Design Elements and Promotion Strategies of DC/EP

While the innovations in private digital currencies are leading to a decreased use of cash and a "currency decentralization," central banks in a number of countries are also working on central bank digital currencies (CBDC). As early as 2014，the People's Bank of China (PBOC) had already officially begun research on the feasibility of issuing a CBDC. In 2016，the PBOC established the Digital Currency Research Institute to undertake research and development of CBDC. Since the Libra White Paper was released in June 2019，the PBOC has been speaking out about plans for CBDC. The Chinese version of CBDC，temporarily named "DC/EP," is expected to be launched in the very near future. So far，it is being rolled out employing the principles of a two-tier issuance，a replacement of M0 money supply and "controlled" anonymity. It entails top-level design and standardization as well as research and development. Testing has largely been completed and a great number of pilot tests have been carried out. The testing phase has basically been completed.

The DC/EP being piloted in China is a retail CBDC issued to the public. Some countries are also studying and assessing the feasibility of issuing retail CBDC，but mainly to facilitate retail payments and promote inclusive finance. Some smaller countries have even issued CBDC already，but mostly for the purpose of seizing their own monetary sovereignty or curbing high inflation.

For China，the third-party retail payment market represented by Alipay and WeChat Pay has been developed to a large extent and the government-issued  currency is stable. There has been a considerable amount of debate over whether a digital currency is necessary in China. The author believes that the value is mainly seen in these areas:

Firstly，CBDC will strengthen macro management and control and improve the accuracy of capital investment. For starters，CBDC can effectively push interest rates down through their existing lower limit. After the retail CBDC is issued and it replaces the use of large amounts of cash，CBDC will probably apply negative interest rates，or charge a so-called "wallet custody" fee，which is essentially equivalent to a negative interest rate policy. As a result，there will no longer be a zero limit to interest rates，leaving more room for monetary policy adjustments.

In the future，if DC/EP can be used to replace deposits，pay interest and issue credits，it will truly have a substantial impact on monetary policy. What is more，CBDC can also help the PBOC get a better grasp of macroeconomic dynamics as well as enhance the traceability of credit funds. It will also enable  the optimization of the monetary transmission mechanism. Specifically，through the detailed record of each transaction，CBDC can be used to track or even guide the economy and help the PBOC gain a more accurate understanding of every micro level aspect of the economy and determine changes in real time.

Yao Qian，former director of the Digital Currency Research Institute of the PBOC，once provided a design for a digital currency based on "conditional triggers" to issue credits and loans accurately to groups such as small and micro enterprises，and thereby improve the accuracy of the central inclusive financial policy support.

Secondly，CBDC will improve the management of mobile payment data and give full play to the value of data. For China，an important strategic value of issuing DC/EP is that it can be used to better manage mobile payment data.  There has been serious data infringement in the field of electronic payments. Existing electronic payment tools around the world have excessively infringed on the privacy of users. Due to concerns over privacy protection the use of these tools has fallen short of potential with the public still relying on cash and thereby protect privacy. Additionally，there are no effective rules on the protection of personal privacy in China，and some third-party payment agencies have been excessively collecting personal data and making improper use of the information.

At the same time，the extremely valuable data captured from electronic payments have not been fully utilized. In the commercial banking system，payment transactions are dominated by China Unipay，and thus data are well integrated. But that is not the case with third-party payment transaction data. As a result，the so-called effect of "1+1>2" in the use of electronic payment data has not been fully exploited. We all know that the digital economy cannot develop without the support of massive mobile payment data from real transactions，so data management of mobile payment tools does not mean we have to completely stop third-party payment agencies from acquiring or using payment-related data. Instead，what we should do is prevent excessive collection and abuse. In addition，there is also a "data island" problem whereby not all data are shared. To address this，we need to maximize the efficiency of data use and exploit the values of existing data to the greatest extent while meeting the requirements of financial regulatory compliance. Once it is launched the retail CBDC will serve as an important means for data management in the retail payment market.

