The opponent is also a friend? Seeing the competition and cooperation between stable currency and commercial banks from the IMF report


The article "The Raise of Digital Money" was published by the International Monetary Fund (IMF) in July 2019. Later, the author published a blog in September 2019 /article/rise-digital-currency, which supplements this article and corrects some bugs. One of the mistakes is to list the electronic money in Alipay as a digital currency. At the time of this writing, the Libra white paper was just released, and many central banks and commercial banks around the world are still in a state of mind. In fact, Libra's discussion and its possible impact later exceeded the author's expectations.

About the Author:

Tobias Adrian is the IMF Financial Counselor and Director of the Monetary and Capital Markets Department. In this capacity, he leads the IMF's work in financial sector regulation, monetary and macroprudential policies, financial regulation, debt management and capital markets.

He is also responsible for overseeing capacity building activities in IMF member countries. Prior to joining the IMF, he served as Senior Vice President at the Federal Reserve Bank of New York and served as Vice Chairman of the Research and Statistics Group. The Federal Reserve Bank of New York is the most important bank in the Fed.

Mr. Adrian has taught at Princeton University and New York University and has published numerous articles in economics and financial journals such as the American Economic Review, Financial Journal, Journal of Financial Economics, and Financial Research Review. He holds a Ph.D. from the Massachusetts Institute of Technology; a Master of Science degree from the London School of Economics, and a university in Germany and France. The Department of Economics at MIT and Princeton University has long been ranked number one in the United States (others often ranked first at Harvard University).

Tommaso Mancini Griffoli is the Deputy Director of the IMF's Monetary and Capital Markets department, focusing on monetary policy, central banking and financial technology. He advised national authorities and expressed his views on unconventional monetary policy, monetary policy and financial stability, spillover effects, exchange rate regimes and interventions, modeling and forecasting, evolving monetary policy frameworks, and financial technology. Prior to joining the IMF, Mr. Mancini-Grifey was a senior economist in the Research and Monetary Policy Division of the National Bank of Switzerland, advising the Board on quarterly monetary policy decisions. Mr. Mancini-Grifey worked in the private sector, Goldman Sachs, the Boston Consulting Group and Silicon Valley technology start-ups a few years ago. He holds a Ph.D. from the Graduate School of Geneva and other degrees from the London School of Economics and Stanford University.

The authors agree that the digital currency has a positive impact. In fact, starting in September 2017, the author's unit, the IMF, fully accepts the digital currency. It can be said that in the world's large financial institutions, I am afraid that no other institution is more avant-garde than this institution. If the IMF in September 2017 already believes that digital currency will “substantially subvert” the current financial and currency markets, digital currencies will certainly compete with many countries in the world, requiring central banks to issue digital currency to counter digital tokens, and others. Radical ideas, such as considering putting digital currency in a currency basket, issue "learning coins" with the World Bank. The author also uses the term “subversion” in this article to show that they believe that the future financial world will be very different from the current one, and that blockchain technology will completely change the current financial and currency markets.

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Article structure:

This article is divided into four parts:

1. New digital currency;

2. Digital currency will be applied quickly;

3. The impact of stable currency on commercial banks;

4. Central bank and synthetic digital currency.

Important thoughts :

Some impressive concepts are mentioned in the article:

1. Stable competition between stable coins and commercial banks;

2. The model of cooperation between the stable currency and the central bank (this will deepen the competition between the stable currency project party and the bank, and is beneficial to the stable currency project);

3. Future commercial banks need to make adjustments.

This paper provides a good analytical framework for the issues of concern, and some of the new ideas are very shocking. Anyone interested in digital currency, whether or not they agree with the text, can refer to it.

Stabilization Coins and Commercial Bank Competition and Cooperation : The article mentions that stable coins can provide services for many commercial banks. As stable coins have great competitiveness in the market, they will seriously crack down on commercial banks. After the author analyzes, he also made some suggestions, such as some stable coins do not pay interest (Libra is an example), the author believes that traditional banks can now pay high interest to maintain the advantage. However, the stable currency can also cooperate with the bank, for example, the project party can deposit the legal currency in the bank.

There are three possible scenarios for commercial banks in the future : the first is coexistence, the stable currency and the bank coexist under one economic entity; the second is complementarity, which is to say that it is better, in fact, it is “replacement”. In this scenario, the stable currency replaces some functions of the economic entity, while the commercial bank withdraws from these functions, which is equal to the division of the North and the South; the third is to replace, but in fact the “bank is forced to change” to become the private equity fund responsible for the loan business, The stable currency project has other functions. Commercial banks can be divided into two types: credit banks (partial reserve banks) and payment banks (narrow banks), and the current business of the bank will turn to the project side of the stable currency. This kind of change is very strong, and if it is developed in this way, traditional commercial banks will be greatly affected.

Stabilizing the project side and central bank cooperation and competition : The author proposed that the central bank and the stable currency project party cooperate to complete the digital legal currency. This breaks the tradition that is dominated by the central bank and cooperates with commercial banks to realize the tradition of issuing, monetary policy, supervision and clearing of legal currency. The central bank and technology companies cooperate to realize digital legal currency. But this will also increase the impact on commercial banks, because one of the original advantages of commercial banks is the support of the central bank. Once the stable currency also has central bank support, the advantages of commercial banks are once again reduced. However, the stable currency may also suppress the legal currency, especially to suppress the weak legal currency, forming a stable currency and the central bank's competition.

In the past two months, the author and some stable currency project parties have held discussions. Based on these discussions and our analysis, we have added some comments in the translation, and there are relevant interpretations in the text, which are comprehensively interpreted after the text. These comments are placed in the table to distinguish them from the text and I hope to help the reader.

The authors refer to Tobias Adrian and Tommaso Mancini-Griffoli. The author refers to us, the translator and the reviewer.

