The future of the central bank's digital currency

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In the previous article "What is the central bank cryptocurrency" , I simply answered the type and nature of the central bank's digital currency. In this article, I will analyze the following three questions from the perspective of the central bank:

  1. Attitudes of central banks facing digital currency (or alternative currency) competition
  2. The scenes, benefits and disadvantages of the central bank’s digital currency
  3. Summary – the future of the central bank's digital currency

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Attitudes of central banks facing digital currency (or alternative currency) competition

Bitcoin's creation block. On January 3, 2009, Nakamoto created the first bitcoin block and left a sentence in the creation block:

"TheTimes 03/Jan/2009 Chancellor on brink of secondbailout for banks"

On January 3, 2009, the Chancellor of the Exchequer was on the verge of implementing the second round of bank emergency assistance.

This sentence is the headline of the day.


Bitcoin is a long-lasting, and a "carved" is always circulated. This sentence written by Nakamoto Satoshi on the creation block is meaningful. At that time, the global economic crisis, this sentence implicitly commented on the fragility of the World Bank system, and the inability of central banks to do so.

Nakamoto Satoshi symbolically coded this information into the creation block. They estimate that they did not expect that in just five years, blockchain and shared books were seen as major breakthroughs in the preservation of financial records, and central banks, stock exchanges and many other financial markets began to adopt such disruptive technologies. Realize the modernization of your business. With the advent of Bitcoin, the opening of cryptocurrency exchanges, and the establishment of various ecosystems, the cryptocurrency is circulating in the economy. There is no doubt that it will compete with the official currency issued by the state.

Then we first analyze the first point, the attitude of central banks facing the competition of digital currency.

The competition between official and private currencies is not new. In many societies, alternative currencies include gold and silver. But in most countries, the biggest competition facing the national currency is often not these, but the “dollar”. With dollars, you can buy almost everything you want, although some are not sold (such as core chips, aircraft carriers, etc.). For a central bank, the challenges and competition brought about by digital currencies are basically the same as those of the existence of another currency.

Whether it is the central bank's digital currency or other currencies, only the relationship between supply and demand will determine which currency or currencies are used as a generally accepted medium of trading . When you have a brand new 100 yuan and a broken 100 yuan in your wallet, are you more inclined to spend the old 100 yuan and reluctant to spend the new 100 yuan? This led to the law of Gresham, which is the bad money to drive out good money. When the central bank issues digital currency, will you leave this new and new thing, so that you can spend the balance of Alipay and WeChat, or other digital currency instead?

From the point of view of the central bank's supply of money and the exchange rate, the debtor countries are certainly reluctant to settle in the currency that will immediately appreciate after signing the contract, and the creditor countries are not willing to sign contracts in a depreciating currency . Therefore, the existence of a competitor in the money supply is a constraint on the unilateral behavior of the supplier, that is, if you are a dollar indebted country, the exchange rate of the dollar, and the dynamics of the Fed will limit the liability to a large extent. Country's money supply.

From the perspective of digital currency, can digital currency provide a way to create stability for countries with poorly managed money supply? Below I will give examples of several countries to specify.

First, Argentina provides an inspiring example. This example is a good illustration of digital currency (like foreign exchange) and provides a stable solution when national economic policy management is not ideal.

According to the World Bank data [1] , since 2002, Argentina has experienced double-digit inflation every year, with one exception. On April 29, 2015, just before the election of Argentine President Makri, the New York Times reported that many Argentine citizens used bitcoin to evade national currency control in a financially unstable atmosphere [2] . When the Argentine peso and the country's central bank are no longer able to meet the individual's demand for money, citizens can indeed choose other means of hedging, including not only digital currency, but also common foreign exchange. In general, if a country's currency is unstable , it will create risks in the participation of global financial markets. Makri also served as the mayor of Buenos Aires and helped set up a Bitcoin forum. After taking office, the first thing he did was to lift the country’s currency control.

