The Second Series of Digital RMB Conjecture by Fang Hongjin: Commercial Banks Will Face a Huge Strike of De-intermediation

Abstract : In the first article of "Digital RMB Conjecture", Fang Hongjin discussed seven questions including “relationship between digital RMB and people", "who can hold and use the digital RMB”, “where can I get the digital RMB", "digital RMB’s shape", "what is a digital wallet" and "who is providing a digital wallet service".


Nov 09

Fang Hongjin was the leading host of CCTV "Oriental Time and Space" and "Focus Interview” and the previous general manager of Dragon TV. Beginning in 2016, he started to study the blockchain theory, focusing on the top-level design of the token projects. In June 2018, he designed the world's first stable digital currency anchored offshore RMB, with complete operational experience on the top-level design and supervision of stable currency. At present, he majorly focuses on the application of digital vouchers for the development of offshore RMB deposits in international settlement, the application of RMB deposit digital vouchers in supply chain finance, the application of mass spectrometry detection and blockchain technology in food traceability, and other blockchain application solutions .

The purpose of this paper is to proceed from the application characteristics of digital currency, strictly refer to the information disclosed in a series of speeches and articles published by central bank officials recently, and make inferential conjecture on the application of digital RMB and its social impact.

8. Will there be interest income when holding a digital RMB?

Commercial banks take our deposits to lend, and after the loan interest is deducted from the operating costs and profits of commercial banks, the rest provided for us is deposit interest. Therefore, if we want our own money to generate interest income, there must be two premises. First, we must deposit the money in the accounts of commercial banks or other financial institutions. Second, these commercial banks or financial institutions can make the money relatively high. The interest is loaned to other institutions or individuals.

It can be seen that there is no interest income on holding the digital RMB.

Holding a digital RMB is just like collecting tens of thousands of RMB cash under your own mattress at home. The money is saved by yourself, and there is no loan to go out, so no one will pay you interest.

The central bank has invested a lot of manpower and resources to develop the digital RMB in the past five years. The application and promotion of digital RMB is bound to require all commercial banks, third-party payment institutions and other relevant financial institutions apart from central bank to invest a lot of manpower and resources, so that to develop and build systems and equipment that can operate digital RMB.

9. Can we put digital RMB in the bank?

You of course can deposit your own digital RMB into any commercial bank or other financial institution, provided you need to open an account with them and save your deposit in this account.
When a commercial bank or other financial institution is helping you complete this deposit business, you will not be charged any handling fees. The reason for this will be analyzed later.

It should be noted that at this time, in the account opened by this commercial bank, the record is only the number of your RMB deposit, and there will be no difference between the number of RMB or the cash. And you can further agree with the bank whether the money you deposit is current or fixed, and how long it is. In this way, as long as your money is in the bank's digital wallet instead of your digital wallet, you can collect the deposit interest as you would do in the bank.

Because commercial banks can exchange their digital RMB into the RMB cash at any time, although they all display an electronic data, they have different meanings for commercial banks. After the commercial bank converts the digital RMB received into RMB cash, it can transfer the remaining portion of the loan to the required institutions and individuals after the reserve is paid, and collect the corresponding loan interest. Because the commercial bank lends out your money, it can also pay you deposit interest.

I suspect that commercial banks will save most of their deposit balances in cash in a certain proportion, so that they can easily lend to foreign loans. A small portion is stored in digital wallets in the form of digital RMB, providing digital RMB to users who are exchanging cash for digital RMB, or wishing to use digital RMB in loan.

Here we have to focus on the issue: the issuance and use of digital RMB will influence the commercial bank profoundly. The pressure for this change comes from two aspects. One is that commercial banks will face the pressure of de-intermediation, and the other is after the interest rate difference is compressed, the pressure on the service level has to be raised. The good days of earning money and helping all banks make money easily have already gone!

With the digital RMB, the way of business dealings between the central bank and commercial banks will undergo fundamental changes.

Let me first talk about simplifying the process and cutting the intermediate parts. Nowadays, regardless of the size, all commercial banks have pyramid management structures. National commercial banks may have five to six levels from their head office to their front-line department. Each intermediate level must have every capital flow through it. Arranging and documenting verifications requires a lot of manpower and time.

The digital RMB is based on the characteristics of the blockchain application. First, the payment transfer is done point-to-point. It is directly transferred between the two digital wallets without any intermediate parts. As long as the first-line branches and the department departments of the commercial banks report their respective digital wallet collection addresses to the relevant departments of the central bank, the central bank can directly transfer the funds needed by the front-line departments of the commercial banks into their respective dedicated wallets. It can be done without the intermediate links of these commercial banks. By the same token, the frontline departments of these commercial banks can also directly transfer money back to the central bank's dedicated digital wallet in the form of digital RMB.

Besides, user' current accounts are constrained and distributed records through smart contracts. That is to say, funds that meet the agreed amount and usage of the exchanges can be automatically passed. If they do not meet the requirements, they will not be executed. If there is anything unusual happening, it will be automatically locked, and manual intervention is required at this time. All current accounts are recorded in form of blockchained and distributed, and no one can delete the tampering. It is not possible to deny your identity of the account if you are users.

The central bank has the most complete digital currency flow storage record between the commercial banks. As long as the digital wallet addresses held by the various departments of these commercial banks are fixed and mandatory for the central bank, it is not likely to have any mistake. This will mean that all the intermediate links of commercial banks are not necessary. The commercial banks only have to go to the middle of the process, and improve their efficiency to maintain their survival.

Let me now talk about the issue of being forced to improve the service level. In theory, when bank deposit interest rates are getting lower and lower, people will become less and less interested in putting money in the bank. In the past, if there was no large amount of cash in the bank, there would be dangers of loss, rot, and theft. If it was replaced by digital currency and stored in a digital wallet, especially if the digital wallet was backed up, the dangers can be avoided. A large amount of cash in digital form can also be achieved.

Therefore, under the squeezing of the increasingly good use of digital RMB and the decreasing interest in deposits, I personally believe that the proportion of commercial bank deposits moving into digital currency will continue to increase. So how can a commercial bank retain its deposits? The easiest method is to increase the deposit interest, so that people think that the deposit income is still attractive enough. Then the next thing to test is the risk management ability of these commercial banks to lend. In order to make the loan recover a higher interest and also control the bad debt rate, everyone must work hard.

Another long-term and effective way to make more efforts is to improve the service level, so that both depositors and borrowers have long-term dependence on banks and rely on services to stabilize deposit levels.
From this point of view, the issuance of the digital RMB will re-enforce the central bank's ability to control, allowing the central bank to see the flow of all funds at a glance. And each commercial bank must simplify the middle department to improve the service level of the frontline department. Such a result is undoubtedly beneficial to the whole society. (To be continued...)

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