Thirdly，CBDC will serve as a supplement to the current payment tools and fill the gaps in the market. When studying the feasibility of issuing CBDC，the European Central Bank made it clear that the launch of CBDC should not jeopardize the efforts of the private sector to innovate convenient retail payment tools. In China，despite a declining use rate，cash is still massively the preferred payment method，so it is unclear how big the market can be. Currently，the proposed "dual offline payment" function of DC/EP is aimed precisely at this offline market. To the existing payment tools，DC/EP does not have to be absolutely dominant in the market. If a low proportion of the existing payment tools are replaced by DC/EP，it may，to some extent，show that the existing payment tools have fully satisfied the market needs for convenience and security purposes. Of course，considering individual users' increasing awareness of privacy issues，they may tend to switch to DC/EP，as it can provide them with the ability to control their private information. This could lead to a differentiated competition with the existing electronic payment tools and force the existing ones to constantly improve their data management.

The Elements of the DC/EP Design

So far，no major country has successfully issued a CBDC. In order to prevent possible undesirable effects on the domestic economy and financial market，the PBOC has made some safe choices in designing China's central bank digital currency.

The first is shown in interest payment and limits. In theory，DC/EP can be used for interest payments and even realize differentiated interest payments for different individuals. In China，DC/EP is legal tender，and it is envisioned as a replacement of some of the M0 money supply – currency in circulation – rather than M1 (currency plus demand deposits) and M2 (M1 plus near money – or savings，time deposits and some off balance sheet items of banks). However，in order to prevent its impact on bank deposits，DC/EP is not intended for interest payments. And since digital currency makes it easier for deposits (M1 and M2) to be converted into cash (M0)，in the case of a financial panic and financial risk，the spread is likely to be much faster and could have an impact on the entire banking system. To prevent this kind of replacement effect of DC/EP，some observers suggest imposing limits on the use of DC/EP. For example，there may be daily and annual cumulative transaction limits or  there could be special requirements for exchanges of large amounts to be  appointment-based. Higher fees could also be charged for larger transactions.

One thing to note is that DC/EP not being used for interest payments will weaken the role of DC/EP in macro control. Yao Qian，former director of the Digital Currency Research Institute，once indicated that if CBDC was not only a payment tool，but also an interest-bearing asset，it would create a new price-based monetary policy tool. First，at the wholesale end，when the CBDC interest rate is higher than the reserve interest rate，it will replace the reserve interest rate as the lower limit of the monetary market interest rate corridor. Second，at the retail end，the CBDC interest rate will become the lower limit of the bank deposit interest rate. However，if DC/EP cannot be used for interest payments，the public will be less willing to hold it，thereby weakening its role in the transmission of macro policies.

The second is reflected in anonymity. The anonymity of DC/EP is designed to be controllable – it is anonymous during the end-to-end payment，but it also discloses necessary real-name information and transaction data for the PBOC to monitor in order to ensure regulatory compliance. This is what we describe as “real name at the back end，voluntary use of real name on the front end” for the digital fiat currency. Regarding the design of controllable anonymity，Fan Yifei，vice governor of the PBOC，once pointed out that if data are not anonymous to third parties，personal information and privacy would be leaked. But that if data are completely anonymous to third parties，it will make it more difficult to root out crimes such as tax evasion，terrorist financing and money laundering. To strike a balance between the two goals，the anonymity must be controllable，with data disclosure limited to the third party PBOC.

Anonymity is only a relative term. From the perspective of the development of the digital economy，completely banning the use of mobile payment data for commercial purposes could bring huge losses to the economy and the society. In this big data and cloud computing environment，transaction security is no longer entirely dependent on the traditional identity authentication system，and now it has already become a trend to guarantee transaction security and avoid risks through customer behavior analysis. For transaction information to be anonymous，DC/EP can still be used for big data masking analysis at the macro-level without infringing on the privacy of legitimate users at the micro-level. However，"masking" the identity of transaction information will make it difficult to integrate diversified data and reduce the value of data. Thanks to the loosely coupled design of the current DC/EP account，residents can choose to bind DC/EP to bank