In addition, the authors of this article are all discussed in terms of “electronic money”, but the “electronic money” here is different from the commonly used electronic money in China (such as Alipay currency), including electronic money and digital currency (such as Facebook stable currency). The two technologies of electronic money and digital currency are actually very different. Obviously, the author's discussion is mainly focused on digital currency. The similarities and differences between Chinese electronic money and digital currency are listed in the appendix.

Alipay, Libra, M-Pesa, Paxos, Stabilized Coins, Swish, WeChat Pay, Zelle, all of these and other digital currencies, have increased usage in payments and cannot be ignored in policy decisions. But how should we view these new digital forms of currency? Are they real money, or is it important that they are money? Can their wide application really benefit? If so, how do they affect the banking industry that creates and manages money? What is the reaction of the central bank? Is there an opportunity to benefit from these rapid changes, or is it only necessary to regulate it?

The above question is actually a matter of knowing. If these stable coins (such as Libra) are not money, do central banks still need to worry? They can go home to sell sweet potatoes, and don't worry. If it is not money, the People’s Bank of China does not need to talk about the importance of this matter recently. The Fed does not need to discuss these issues.

This is very different from their attitude towards Bitcoin. When talking about bitcoin, the Fed’s answer is that this is not money, and its assets are still very small, and will not have a real impact on the world financial market, nor will it affect the dollar. .

But for the stable currency, central banks immediately stated that they would supervise these stable currencies and began to discuss their impact on commercial banks. Now that Libra has not been released, the scale is still much smaller than Bitcoin, but everyone is nervous. Why are you so nervous? Because this time the stable currency is money.

This article took the first step in solving these problems. The complexity of the problem limits the scope of the analysis and the analysis in this paper does not involve the specification domain. The goal of this paper is to provide a new digital currency classification framework that identifies its risks, considers its impact, and provides some policy ideas for the central bank. This article focuses on the new currency and banking industry, which studies financial stability and consumer protection. Other risks and impacts – such as financial integrity, monetary policy, capital flows, and antitrust – are mentioned in the text, but are not the core of this article.

In short, this article argues that the two most common forms of money today will face severe competition and may even be surpassed. Cash and bank deposits will compete with e-money, which is the monetary value stored in electronic form, valued and anchored in units of value such as euros, dollars, renminbi or a basket of currencies. Stabilizing coins in electronic money are becoming more and more popular. E-money may be more convenient as a means of payment, but the stability of its value is problematic. After all, economically, it is similar to a private equity fund, guaranteed to be redeemed at face value. If you invest 10 euros, you must be able to return 10 euros. The issuer must have sufficient credit to provide security.

It is mentioned here that these stable coins have a significant impact on cash and deposits in banks. The author also used the term "competition" commonly used by the author. This is a new type of currency competition. The author has been raising a concept from June 2019, and it is also a problem that many central banks, commercial banks, and e-commerce companies are worried about today [5]. The reader is again reminded that China refers to the currency in the bank as electronic money, while the cryptocurrency is a digital currency with different terms.

Banks will feel the pressure from e-money, but should be able to respond by offering more attractive services or similar products. Still, policymakers should still be prepared for some kind of disruption in the banking industry. Today, new entrants in the payments space may one day become banks and provide targeted credit based on the information they receive. Therefore, the bank's business model is unlikely to disappear.

The authors say that digital currency affects cash and bank electronic money. In addition, the author also used the term "subversion", a term that many bank parents have been unacceptable for a long time, but this term has been mentioned in many Western academic papers in 2015. “New entrants in the payment field may one day become a bank,” which is what I have been talking about. “And provide targeted credit based on the information they receive. Therefore, the bank’s business model is unlikely to disappear”. The question is who will be the bank in the future? The traditional bank, the stable currency project side, or the integration of the two?

The central bank will play an important role in the future development. The rules they set will largely restrict the use of digital currency and put pressure on commercial banks. One solution is to allow the newly screened new e-money provider to obtain central bank reserves, but the conditions are harsh. Doing so raises the risk, but it also has many benefits. Moreover, central banks in some countries can work with electronic money providers to effectively provide "central bank digital currency (CBDC)", a cash version of digital currency. We call this arrangement "synthetic CBDC." When delineating blueprints, we need to focus on the issues that need to be addressed before a specific policy is developed.

“The rules they set will largely restrict the use of digital currency and put pressure on commercial banks.” This shows that the central bank is only delaying the massive use of stable currency, and at the same time giving commercial banks time to find ways to save themselves. Survive in a new environment. The author actually believes that commercial banks will have great advantages in the future, but their strategies need to be greatly adjusted. The era of relying solely on the difference between traditional bank deposits and loans is ending.

“One solution is to allow the newly-screened e-money suppliers to obtain central bank reserves, but the conditions are harsh.” This means that the author believes that the stable currency will cooperate with the central bank and that there is a reserve fund in the central bank, but the conditions are better than those of the bank. The reserve conditions are harsh.

This is equivalent to recognizing that the project party that stabilizes the currency is a new type of bank.

“Some countries’ central banks can work with e-money providers to effectively provide 'central bank digital currency (CBDC)', a cash version of digital currency, which indicates that the author supports stable currency as a factual digital currency. This is also the idea of ​​IBM in August 2018, and the idea that the author put forward in August 2018. We propose the three principles of digital legal currency. The first is to stabilize the currency into digital legal currency: many countries or multinational corporations will have strategic layouts, such as deploying digital legal currency in important areas, occupying highland in new currency competition, and digital legal currency. It is possible that the alliance will enter a new currency competition; the stable currency without state support may close [11].

This article is divided into four parts. The first part reviews different digital currency models and provides a simple conceptual framework for comparison. The second part believes that the popularity of some new models may be very rapid. Although digital currency is not the best value store, due to network effects and network integration, their convenience as a means of payment may be unparalleled. In short, although the first part provides some changed terms, this section concludes that certain changes are acceptable. The third section discusses the potential impact of the use of digital currency on the banking industry. It considers three situations: the first, the digital currency is a supplement to the bank. Second, digital currency is a substitute, but banks are highly competitive in securing deposits. Third, banks have turned into private equity funds after a large amount of deposits have flowed out. This article also provides a brief description of other risks. The fourth part, the last part, envisions how the central bank will respond. This section discusses the potential benefits of allowing some digital money providers to hold central bank reserves and believes that this can effectively promote CBDC to the public.

