Digital currency attributes

To offset the shock to the current banking system imposed by an independent digital currency system (and to protect the investment made by commercial banks on infrastructure), it is possible to incorporate digital currency wallet attributes into the existing commercial bank account system so that electronic currency and digital currency are managed under the same account.

The management of digital currency and that of electronic currency have some similarities in areas such as account usage, identity authentication and money transfer, but there are also differences.

Digital currency should be managed in compliance with the standards on wallet design specified by the central bank. The wallet is similar to a safe box which is managed by the bank based on agreement with the customer (eg it requires both keys from the customer and the bank to open the safe box). All the attributes of digital currency and cryptocurrency would be preserved to enable customized application in the future.

One of the merits of the aforementioned approach is that it leverages the current ‘central bank–commercial bank’ system for currency issuance.

Digital currency, categorized into M0 (a measure of money supply in a central bank), is the liability of the currency-issuing bank (referred to as the issuing bank) and is not on the balance sheet of the bank providing the account (referred to as the account bank).

The approach would not lead to the commercial banks being channelized or marginalized because customers and their accounts are still managed by the account bank. Unlike money transfer, digital currency does not completely rely on bank accounts and the ownership of digital currency can be verified directly by the issuing bank, so as to realize peer-to-peer cash transaction via digital currency wallet on user’s end.

Two types of issuance

The issuing bank could be the central bank or banks authorized by the central bank (as in the Hong Kong dollar issuance model, for example). Determining which model to follow should be based on actual situation. This article is only for the purpose of academic discussions.

Below is an elaboration on the two models.

In the first one, the central bank is the only issuer of digital currency, and in the second one, banks are authorized by the central bank to issue digital currency.

It should be pointed out that the issuing banks are interconnected with the central bank and among themselves on an infrastructure designed by the central bank.

Whether the infrastructure should be migrated to a distributed ledger architecture would be a huge topic for the industry.

Designing a new kind of wallet

To follow the customer-centric strategy of commercial banks, digital currency wallet ID fields could be added to the bank account to enable the account-based and non-account-based models to co-exist and operate at different layers. The wallet serves as a safe box and is not involved in activities such as day-end counting and reconciliation, so as to minimize the impact on the existing core banking system.

The ownership verification of digital currency relies on the issuing bank. The combination of traditional bank account and digital currency can significantly enhance the bank’s KYC and AML capabilities.

The digital currency wallet should be designed in compliance with standards specified by the central bank.

The wallet at the bank end is ‘lighter’, as it only provides security control measures and features at the account level. The wallet offered by the application service providers at the user end would be ‘heavier’, as the functions of such wallet would extend to the presentation and application layers.

At the user end, the role of smart contracts can be played to the fullest and it would also become one of the core competitive advantages of the application service providers.

Wallets meet accounts