Second, Ecuador took a slightly different approach. The country officially banned Bitcoin in 2014, but launched its own digital currency project, Sistema de Dinero Electronico. Similar to M-PESA, the system allows individuals to enter mobile payments using currency approved by the central bank . After years of currency instability, Ecuador adopted the US dollar as the official currency. Ecuador's new digital currency system is not intended to replace the US dollar. Similar to China's strategy, the new system mainly wants to replace M0 and physical banknotes . That being said, after all, the official currency of Ecuador is the US dollar. In a sense, the system also promotes the development of Ecuador to the dollar , so that the government can have more control over its economy and economy.

Writing here, I can't help but remind me of a piece of history. Before the American Civil War from 1861 to 1865, the US currency was issued by private banks , including the First Bank of the United States. In order to finance the civil war, Congress passed the Legal Margin Act in 1862, which not only stipulated that “greenback” US dollar bills could be circulated as money , but also declared that the legal currency could be used to pay all domestic debt relations (whether Private or public), and legal currency (green back notes) is the currency that must be used to repay debt.


“Green Back” was issued three times before and after, and a total of US$450 million was approved. With the mass production of "green back" US dollar bills, a series of problems such as inflation and currency devaluation have followed.

The United States is a country with separate powers. At the beginning, the US Supreme Court declared that the bill violated the US Constitution because it forced the parties to accept a depreciated currency that violated the Constitution and prohibited the government from confiscation of individuals without due process of law . Property regulations.

The green back was devalued in the market, and the majority of the holders (mainly farmers) suffered great losses, which also led to the green back banknote movement initiated by farmers at that time. Therefore, these banknotes are called "green back" banknotes, and their value depends on how much people trust the government. The war between the Northern Alliance and the Southern Confederation is getting tighter, and the confidence of the American people in the government is fluctuating. As long as the alliance is defeated, the value of the green back banknotes will fall (previously fell from 1 US dollar to 35 US cents). After the end of the civil war, the green back banknotes were still in circulation, and eventually returned to full value in 1878.

The currency law gives the government a monopoly privilege and allows it to operate its own printing press. Without such a law, the central bank will be just a bank. The US Constitution stipulates that personal property is sacred and inviolable. The excessive issuance of money exploits the people in labor, and the people have the right to resist. However, in many highly centralized countries, whether it is the central bank digital currency or the domestic legal currency, if it is to make up for the economic problems that existed for a long time, or to better control the individual, the result is often the ordinary working people. Expansive prices and housing prices are being exploited invisibly.

Whether the monopoly of the central bank is desirable is beyond the scope of this article. "Rules and discretion – the ideological struggle between the two sides of the Rhine" [3] This book review of the "Ideological Controversy of the Euro" is believed to bring you A satisfactory answer.

The competition faced by the Icelandic Krona – AuroraCoin claims to replace the privately-owned digital currency of the Krone. According to the author's understanding, the Aurora Coin was issued to Icelandic citizens in the form of “airdrop” passed in March 2014. At the same time, Iceland is under strict capital controls after the global financial crisis. The global financial crisis has destroyed the country’s banking system. Unlike China, Iceland lacks a real economy as a support and relies too much on the banking system. Iceland's economic development model is to use high-interest and low-regulated open financial environment to attract overseas capital, and then invest in high-yield financial projects, and then globally. Profit in the capital flow value-added chain. This kind of leveraged development based on the international credit market has high returns but high risks. Once the global financial crisis has led to a credit crunch in financial markets, money market financing will stagnate and its vitality will naturally decline.

The introduction of AuroraCoin prompted the government to hold a series of meetings. Almost everyone believes that AuroraCoin is a failure and has not replaced Icelandic Krona in any meaningful way.