If the reader does not read it carefully, it is difficult to find that the three scenarios described by the author here are shocking.

1. Coexistence: This is the easiest scenario and it is already happening.

2. Complementary: "Digital currency as a substitute"! It is said that the stable currency will replace the commercial bank's services. Although the author uses the term “complementary” in the future, this is actually not complementary to the bank. When some of the bank's business is taken away by the stable currency project, the bank will feel the impact.

3. Replace: "Banks turn into private equity funds after a large amount of deposits flow out." In this scenario, commercial banks are heavily slimmed down, and the financial market has changed to something beyond recognition.

New digital currency form

“How much is coffee?” “1 Euro, 1 USD, 10 USD… Regardless of the price, we may use local banknotes and tokens to pay. Or we may swipe or wave the phone and then pay to leave. People from the last century It would be like magic. In fact, it is almost like this. These invisible steps are extremely complicated, including information exchange, legal and regulatory structures, and back-end fund settlement. However, we are not aware of this.

If someone walks into the same coffee shop, pays with a stable currency or social application, or with digital tokens supported by other safe and liquid assets such as gold or US Treasury bonds, do we feel that we are from another A century of tourists?

In order to understand these new payment technologies, it is useful to introduce common vocabularies and conceptual frameworks. We will introduce in the next section. In this context, the next section briefly outlines existing and future possible payment methods.

Taxonomy – "Currency Tree "

Through a simple conceptual framework, we compare and contrast different payment methods. This highlights the four attributes of the payment method: type, value, guarantee, and technology [i]. These issues are discussed below and are illustrated in Figure 1.

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Figure 1: Currency Tree Source: IMF

Because of its tree-like structure, we call it the “currency tree”, borrowing the original usage of plant analogies in monetary economics by Bech and Garratt (2017) (their “currency flower” theory and our framework are complementary). Indeed, some flowers are on the tree!)

The above picture is excerpted from the blog, correcting the error in the original text.

The first attribute used to define the payment method is the type—either a claim or a physical object. The cash mentioned above for paying for coffee is a kind of payment based on kind. The transaction is completed as long as both parties believe that the object is valid. There is no need to exchange any information. Another option is to transfer the valued claims. This is the case of using a debit card to buy coffee. Swapping means giving instructions to transfer bank asset claims from one person to another.

Claim-based payments simplify transactions but require complex infrastructure. During the Renaissance, with the advent of the credit system, merchants can easily carry a letter of credit issued by a bank to travel abroad, and purchase goods without carrying heavy gold coins, which is easy to attract danger. Today, most payment methods are based on claims. These require confirmation that the payer is the appropriate debtor, that there is sufficient funds to repay its debt, and that the transfer requires all relevant entities to register.

The second attribute is value. When it comes to creditor's rights, the problem is to redeem the debt in money, whether the value is fixed or variable. Fixed value debt is redeemed at a pre-set face value. At the time of payment, this feature makes it easy for both parties to the transaction to agree on the size of the debt calculated by the transaction in a certain unit of measure. For example, a claim on a bank in the form of a deposit, for example, 10 euros can be converted into a par value of 10 euros. These claims are equivalent to debt instruments (which may or may not be paid) and can be redeemed at face value. Other types of bonds can be converted into currency in variable value, that is, assets denominated in market value to redeem claims. Therefore, such claims are similar to stock-like instruments, with both upside and downside risks. These similarities are for illustrative purposes, but do not necessarily mean that the classification of such debt or stocks will be recognized in court. For physical payment-based methods, the important issue is their denomination, calculated in domestic units or their own units. The concept of redemption does not apply to physical payment methods.

The third attribute of the payment method applies only to fixed value claims. The question now is whether such redemption guarantees are guaranteed by the government or simply rely on the issuer's prudent commercial practices and legal structure. In the latter case, we call it "private." This distinction is important because it can affect a user's trust in different forms of currency and how the regulators respond.

The last attribute is technology: Is the settlement centralized or decentralized? Centralized technology transactions are conducted through a central proprietary server; decentralized transactions use distributed ledger technology (DLT) or blockchain technology to settle between several servers. These can be restricted to a small number of trusted ("licensed" networks) or open to the public ("unlicensed"). Decentralized financial instruments can more easily cross national borders.

There is a consensus mechanism for digital currencies so that there is a consensus economy.

There is a consensus mechanism for Facebook's stable currency. After consensus, there is almost no reconciliation. There is a consensus mechanism that has a consensus economy. The consensus economy is what you and I agree to before you can put it on the ledger. It has the following characteristics:

1. I and you are at the same time to reach a consensus, not to say that you agreed yesterday, I agreed today, we agreed at the same time.

2. I know your data (and it is consistent with my data), and I know that you can't modify the data that exists there.

3. You know my data (and it is consistent with your data), you know that I can't modify the data that exists here.

4. Any unit joining this consensus mechanism also got the same result. This is the "consensus economy." Although it is a distributed system, each person has his or her own ledger, but the ledger data is consistent, and the ledger cannot be changed, and no reconciliation is required in the future. In this environment, the transaction speed is fast, the two parties do not know each other, have not seen each other, and have confidence that the transaction can be successfully completed [2, 3].

Five payment methods

The above features can help us distinguish between five different payment methods: one is the currency of the central bank; the second is the cryptocurrency; the third is B-Money, currently issued by the bank; the fourth is E-Money (electronic money), the new private sector The provided electronic money; the fifth is I-Money, the abbreviation of investment currency, issued by private investment funds.

