Babbitt column | Central bank digital currency is a kind of "nickel coin"

Recently, the relevant person in charge of the central bank publicly released the news that the digital currency of the People’s Bank of China is about to be launched. The digital currency officially uses the concept of DC/EP (DE, digital currency, electronic payment, electronic payment). Encrypted digital fiat currency under mature electronic payment methods. This article has disclosed the technical details and intends to analyze or clarify some qualitative issues regarding DC/EP.

1. What is a coin?

Generally, the currency of a country entering the circulation field can be divided into a base currency and a subsidiary currency. The local currency is also known as the main currency. The auxiliary currency is the small currency below the main currency, mainly to facilitate the trading of small value and small amount of goods, such as the balance of large payment and the change of daily transactions. The auxiliary currency is generally cast from base metal, and its actual value is lower than the nominal value. The state is regulated by a decree within a certain limit. The auxiliary currency has limited liability and can be freely exchanged with the main currency. Coin currency is an insufficient currency, so in order to prevent abuse, private individuals are generally not free to cast, but can only be cast by the state. In countries where the gold standard is implemented, the currency can be freely exchanged with gold at a certain legal rate. In the modern state where the sovereign standard is implemented, the auxiliary currency and the banknote have the same function as the pay-as-you-go, and secondly, the creditor's right to legally repay the currency issuing authority according to its denomination. Since the amount of coins to be cast is generally limited to the demand range of commercial micropayments, the quantity is not large, so this currency claim has a higher liquidation guarantee. However, once the casting rights or excessive issuance is released, it will seriously reduce the value of currency, interfere with the entire monetary system, and cause currency depreciation.

In modern China, the coin was minted from the end of the Qing Dynasty, and silver and copper coins were used. Previously, foreign silver coins were circulating along the coast and were favored by businessmen. Silver coin (also known as silver horn) is not only easier to cast silver, but also 40% lower than silver. Up to 80%. The profit is even greater, so the Guangzhou Mint “slowly cast the silver dollar and engage in profitable coin casting”, which is the beginning of casting silver coin in modern China. In June 1900, the Qing government opened a bronze yuan in Guangzhou. In the past, the money-making units were all based on “text”, and the Guangzhou copper yuan was changed to “xian”, indicating that it established a relationship with the silver dollar. The release of the Silver Horn copper not only brought new currency types to China, but also had the intention of being a silver dollar coin at the beginning of its issuance, which had a profound impact on the development of the modern currency system.

However, in the early years of the Republic of China, the provinces were indiscriminately cast, making the types of silver coins extremely unusual. For example, in 1926, there were as many as 30 silver coins in Shanghai. At the same time, in order to compete, all localities continue to cut corners and the silver angle is even worse. For the casting of copper, the Qing government did not explicitly stipulate at first. The copper yuan is independently cast by the provinces, and the styles are self-contained and the color is different. It is not too late for the provinces to build up day and night, and the quality of the copper is inevitably confusing. After the Republic of China, the warlords of various provinces used the drum cast copper yuan as an important way to make profits. In addition to the "World War I" period, as the price of copper rose, the profit of coinage was greatly reduced, and the number of copper coins was reduced. The number of other times continued to rise. According to statistics, the number of copper yuan was 29.1 billion at the end of 1913, 34.2 billion at the end of 1917, and 46.6 billion at the end of 1923. In 1928, the number of copper coins reached 70 billion (corresponding to ten copper coins). According to the proportion of 40 million people in the country, the number of copper yuan has been about 200, which is far more than the circulation required by the society.

The massive indiscriminate use of the auxiliary coins has had an extremely bad impact on the economy, people's livelihood and social stability. As far as the monetary system is concerned, the substitution of the auxiliary currency and the falling of the price have caused the price ratio between the auxiliary currency and the silver dollar to be broken, and the auxiliary currency and the silver dollar are separated from each other. The Silver Horn copper dollar "is not a small unit of the main currency, but is not associated with the silver dollar." In this way, the silver-horned copper element loses its complementary currency, or becomes a misnomer. In many areas, the auxiliary currency has even become a commodity, and the market for the auxiliary currency has appeared. The currency system has existed in name only.

Later, the National Government introduced the reform of the legal currency and the reform of the currency, and in 1936 enacted the "Supplementary Currency Regulations". The regulations clearly stipulate that "the casting of the auxiliary currency is exclusively for the Central Mint. Its issuance is handled by the Central Bank." This ended the long-standing dispersion of the distribution rights of the auxiliary currency and terminated the phenomenon of indiscriminate casting. At the same time, replacing nickel coins with nickel coins is a major change in the reform of the currency, which not only avoids the bad impression that the silver coin has been devalued for a long time, but also lays the foundation for ending the silver standard. After the establishment of the new Chinese government, this method was followed and nickel coins became the main auxiliary currency.