Countries have adopted different attitudes towards the competition of digital currencies, from ambiguity to hostility to laissez-faire and encouragement. China’s attitude towards cryptocurrencies can be seen in China’s attitude towards foreign exchange. In China, the government implements foreign exchange and capital controls, and the central bank actively intervenes in the market to influence the value of the renminbi. Therefore, non-government organizations such as private and private enterprises are difficult to participate in the global foreign exchange market under the foreign exchange control policy. Similarly, China’s attitude towards Bitcoin and other digital currencies has also hampered the participation of Chinese citizens. Although individuals own Bitcoin in China, banks and financial institutions are not allowed to participate in Bitcoin. As early as April 2014, the People's Bank of China ordered commercial banks and trading companies to close their Bitcoin trading accounts. Other digital currencies such as Bitcoin are easily seen by China as a threat to capital or foreign exchange controls, because Bitcoin can easily spread internationally, leading to asset outflows.

On the other hand, in the UK, private use of bitcoin is allowed, and companies that conduct transactions in Bitcoin are allowed to open. The same is true in the US. Although both countries apply to the anti-money laundering law, neither country has attempted to ban bitcoin or prevent its spread.

The scenes, benefits and disadvantages of the central bank’s digital currency

First of all, I want to use the design perspective of "Fedcoin" published by JP Koning on his personal blog [4] to explore what he thinks is the possible scenario of the central bank issuing digital currency. (Note: JP Koning, a Canadian economist. The concept of Fedcoin is presented in the author's previous article, "What is Central Bank Cryptographic Currency," also to Fedcoin, the consumer-oriented CBDC.

According to Fedcoin's proposal, citizens and businesses will be allowed to open accounts in the central bank instead of depositing funds into commercial banks as they do today. First of all, historically, the central bank has never taken deposits from the public because the amount of transaction records and customer information to be kept is simply too large . According to Fedcoin's proposal, today's digital technology can easily overcome these problems, cloud-based servers and distributed storage can easily accommodate very large financial transactions. Bank branches and ATMs do not require maintenance if they have direct access to the currency side via their mobile phone. The central bank's digital accounts can initially allow depositors to exchange existing currencies at a one-to-one exchange rate, while new digital currencies are kept in the blockchain operated and regulated by the central bank .

When depositors want to use their digital currency, they transfer it to the other's account via the blockchain, and the central bank encodes each transaction into the blockchain. The blockchain will be regulated by a trusted third party, the central bank , rather than by competing miners, and the central bank will have exclusive rights to add or modify. In addition, the article "Fedcoin" also believes that the central bank's blockchain will certainly be hidden to protect the privacy of citizens and business secrets.

Because of these two points, the platform built by the blockchain technology used by the central bank will be very distinct from the open source Bitcoin and Ethereum. Such a centralized design system, although having a national credit endorsement, is also likely to cause the entire financial system to be attacked or destroyed by hackers.

Of course, the benefits are also good throughout the Fedcoin system. A very simple example – the central bank’s implementation of monetary policy will be much easier. For example, a bank can publicly commit an algorithm that promises a rate of money creation and precisely control it by interest on user deposits.

In principle, this interest rate can be negative. The currency creation rate is corrected by the intelligent contract in the chain and changes the speed of currency creation.

For example, if economic development follows a certain pattern, smart contracts will accelerate or slow down the rate of money creation as the laws of economic development .

Broadly speaking, the central bank's digital currency is to narrow the banking system to the direct relationship between citizens and the central bank . In China, it will represent the characteristic financial socialism . This innovation will subvert the existing banking system. I will analyze its benefits and disadvantages below.

Allowing private accounts to enter the central bank will first solve many of the problems brought about by the reserve . The central bank will not be affected by the run of commercial banks . The central bank, as the last lender of commercial banks, can also withdraw from the investment of some commercial banks with insufficient funds or high performance risks. For commercial banks, there is no longer a need to “ term convert ” (ie , raise funds from short-term demand deposits and then issue them in the form of long-term mortgages and other loans ).

From a macroeconomic perspective, the main advantage of the central bank having its own digital currency will come from giving the government more control . This control will allow for better intervention in the business cycle of all industries, while at the same time ensuring that individuals are better able to comply with their own tax laws and anti-money laundering laws .

In addition, the central bank's digital currency can be used as a way to stimulate consumption and investment by lowering interest rates below zero (negative interest rates) . (Negative interest rate is that you deposit money in the bank, not only no interest, the bank also charges you a fee, your wealth shrinks as the price rises.) When the currency is circulated in the form of banknotes , the negative interest rate is difficult to implement, because citizens can I hoard some hard currency and refuse to deposit it in the bank, thus getting zero interest rates .