The most well-known is the central bank currency in the form of cash – the banknotes and tokens that we have been squatting in our wallets for centuries. As mentioned earlier, cash is a physical payment method. It is denominated in local pricing units, issued by the central bank, and settled in a decentralized manner between the parties to the transaction, apparently in physical form. Its digital version is currently under discussion and is known as the "Central Bank Digital Currency" or CBDC for short. Unlike cash, CBDC is not anonymous, although it protects user data from third-party theft. Its verification technology can be centralized or decentralized, and it can pay interest. Mancini-Griffoli and others (2018) reviewed the design and meaning of CBDC in detail.

Another kind of payment based on physical objects is cryptocurrency. It is denominated in its own unit of account, created (or “made”) by a non-banking institution, and issued on the blockchain, usually of a type that does not require permission.

Another difference is also important; that is, when creating a cryptocurrency, the algorithm attempts to stabilize its currency relative to legal tender by issuing more currency when the price is high, or by allowing the currency to exit the circulation when the price is low. We refer to these systems as “managed tokens” (some people call them “algorithms to ensure stable tokens”). Although this model has been proposed by startups such as Basis, it has not been extensively tested. We refer to other cryptocurrencies as “open tokens”, including Bitcoin and Ethereum.

The most extensive debt-based currency is B-Money, which typically includes commercial bank deposits. In many countries, most payments require the transfer of funds from one bank account to another, usually from one bank to another, or across borders. As we said earlier, we associate B-Money with a debt-like instrument that is denominated in bookkeeping units and redeemable at face value. The most common transfers are through centralized techniques such as debit cards, wire transfers and checks.

The obvious feature of B-Money is that its redemption guarantee is supported by the government. Of course, a cautious business model can help meet potential redemption requests. But public policy has also played a role. Banks are regulated and closely monitored. Where regulation is effective, banks cannot take on too much risk and must maintain sufficient liquidity. In addition, if a bank exhausts its liquid assets to meet the withdrawal requirements, the central bank can provide liquidity through overnight or emergency loans in the face of systemic pressure. Finally, deposits can be insured in many countries but cannot exceed a certain limit. As long as this insurance is reliable, consumers will not worry about the safety of their deposits, and enterprises should be effectively regulated to ensure safety.

In the field of payments, E-Money is becoming one of the most significant new models. One of the most important innovations compared to cryptocurrencies is the issuance of claims that can be exchanged at face value on demand. Borrowing our previous analogy, E-Money is a class-like tool. E-Money is like B-Money, except that its redemption guarantee is not supported by the government. E-Money's redemption guarantee relies solely on prudent management and legal protection for redemption of assets. Transfers can be concentrated, like many payment method solutions popular in Asia and Africa, including China's Alipay and WeChat payments, India's Paytm, and East Africa's M-Pesa (also known as "the tool for storing value"). Please note that banks can also issue E-Money to serve customers who cannot benefit from deposit insurance. Blockchain-based E-Money forms, such as Gemini, Paxos, TrueUSD, and USD Coin, are also emerging, often referred to as "legal generations." Fiat tokens. The term "stablecoin" is also widely used, but it often defines confusion and is influenced by the "managed tokens" discussed earlier.

The blockchain-based digital currency is different from electronic money such as Alipay. The author confuses these two methods in the original text. In fact, the two are different, including the entire system architecture, supervision methods, payment methods, and so on. On the blog, the author changed this error.

Finally, I-Money is a potential new payment method, but it may or may not succeed. In addition to an important feature that provides variable value currency redemption, I-Money is equivalent to E-Money. Therefore, I-Money is a tool similar to stocks. I-Money refers to the claims of assets. Typical products have claims on assets such as gold or portfolio stocks. Examples of gold-backed I-Money are Digital Swiss Gold (DSG) and Novem.

Private equity funds, such as money market funds and exchange-traded funds, which provide relatively safe and liquid investments, have been growing rapidly, but have yet to offer a wide range of payment instruments. Especially in the United States, the market-based financial system is larger than the traditional banking system. Private equity funds have allowed customers to complete payments, but these are mainly dependent on mortgages (credit card payments) or legal tenders that are quickly redeemed at low cost for subsequent payments.

However, the shares of private equity funds can now be converted into I-Money. They can be tokenized, which means they can be represented by any number of tokens on the digital ledger. Tokens are traded directly at low cost, forming a payment denominated in the underlying portfolio, which is denominated in any currency of the portfolio. For example, if B owes A10 euros, B can transfer money market funds worth 10 euros to A. As long as the market is liquid, its market value is known at all times. And if the fund contains very safe assets, A may agree to hold the funds and expect to use them – the exchange rate is roughly the same as the local currency to pay for future goods or services. In other words, I-Money is stable enough to be a wide payment method. However, because the transfer of I-Money requires the transfer of securities claims, it may be subject to regulatory restrictions, such as cross-border trading restrictions.

A specific example of I-Money supported by an asset portfolio is Libra, which was just announced by members of Facebook and the Libra Association. Details on Libra have yet to be announced on June 18, 2019. However, it seems that Libra seems to have a portfolio of bank deposits and short-term government bonds (called Libra Reserve) as a backing. Libra's tokens can be exchanged into fiat currency at any time in exchange for their share of the current value of the underlying portfolio without any price guarantee. This allows Libra to be distinguished from electronic money. Libra's substantial share transfer (although there may be no legal requirements) will include payment functions, as in the above example.

Table 1 is a summary of our assessment of the different monetary forms from the four elements of the conceptual framework.

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Table 1: Overview of digital currency forms and their attributes

Readers will be surprised to find that the author puts blockchains in all digital currency systems, which means that blockchain technology can be used in a variety of systems such as commercial banks and central banks.

The application of electronic money will speed up

If a means of payment (debt or in-kind) has a stable value in the pricing unit most relevant to the user, this means is more likely to be widely adopted. For example, the parties will agree to hold electronic money at least for the time required to complete the transaction. In addition, they will be more likely to agree on their value relative to the price of the contract transaction, which is usually expressed in common pricing units. Therefore, stabilizing the currency is a necessary condition that can be widely used as a means of payment. The question now is how to stabilize the currency? Can electronic money be as stable as some currencies that exist in a competitive form? If not, can it make up for the disadvantages of instability as a convenient means of payment and still be widely adopted? Please note that we are concerned about e-money, but many comments have been extended to I-Money, when I-Money is also on the market.

