Viewpoint | Will the ultimate future liquidity trap of digital currency still exist?

Credit Evolution and Carrier Evolution of the Currency System

Looking at the digital currency from the nature of money, we must first look at the two evolutions of the monetary system, namely the nature of money and the supply of money.

The essence of money is the function of money. Because money is the function of money, money does not need any physical form. Based on this thinking, we know that until now, as long as the monetary function can be performed, it is money. The evolution of money in human history is two directions, one is the evolution of credit, and the other is the evolution of carriers. The evolution of the carrier, the most typical is that the currency ultimately comes down to gold. Why does gold become a particularly important gold standard currency?

Because gold is expensive and useless. Tiffin proposed that human beings traveled all over the world to explore, mine and refine gold, mainly to hide gold in a more stable vault. Nothing is more wasteful and more ridiculous than this currency arrangement! This is the original words of Triffin. A particularly important point of gold is that it cannot be forged and credit is particularly harsh. The gold standard is characterized by bad money driving good money, and the credit standard is good money driving money. The Bretton Woods system is a virtual gold standard rather than a solid gold standard. The US dollar succeeded in replacing gold with the Bretton Woods system. The national credit finally defeated the metal credit, and the tail of the last small metal of mankind was gone. The evolution of the carrier evolved from stone to plastic to a variety of things. Because we entered the era of credit money, not every central bank necessarily has the right to issue money. Sovereign currency credits are competing with each other. A country’s strong credit will overwhelm the sovereign credit of another country, so there will be a statutory dollarization and a de facto dollarization.

From the history of the evolution of the carrier, digital currency is basically not an evolution of credit. If the People’s Bank of China issues a legal digital currency, there is still no evolution in credit, or the central bank’s credit on behalf of the country. Digital currency is largely a evolution of the carrier rather than the evolution of credit. We can probably understand that the digital currency is mainly aimed at individuals, mainly for retail, and the main alternative is M0. It has little impact on wholesale, on institutions, and on large-scale real-time transactions.

Second, money supply and credit demand are two different things. We often talk about the current Chinese monetary policy called wide currency and tight credit. Central banks are able to supply the base currency but have no ability to supply social credit. Credit is a demand, not a supply. Therefore, central banks in all countries can only supply money and cannot supply credit. The whole development process from currency to credit relies on the financial transmission formed by financial markets and financial intermediaries. If it is a single-layer digital currency that is directly issued by the central bank to individuals, it will certainly bring huge troubles. Because the central bank only issues currency and does not issue credit, the entire social credit may collapse, and the single-layer structure is completely unfeasible.

The two-tier structure guarantees that the central bank issues currency, whether it is electronic money, banknotes or digital currency. But the central bank cannot create the credit needs of society. Credit demand is determined by the economic aggregate and the economic cycle of economic operations. Therefore, to a large extent, the central bank cannot maintain the stability of the currency, and can only maintain inflation stability and credit stability, that is, the relative stability of CPI and PPI. After we understand this, we know that the central bank stimulates the economy through monetary policy, but it cannot stimulate the economy through currency issuance. What the central bank does is to directly face the financial needs of financial institutions to purchase corporate assets, which is why the central bank wants to push various "powders" and PSL. So the central bank is not without credit expansion, because he can directly enter the market to buy various assets. This is the reason why we see a huge gap between the money supply and credit demand. The central bank can do the former rather than the latter.

Three-tier structure of the digital currency system

The currency encryption system has about three layers. One is to encrypt the underlying digital currency, the other is to encrypt the digital account, and the third is to encrypt the entire payment clearing system. The more encrypted, the lower the efficiency, the higher the cost, the more trouble the transaction.

First, payment system encryption is feasible. We now have two major types of systems, one is the vertical total accounting system, which is the centralized system. This system operates efficiently and clearly; another system is a distributed system. The system that Libra will use in the future is a distributed system. It is inefficient to implement direct pairing transactions in a distributed system. If both systems are encrypted, there is no doubt that the vertical centralized system is much more efficient than the decentralized distributed system. But there is a bit of a loophole in this system, which is the handling of cash. Because the cash and coins we hold now are indeed a distributed pairing transaction in the offline scene. For example, Zhang San gave money to Li Si, which is completely a haircut-style issue. If the central bank issues digital currency in the future, the cash and main currency can disappear, and the central bank payment system is free of loopholes.