If the central bank's digital currency does reduce the size of the banking system by shifting the function of absorbing deposits from commercial banks to the central bank , then the commercial banking industry will also encounter problems.

For example, commercial banks will not be able to obtain major sources of funding , so commercial banks either have to cut back on loans or raise new capital by issuing securities to investors . The new financing behavior may be much higher than the cost of demand deposits, and it is not so stable . Therefore, commercial banks may significantly reduce lending activities to businesses and individuals . (eg reducing the amount of mortgage or commercial credit)

Similarly, there may be a related issue in the regulatory field. A central bank that absorbs deposits from the public, and ultimately, his competitors are the following commercial banks, although the central bank is the industry's regulator.

The central bank will have unprecedented power to monitor everyone's financial situation. The government can decide how much money each person has and where he spends his money . It is for this reason that many people prefer to hold hard currency or other decentralized cryptocurrencies for risk aversion.

In addition, if governments issue digital currencies, it is likely that a group of conservatives will reject or avoid using the central bank's digital currency. After all, the government does not need to spend more paper or cast coins. It only needs the central bank to add more zeros to its account to issue currency. This is a very convenient means for inflation .

All in all, in my opinion, such a new kind of currency, banking, and economic system will eventually become a more efficient, stronger, and more productive system than before. The high concentration of rights also represents a high concentration of efficiency (no one is opposed, one is not the case), so that the government can achieve more powerful control over the economy, thereby controlling people's productivity and labor.

Summary – the future of the central bank's digital currency

There is no doubt that the blockchain technology behind digital currencies has the potential to improve the central bank's payment and clearing operations (see “Open Finance – Exploring Bitcoin's Clearing System and Payment Process” ) and may become the central bank's own number. The platform of money.

The central bank's digital currency may have a profound impact on the banking system. As mentioned earlier, reducing the distance between citizens and the central bank, eliminating the need for the public to retain deposits in commercial banks, leading to a serious reduction in commercial bank funds, and so on.

Around these issues, central banks may never choose to narrow the scope of the banking system and issue digital currencies in accordance with the Fedcoin model (eg, Figures 1 to 2). Like other financial institutions, central banks are paying more attention to the fact that blockchain technology behind Bitcoin is more attractive , and central banks may choose to adjust their strategies to how to implement blockchain technology in payment processing and transaction clearing functions. Used in .


Figure 1 (existing banking system)


Figure 2 (Central Bank fully supervises users)

Although mentioned at the beginning of this article, the message in the Bitcoin creation block is a mistrust of the bank. The bitcoin distributed system is to bypass the interbank clearing process for point-to-point value transfer. Ironically, this technology may allow central banks to provide more reliable, cheaper, and safer transfers of funds between users than before. In my opinion, the central bank's digital currency, if it is needed, will be a settlement currency , similar to the function of gold in the past.

The central bank not only performs these accounting and settlement tasks for itself but also for commercial banks. Although blockchain technology is still in its infancy, a small increase in clearing efficiency can also save the central bank a lot of money. In addition, international liquidation fraud and theft remain a problem, even if the parties are the central bank of the government. The international currency transfer market has many intermediaries in addition to the central bank, but blockchain technology may make many intermediaries unnecessary, thereby reducing fraud.

As a disruptive new technology, digital currencies are forcing governments and central banks to choose between prohibiting, supporting or adopting their innovative technologies. In most mature economies, the central bank has chosen to adopt its innovative technology.

There is still a lot to learn about the future of digital currency and blockchain. Therefore, while the central bank's digital currency is accompanied by efficiency and regulatory benefits , it also brings a lot of risks . A mandatory central bank digital currency protected by law will run counter to the vision of competition, decentralization and openness envisioned by Bitcoin or other digital currency creators.


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Author: Rickkk, This article first appeared in Babbitt information is forbidden without authorization.