How stable is electronic money?

The difference in currency stability between different forms of currency is actually very significant. Users can compare these currencies based on revenue and risk. Unless otherwise stated, we use nominal value to measure the value of the currency relative to the domestic currency. This helps us to focus only on the design of the currency itself, not on the macroeconomic background.

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Figure 2: Building a stylized electronic currency

The cryptocurrency risk is greater now, but it may provide a higher return (capital gain). This applies in particular to public tokens whose value is denominated in French currency and which may fluctuate significantly. The standard deviation of the daily price movements of Bitcoin is about 10 times higher than that of the G7 currency, and even slightly higher than the exchange rate fluctuation of Venezuelan Bolivar against the US dollar.

Managed tokens are designed to exhibit low price volatility. However, the use of simple systems to stabilize the value of these tokens is not always reliable. The issuer purchases tokens when the value of other assets is low and sells the tokens when the value is high. Although public tokens are similar to floating exchange rates, managed tokens are similar to managing exchange rates. Stocks that perform well should be consistent with the exchange rate of fiat currencies. However, we are very clear about their ultimate fate. When a country's economic fundamentals deteriorate, the central bank must purchase its own currency in the market and may use up the foreign exchange reserves it needs. Providers of managed tokens may also run out of funds to support their token prices, especially since their own foundations are not solid – applications determine value and value encourages application. However, we must always remain open in terms of technological innovation.

On the other hand, the central bank's currency cash or CBDC is very stable as a value store (nominal value). The central bank's funds cannot be exchanged for anything (such as gold) at the central bank because it is the unit of the account. Of course, technically, government bonds balance the central bank’s cash liabilities to the public in the modern statutory system. As a result, the government's solvency supports the value of money – but in fact, unfortunately, there are many examples of poor fiscal conditions, due to foreign exchange conflicts or monetary financing of debt, the country's currency has disappeared due to hyperinflation.

Then there are payments in the form of claims, which may be more risky in design. Stock-like instruments like I-Money directly inherit the risks of their underlying assets. I-Money, backed by Treasury bills, will be less risky than I-Money supported by stock market equities. Liquidity and secure asset support also contributed to B-Money, but as discussed earlier, in particular government endorsements provide security support as a value reserve; bank deposits and central bank liquidity.

So how about electronic money? The stability of value comes from the guarantee of redemption at face value. However, since e-money does not endorse the government as B-Money, it is still unknown whether it can always redeem the redemption request. It must be formed through a privately strong balance sheet and a specific legal structure. Otherwise, electronic money may face operational risks. In essence, e-money has many of the characteristics of a fixed net asset value (CNAV) fund and promises that customers will at least recover their funds. But after the bankruptcy of Lehman Brothers, we learned that when money market funds “fall below the net value”, they will encounter problems. In other words, investors believe that these foundations return a dollar for every dollar of investment, but when the market collapses, the value of the fund's risk assets plummets, and their returns will decrease.

In general, in addition to operational risks (including cyber risks), electronic money faces four risks, which have different degrees of existence for all payment methods. Liquidity, default, market and foreign exchange risk all undermine the redemption of face value.

• Liquidity risk means there may be a lag before redemption requests can be met. Liquidity risk depends on the market liquidity of the assets held by the electronic money issuer.

• The risk of default depends on the default of the electronic money issuer and will put the client's funds at risk. A default may occur due to loss of other business activities or failure to meet debt obligations.

• Market risk comes from assets held by electronic money providers. Large amounts of losses may put redemption at risk relative to the capital of an electronic money provider.


• Foreign exchange risk exists if the claims held in electronic money are denominated in a currency other than the domestic account. This is the case, for example, in Libra, which is denominated in a basket of currencies.

One of the characteristics of the blockchain is that the blockchain project cannot be breached and cannot change the data by itself. Unlike traditional banks, bank staff can change the bank account data, which is impossible for the blockchain, so the project party defaults. The risk is greatly reduced. This is the second element of new currency competition.

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Figure 3: Electronic money protects client funds in a trust

To minimize these risks and thereby maximize their monetary value, e-money issuers have multiple options. Extending the early exchange rate analogy is equivalent to pushing e-money to a level similar to the currency board and maintaining transparency.

• They can invest in safe and liquid assets, such as short-term government bonds. Of course, the safest and most liquid assets are the reserves of the central bank. If permitted, they can be held directly or indirectly through a professional bank, such as a payment bank in the United States or India or a specialized agency that holds a banking license.

• In order to be less than or equal to the value obtained by the client, they must cover the creation of electronic money. Over-issuance will weaken the ability to meet redemption requirements.

The issuer of a stable currency is not a sovereign state, nor a central bank, nor a bank. It cannot decide whether to issue money according to its own will or loan. Its issuance is limited to the corresponding legal currency. If there is no legal currency of the same value, the stable currency cannot be issued. This can be solved with a smart contract. For example, if a hosted financial institution receives $5,000 in legal currency, it can issue $5,000 in stable currency. Each stable currency can be recorded and tracked by regulatory agencies.

This model is the same as the medical blockchain mentioned by the author in early 2019. All participants, whether pharmacies, pharmaceutical companies, hospitals or logistics, can see the entire process of medicine, such a blockchain consistency model and The traditional blockchain consistency model is different, but it can be done. This tracking model is not a large reservoir model (the funds lose their identity when they enter the fund pool), but a proprietary box model (each dedicated box can only store one object, each object can only exist in a dedicated box, and the identity must be verified when storing). Under such strong supervision, the stable currency can be truly stable. This exclusive box model is the X-ray model proposed by the author.