2. Is the central bank digital currency a kind of supplementary currency?

First of all, the DC/EP central bank digital currency is still the central bank's liability to the public, and secondly, it is mainly for M0, which is a substitute for cash flow. Finally, its application scenario is mainly micropayment. These all indicate that the DC/EP conforms to the characteristics of the coin and can be used as a token or as a digital nickel coin.

If the DC/EP is issued without increasing the total amount of existing currency issuance, the same amount of nickel or small denominations should be recovered at the same time, that is, the issuance mechanism for the private exchange of cash for the same amount of digital currency.

From the perspective of the central bank, DC/EP is a cash in circulation, although it is a debt to the public, but because cash has unlimited transferable rights, such debt does not need to pay interest. On the other hand, from the perspective of commercial banks, since issuing DC/EP requires 100% of the reserve in the central bank, they have no reason to use it as a deposit to pay interest to the holder. In turn, they have reason to do this. The intermediary service charges a certain issue fee. As for the interest generated in the DC/EP lending business in the future, it is completely different from the concept of deposit interest.

Since the currency is rarely used for foreign trade settlement, DC/EP cannot be used as a means of cross-border large-value payment in the short term, and cannot be used as offshore RMB foreign exchange.

3. Is there a difference between the central bank's digital currency and Alipay and WeChat payment?

Although it also has the function of electronic payment means, DC/EP is a legally requisitioned currency, it is not only an internet payment tool, but also a denomination as a payment limit. Alipay and WeChat payment are Internet payment instruments based on bank deposit accounts or credit accounts. They use bank account balance (or credit limit) as the payment limit. However, the main difference is that DC/EP has the anonymity of the payment of the usual coins, and the Internet payment instrument associated with the bank account does not have the anonymity of payment, which will apply to anonymous purchases, anonymous donations, anonymous red envelopes, etc. Application scenario. However, this anonymity will be limited under the premise of anti-money laundering, at least for the government anti-money laundering department, but only for the transaction side has certain anonymity. Of course, no government will support the issuance of a completely anonymous digital currency.

4. Is Gretchen's law valid for the central bank's digital currency?

Although digital currency has the convenience of payment and meets certain anonymity requirements, people's demand for cash is greatly reduced. In the short term, people have the enthusiasm for trading and holding of DC/EP, but in the long run, due to the value of digital currency itself. Almost zero, people will tend to store nickel coins and use digital nickel coins whenever possible, when the Gresham rule will work.

5. Will the central bank’s digital currency cause disintermediation in the banking industry?

Due to the two-tier architecture, DC/EP is not directly issued to the residents by the central bank or other third parties, but actually uses the existing currency issuance system, clearing system and payment system, and does not change the currency intermediary role of commercial banks. In addition, if the issuance of digital currency is controlled within the limits of the existing circulation currency, it will not have much impact on the credit deposit system of commercial banks.

6. Does the central bank's digital currency have an impact on digital currencies such as bitcoin?

DC/EP is a substitute for central bank cash flow, and its exchange value is equal to cash, in fact, it is digital cash. It supports P2P (peer-to-peer) anonymous transactions, which is applicable to domestic micro-payment scenarios. Its distribution method follows the existing banking system and implements centralized management. Digital currencies such as Bitcoin are not currently counted as currency, and their exchange value is unstable and fluctuating. It should be regarded as a digital asset with monetary potential. Digital currency adopts a decentralized distributed governance structure, and its application scenario is applicable to any amount of peer-to-peer payment, and the application as a transaction cost reduction is mainly in cross-border payment. These are two completely different operating systems, different application scenarios, and different asset classes.

DC/EP has all the characteristics of a legal currency, except that its credit expansion is subject to certain subjective restrictions. However, the no-cost coinage mechanism may also breed the phenomenon of future currency oversupply, causing inflation risks. The biggest advantage of Bitcoin, which is locked by the code-issuing quota, may be anti-inflation, which can objectively stop the discovery of the image, which is one of the original intentions of its designers.

The modern bank credit monetary system has the impulse to over-expansion, which is one of the root causes of the business cycle. In addition, the bank credit system is endogenously unstable. Once the redemption crisis occurs, the financial market will be turbulent, and the government's increase in fiscal deficit or high external debt will also lead to a significant depreciation of the local currency. These phenomena have occurred many times in many countries. Before the next financial crisis, people are in desperate need of a stable currency. For Bitcoin and digital currency experiments like Libra, if successful, it will be a good complement to the traditional monetary system.

Author: see together, Babbitt This article first appeared in the News