Second, talk about account encryption. The account is divided into two layers, one is an online encrypted account, and the other is a digital identity after the encrypted account is authorized for use. Digital accounts and digital identities can be viewed as two layers or as a layer. There is a digital account, and all offline cards are useless. In the future, our offline bank cards, savings cards or other offline payment tools are just the ultimate account. The balances in each payment instrument will be quickly collected. We only need a hierarchical digital account. If you already have a digital account system, encrypting the underlying digital currency is a bit redundant. In turn, it can be said that because some digital assets, such as Bitcoin, do not have a reliable digital account system, they have to The digital currency system is encrypted. In turn, we can also say that the banknotes on the banknotes are encrypted by the bank. Therefore, for China, after we have online payment accounts such as WeChat and Alipay, we will basically not consider whether the money transferred by Zhang San through Alipay is real money or fake money. We will basically not consider the one you received. How much is 100 pieces and 50 pieces of coins?

Therefore, if the digital currency is the core, it is enough to establish an encrypted clearing settlement system in the future. The digital currency itself does not need to be encrypted. In the future, we will soon see that the digital currency has caused the main and auxiliary coins to disappear completely, because the digital currency itself may be unencrypted, balanced, and stored only in encrypted digital accounts. Therefore, up to two encryptions in this triple system, triple encryption is unnecessary and completely redundant.

Let's discuss the problem with the wallet. Now China has come to a stage where there is already an untargeted online payment method like WeChat and Alipay, which they can use to transfer money online. Commercial bank cards are tied to online accounts.

Alipay and WeChat payment are typical hot wallets. UnionPay's cloud flash payment can also be called a hot wallet, but it is not too hot. Commercial banks offer all payment tools that are cold and are used occasionally rather than often online. So we feel inconvenient, all cold wallets will fade out in the era of digital currency and digital payment systems. There are also some payment phenomena in Western countries. For example, Uber can also bind credit cards, but this does not mean that Uber binds credit cards and makes credit cards become hot wallets. It is still a cold wallet. Always on the line can easily grab it out and let it go, such a wallet is hot. The hot and cold wallet determines that in the future, we may also form a few hot wallet systems based on the current Alipay, or the online UnionPay, or WeChat based on WeChat. Everyone has a hot online digital account based on the hot wallet system. This account determines the possible three-tier structure in the future. The bottom layer is the digital currency, the middle layer is the digital account, and the top layer is the digital identity.

Digital currency and super central bank

Let us look at the possibilities of digital currency and super central banks. I believe that if the cash disappears completely, the electronic money needs to go further and move to two layers, one is the digital account and the other is the digital payment system. After moving towards such a two-tier architecture, the system can be made into a completely flawless, completely closed-loop system, and it is a system of vertical total accounting. Because of the vertical total accounting system, it is particularly convenient to make it into a Laplace system to make smart contracts.

Let me give you a few examples of crazy ideas:

First, does the zero interest rate or liquidity trap still exist? The central bank is fully capable of setting interest rates at will, from very low negative interest rates to zero interest rates to very high interest rates. If it is a negative interest rate penalty or tax policy for depositors, this is no problem. So in the future, there may be no liquidity trap in the digital currency era. Zero interest rates or negative interest rates will all seem normal, if we want to discriminate the balance of the account, especially some extremely wealthy balances.

Second, the conditionality of digital distribution may also be possible. Let's take a very small example. Is it necessary to withdraw from quantitative easing? When the central bank issues these digital currencies, it adds a time stamp. Although the central bank sends a digital currency with a valid period, it may indirectly create credit demand. Users who receive the time stamp currency have to use these digital currencies within the validity period. Drop it. Therefore, the central bank can only create a money supply now, and it may be able to create credit demand in the future. In the case of the super central bank, the future tax system, the future social security system, the future social relief system, etc. will all be highly dependent on the super central bank. The status of the central bank will be a very important and unique position in the entire national economy with the formation of the digital currency system.

Three guesses about digital currency

I want to talk about some speculative things.

First, because the digital currency and digital payment system are the future, as our entire life is formed online, the things that are starting from the bottom line will slowly die or exist in name only.

Second, Libra is a very important thing. Libra has a complete design from the bottom to the account to the payment. It is really different from the tokens and bitcoins we see now. Libra has its own traffic, its own scene, and its own closed loop system. If the United States allows to try Libra, can we imagine or suggest that China’s regulatory authorities, central banks, or government functions can also allow some of our Chinese financial technology companies to try something similar to Libra because we are more qualified than them. Do better, not worse.

Third, the legal digital currency is still a very important thing. Peng Wensheng has done an interesting study: about 70% of central banks are concerned about digital currency, but about 60% of central banks tend to have the necessity and urgency of the central bank to issue legal digital currency for the foreseeable future. So big.

This is my guess of the digital currency, not necessarily right, thank you!

This article is the keynote speech by the author at the 3rd China Financial 40th Yichun Forum Plenary Session 3 "Digital Currency Development and Global Prospects".

Author: Zhong Wei (Director of the Financial Research Center of Beijing Normal University, China Financial forty members of the Forum)

Source: Sina Finance