The author states below: “To protect customers and avoid the risk of financial stability, e-currency issuers must quickly strengthen supervision when necessary.” It is not correct. In the process of issuing stable coins, it is not necessary to strengthen supervision, in fact every Every moment is under strong supervision.

In the blockchain system, each message, whether transaction or communication, must have a signature and encryption mechanism. The supervisory unit has nodes in each blockchain. This is the Panda model [14]. Under this model, Everything can be regulated, and because the Panda model has unlimited scalability, any activity can be tracked and used for anti-money laundering. This is the third element of the new currency competition.

• Assets held may not be retained, ie as part of the loan collateral – ideally separated from the electronic money issuer's balance sheet to protect client funds when the client's funds go bankrupt.

• Adequate capital will help offset losses, thus ensuring that client funds are fully redeemed. Although this is not a regulatory document, it is clear that to protect customers and avoid the risk of financial stability, electronic money issuers must quickly tighten supervision when necessary.

The author's above view is correct and direct, but he has not considered the technical problem. If the bank uses pseudo-chain or unqualified encryption algorithm, the risk is very large. For example, a super-book has a central node, and the central node can control all communication information. If the system is a digital legal currency, the financial system of the entire country will be controlled by external forces. This is what the author has been saying for the past three years. This is a huge risk and must be avoided.

“Rapidly tightening supervision when necessary” is not a blockchain regulatory principle. In the blockchain, regulation is long-lasting and consistent, and there is no “enhanced” or “enhanced” regulation. When using smart contract supervision, the smart contract will be automatically started at runtime, as long as the conditions are met, it will start automatically, not when it is “when necessary”, and the process and means are the same each time it is started, not “enhanced” ".

Electronic money issuers are taking some of the above measures. By far the most popular asset for e-money suppliers is bank deposits. Bonds have the ability to redeem on-demand at face value, but banks may default. Since electronic money issuers are wholesale creditors, their funds are usually not protected by deposit insurance. In order to protect e-money suppliers and protect their customers from bank defaults, other systems must be developed, which may be similar to private investment protection programs.

In order to minimize the risk of default by electronic money providers, client funds may be transferred to the trust company (as shown in Figure 3). The advantage of a trust fund is to isolate client funds from the balance sheet of the electronic money provider. However, the legal protection of trusts is not invulnerable in all jurisdictions. Therefore, it is not always possible to protect client funds from infringement in court. Legal proceedings may delay the redistribution of funds, if any. Depending on the country in which it is located, other legal structures may be more effective in protecting client funds.

E-currency will be rapidly promoted – the convenience of payment methods will promote the rapid spread of electronic money

So, if electronic money can't be used as a value reserve tool like B-Money or central bank currency, can it be successfully applied? The answer is yes, because it is relatively attractive as a means of payment. Obviously, this will depend on the situation of each country and the advanced technology that banks use to improve the convenience of B-Money. We will return to this when discussing the impact of e-money development on banks. But even where B-Money currency is freely convertible, e-money can bring additional benefits, as described below.

Here the author proposes a concept that is more important to the customer for "convenience." Because the payment function of digital currency has advantages over traditional banks, even if digital currency is lost to commercial banks in value storage, people still choose to use digital currency. In the past two months, many companies have begun to accept bitcoin as a payment currency is an important information. An important feature of digital currency is the fast transaction speed, which is the first element of new currency competition. We propose that the four elements of new currency competition are speed, security, regulation, and monetary policy [10].

For example, in China and Kenya, this issue is a false proposition; electronic money is already dominant. 90% of Kenyans over the age of 14 use M-Pesa to pay. In China, the value of electronic money transactions, such as WeChat payment and Alipay, exceeds the sum of Visa and MasterCard's global value.

Elsewhere, the use of e-money may also grow rapidly for at least six reasons:

• Convenience: E-money is easier to integrate into our digital life than B-Money currency or central bank currency. It is usually released by companies that integrate social media, which fundamentally understand user-centric design.

• Everywhere: Cross-border electronic money transfers will be faster and cheaper than cash and bank deposits. However, there may be other obstacles, such as requiring foreign market makers to prepare for local currency redemption. In order to limit the scope of this paper, we have not further explored the rich and important topic of using digital currency for cross-border payment.

• Complementarity: If assets like stocks and bonds are transferred to the blockchain, blockchain-based e-money forms will allow for seamless payment of automated transactions (assuming blockchains are designed to be interoperable, so-called Payment delivery, which is expected to greatly improve efficiency by avoiding manual background links. More generally, the functionality of e-money is more likely to be extended by an active developer community that may utilize open source code rather than supporting B-Money's patented technology. For example, developers can let users decide which items e-money can buy – a useful feature of remittances or charitable donations.

• Transaction costs: Electronic money transfers have almost no cost and are instantaneous, so they are generally more attractive than credit card payments or interbank transfers, especially cross-border transfers. Therefore, people may even agree to sell cars in the form of electronic money, as funds will immediately appear on their accounts without any settlement delays and corresponding risks.

• Trust: In some countries where e-currency is booming, users trust trust in telecommunications and social media companies more than trust in banks

• Network effects: If merchants and peers also use e-money, it will be more valuable to potential users. As new users join, the value of all participants—both existing and potential—is growing.

The first five reasons may be the spark of igniting the fire of electronic money; the sixth is the east wind that can help push the fire. The power of network effects to promote new service applications should not be underestimated. Why do we need to switch from email to SMS in such a short period of time, from SMS to social messaging platform like WhatsApp? WhatsApp is one-third faster than Gmail. . Today, WhatsApp's user base has surpassed Gmail, far exceeding the threshold of 1.5 billion users. The dominant position of WhatsApp is even more pronounced than the standard SMS solution. However, at the beginning, everyone tends to communicate in writing. Why is a form dominant? It's simpler in social information applications, more compatible with photos and other features, more friendly, cheaper… but, importantly, it's available Businesses, between phones, and between countries are interoperable, and all friends use it. We can even invite them to group chat. The network effect magnifies the small objective differences in function. WhatsApp is a good example. Its communication does not require any marketing. It only requires word of mouth and only requires network effects.

