] So, you know, stepping back here again. There are incredible global changes happening right now. We're all very acutely aware of those where we are on a an arc of technological change in every sector, but also on an accelerating basis in the financial sector. Driven by block chains, digital currency. Clearly, this is going to reconstitute and restructure the international monetary system. I think maybe a couple of years ago that felt theoretical. And right now it's feeling like we are going to see that. And I think coming through this global crisis that we're in, it seems to me that this reshaping of the international monetary system will be on par with the reshaping we saw after the Great Depression and World War Two. It's fascinating and exciting in many ways. And I think for for us here in the money movement, we're hopeful that this leads to a better system, a system that serves us all. That brings us all all people everywhere together, brings more people into the financial system and actually drives and improves what's possible for businesses everywhere. [00:48:06][72.0]

[00:48:07] So next our next episode just moving ahead here is actually this Thursday. [00:48:12][4.7]

[00:48:12] And we're going to be going from this kind of macro view, diving into the micro, quite literally. So micro economic units of organization are sort of the other part of the economy. In other words, firms, corporations, modern capitalism itself is built on this system of corporations, the joint stock corporation, the formation of markets for capital around those corporations, the rules, the governance, all the things that go into really the in the industrial revolution and into the 20th century, the the form and substance of how we organize ourselves to work, to collaborate and to create economic output. Now, block chains are really introducing capabilities that allow for the first time, a pretty deep rethinking of the nature of the corporation. What does a corporate form look like in the age of block chains? What does. How do people connect into these labor relationships and economic output relationships that run all around the world? Later this week, we're going to be joined by three guests to discuss the nature of corporations in the age of block chains. First guest is Professor of Economics and director of the Block Chain Innovation Hub at RMIT University, Professor Jason Potts, who's done fascinating thinking into the institutional structure of the economy and really exploring the nature of firms themselves and the interaction and fluctuates with. That's a really, really exciting work happening there, which I think is describing a lot of where where we see perhaps the world going. And that's when we followed by Lewis Q&A, who is co-founder of Aragón. Aragón is, in my view, one of the most exciting breakthrough projects in the block chain space, creating a set of decentralized infrastructure entirely implemented with software on open public block chains for establishing new types of corporate forms. What sometimes people referred to as dhows distributed autonomous organizations, but it's really much bigger than that. It's taking the building blocks of what a corporation is, the ownership, the voting, the Treasury, the interaction of of people committing work and receiving value. These building blocks. And it's creating a software powered model for that that is independent of any given nation state and independent of any given firm. And so it's really interesting. We're gonna be excited to have this. And finally, Aaron Wright, who is co-founder of Open Law, which similarly is trying to take the building blocks of legal agreements, in particular with an eye towards commerce and commercial agreements, and translate those into open source libraries that are smart contracts so that you can actually take real world enforceable contracts and have those deployed, interpreted, enforced and run on block chains. So part of this synthesis of these worlds of decentralization, globalization, digital currency and the future of how companies are going to work. So very excited for that. [00:51:38][205.9]

[00:51:38] And until our next episode, stay well, stay safe and stay informed. Thank you very much. [00:51:38][0.0]


Dr. Chuanwei David Zou
Chief Economist of Wanxiang Blockchain Associate Research Fellow, People's Bank of China
Michael Kumhof
Senior Research Advisor, Bank of England
Tommaso Mancini-Griffoli
Deputy Division Chief in the Monetary & Capital Markets Department, The International Monetary Fund