Economists have to be careful! Paying is more than just paying off debts. They are a kind of communication, a kind of interaction between people – a basic social experience. If two people use the same payment method, then it is very likely that a third person will join. Yes, payments can be fun, at least e-money and I-Money are more interesting than banknotes. Emoji, messages, photos, or customer reviews can't be sent with a debit card!

This is where the world's large high-tech companies and financial technology start-ups enter. These companies are experts in providing convenient, attractive, and low-cost trusted services to a wide range of customers. User-centric design is second nature. They understand people's behavior on social media and the web. They can seamlessly integrate payments. They have done a good job on social media and can integrate funds into it. Whether it is electronic money or I-Money.

The author acknowledges here that technology changes finance, not technology services finance. In 2018, some of the major digital currency projects in the United States were initiated by technology companies or with technology companies, rather than with traditional banks. For example, IBM started the Stabilization Coin project in 2018. Bakkt started in 2018 and worked with Microsoft instead of working with traditional banks. It can be seen that technology companies are more important than traditional banks in the digital economy. But this is the situation in the United States, and we will wait and see in China.

The impact of electronic money on the banking industry

If e-money is popular because of its appeal as a payment method and supported by large technology companies with large existing user bases (or flexible fintech start-ups), that would mean B-Money and its backs. The demise of the bank? Will the deposits of retail banks flow to electronic money providers in large quantities? Not so fast. In fact, banks are unlikely to disappear. This section considers three possible scenarios. However, the other risks of rapidly adopting electronic money (to complete the transaction) are listed first, although the scope of this article is not specified.

“Does the deposits of retail banks flow to electronic money providers in a large amount?” The author began to doubt the future of commercial banks, although he immediately thought that commercial banks would survive. The following authors discuss some of the risks of commercial banks. These risks are like "ten ambush". If commercial banks do not succeed in transformation, they may encounter very big obstacles. Although commercial banks are unlikely to disappear, the widespread use of stable currencies is bound to have a serious impact on commercial banks.

The risk of rapid application of electronic money

In addition to the risk of disintermediation (translator: refers to skipping all intermediaries while conducting transactions and directly between the supply and demand sides), other risks may exist and require in-depth understanding and careful measurement. Regulatory frameworks are often used to address these risks, but they may need to be revised and strengthened. For example, financial services provided by large technology companies may be considered to be globally important and regulated. A guiding principle is that regulation should be commensurate with the type of service provided and the corresponding risks. Financial technology companies that provide banking services will be regulated like banks, and companies that offer similar investment funds or brokerage services will also be regulated.

Previously, we talked about the risks to consumer safety and financial stability in the operation of electronic money with CNAV funds. In addition, if important data such as cross-border capital flows are lost, it may pose risks to privacy, monetary policy transmission, coinage taxes after falling currency demand, market competability, financial integrity, and overall policy development.

“If important data such as cross-border capital flows are lost, this risk is difficult to exist when using real blockchains. But if a pseudo-chain is used, the probability of this risk is greatly increased. Other risks include “privacy, monetary policy transmission, coinage tax after falling currency demand, market competability, financial integrity, and overall policy development” will also be reduced.

Market-competitive risks—the emergence of large monopolies that prevent new companies from joining and extracting rent—may be difficult to deal with. Since the powerful network effect stimulates the use of electronic money, electronic money suppliers naturally form a monopoly (although it will eventually lead to the creation of monopoly power and help the forerunner).

There is also a huge monopoly on the large fixed costs needed to build a large-scale operation, as well as the index-type dividends that can be obtained from the data. Indeed, it is the large dataset that infers user behavior based on a series of near-random examples of rich features and information obtained by peers in the transaction process. In addition, companies can use the same data set to extend their monopoly to related services.

For example, if new forms of money are widely used, countries with weak systems and high inflation rates will have the risk of monetary policy transmission because of currency substitution. With the increase in the use of foreign electronic money, domestic pricing units may be converted to electronic currency pricing units. For example, operators and households may be happy to hold electronic dollars instead of transposing electronic dollars into their own currency. Over time, operators will price the goods in dollars. Therefore, the central bank will lose control of monetary policy.

“Market Competitive Risk”, the Libra currency listed by the author of Risk Facebook has: Facebook has a strong online customer base and is a pioneer. There is also a large amount of money and data is available.

“With the increase in the use of foreign electronic money, domestic pricing units may be converted to electronic currency pricing units. For example, operators and households may be happy to hold electronic dollars, instead of transposing electronic dollars into their national currency. Over time, Operators will use the US dollar to price commodities. Therefore, the central bank will lose control of monetary policy.” The authors point out that these stable currencies will compete with the legal currency, that is, the stable currency project side and the central bank compete.

This is the new type of currency competition that the author has been talking about. Stabilizing the currency will be the forerunner of the later legal currency to seize the market of other countries, so that the central bank of the weak country loses control of monetary policy. Moreover, the stable currency is the pioneer of the French currency, and it can reach the place where the legal currency cannot be reached. Similarly, the stable currency is also the moat of the legal currency, which can protect the legal currency.

This new type of currency competition is different from traditional currency competition, which is why many countries now oppose Libra coins [8].

The decentralization of technology poses new challenges in particular relative to financial integrity. Blockchain-based currency issuers and their partners are involved in customer registration and transaction verification and will continue to fulfill their obligations under AML/CFT. These include identifying customer identities, monitoring transactions, reporting suspicious transactions to competent authorities, and respecting the sanctions list requirements of the United Nations or certain countries. However, when transaction confirmation is decentralized, and the entities involved (such as encrypted digital currency exchanges, governance organizations, wallet suppliers, customer fund managers, and market makers) are numerous and scattered across companies, industries, and countries. At the time, fulfilling the AML / CFT obligations becomes difficult. In short, international cooperation will become even more important to avoid regulatory arbitrage and regulatory dilution.

“When transaction confirmation is decentralized, and the entities involved (such as encrypted digital currency exchanges, governance organizations, wallet suppliers, customer fund managers, and market makers) are numerous and dispersed across companies, industries, and countries. It is difficult to fulfill the AML/CFT obligations." The author mentioned here that "transactional decentralization" does not mean that SWIFT (centralized processing) will no longer centralize monopoly cross-border payments as before? The SWIFT era has slowly passed, and SWIFT has encountered more difficulties than commercial banks.

“It becomes difficult to fulfill AML/CFT obligations”, why? Because if you use a blockchain system, high quality chains will only interact with high quality chains. If a chain does not have AML /CFT for its customers, other chains can refuse to trade with them. Like a bank, there will be a rating, the chain will also have a rating, and the good chain will only interact with the good chain, so the rating can be automatically assessed using the Taishan sandbox. This is the principle of the blockchain Internet proposed by the author in 2017 [4].

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Figure 4: Stylized case of deposit substitution

Scene 1: Coexistence

Let us go back to the risk of disintermediation. The most likely and most likely scenario is that electronic money and B-Money coexist; competition will continue. First, banks have a favorable position. They have fixed users — even though the potential user base is much smaller than that of large technology companies — and a strong distribution network. They can cross-sell other financial services to customers, including overdraft restrictions by providing overdraft protection or credit lines.

"The most likely scenario is that electronic money and B-Money coexist; competition will continue." This is one of the new currency competitions. Digital currency and bank deposit currency competition are also the competition between stable currency project parties and commercial banks.

In addition, e-money suppliers may recycle their client funds to banks in the form of certificates of deposit or other forms of short-term funds (Figure 4). Obviously, from a bank perspective, the results are not ideal. First, they will replace low-cost, stable retail funds with expensive, wholesale funds that will be transferred. Second, they may be cut off from relationships with customers. Third, they may not be able to obtain valuable data about customer transactions. In addition, funds from e-money providers may be concentrated in several large banks (although they will eventually flow to other banks). As a result, smaller banks may feel greater financial pressure, or at least experience greater volatility in funding.

As the authors say, “electronic money providers may recycle their client funds to banks in the form of certificates of deposit or other forms of short-term funds.” Commercial banks will eventually win.

“They will replace low-cost and stable retail funds with expensive wholesale funds that will be transferred. Second, they may be cut off from customer relationships. Third, they may not be able to obtain valuable data about customer transactions.” But The cost of the bank is not small. “Small banks may feel greater financial pressure, or at least experience greater fluctuations in the size of the funds.” But if the stable currency matures, the stable currency may be transferred to other more stable stable currencies. . A similar phenomenon has occurred. Bitcoin is used to purchase other digital tokens as an example, and the digital token market has become a market system.

In any case, banks can respond in three ways: by offering higher interest rates, by improving services to retain deposits (including acquiring promising start-ups), or by looking for other sources of financing. Banks have room to increase interest on deposits. As banks profit from maturity conversions (holding assets longer than deposit liabilities), they may offer higher interest rates than electronic money providers, even more than conservative e-money providers (note that Libra has announced no Any interest will be paid to the user). E-currency providers must hold highly liquid assets and therefore offer interest rates that approximate the overnight currency market. Higher deposit rates can lead to higher operational efficiency, lower profits, and possibly slightly higher lending rates. Andolfatto (2018) believes that if banks proceed from market dominance, there is room for raising deposit rates without significant macroeconomic impacts. Drechsler, Savov and Schnabl (2018) pointed out that banks' market position is the main reason why they tend to pay low and stable interest rates for deposits in various countries. However, banks must bear different costs, such as deposit insurance premiums, regulatory costs, and network of outlets.

Banks can also compete with the quality of electronic money payment services, at least in the country, although not across borders. In fact, B-Money has become more and more convenient, thanks to payment innovations, such as no touch cards and mobile apps, which facilitate debit card payments, such as Venmo, Zelle or Apple in the US. Pay Cash. More fundamental changes can also be achieved through the “fast payment” system launched by the central bank in many countries (Eurozone TIPS-TARGET instant payment settlement), allowing banks to settle retail transactions in real time at almost negligible cost. Despite the development of the banking consortium, Swedish Swish is a relevant example. JPM Coin is a prominent example of a bank's counter-attack in the field of electronic money.

But can banks adapt quickly enough? Can they survive and breathe online, like large technology companies, to meet customer needs, user-centric design, and integration with social media? Are they agile enough to change business models? ? There is no doubt that some banks will be left behind. Other banks will continue to evolve, but they must act quickly. During the transition period, the central bank can help. If banks lose deposits quickly, they can temporarily increase their liquidity. But because their balance sheets are likely to grow, central banks will be reluctant to provide such assistance over the long term, and they may also fall into difficult lending decisions. In addition, banks can also obtain alternative funds by issuing long-term bonds or stocks.

"Some banks will be left behind. Other banks will continue to develop, but they must act quickly." The author warns that commercial banks must act now. Commercial banks must transform as fast as technology companies, or they will be left behind by the wheels of the times.

Scene 2: Complementarity

In the second case, the electronic money provider can be used as a supplement to commercial banks. This result is already evident in some low-income and emerging market economies. E-money can attract poor families and small businesses into the formal economy, familiarize them with new technologies, and encourage them to shift from payments to seeking credit, or more sophisticated savings tools, accounting services, and financial advice from commercial banks. For example, in Kenya, credit money has grown steadily for several years as electronic money has been rapidly applied since 2008.

But even in advanced economies, cooperation is conceivable. E-money suppliers can use their data to assess the creditworthiness of their customers and sell the results to banks or help banks to more effectively distribute credit. In addition, some of the larger e-currency providers are likely to eventually turn to banking, thanks to the data and scale they have accumulated, as well as the profits from the transition. Therefore, although some bank brands may disappear today, the banking model is unlikely to disappear.

Scenario 3: Replace (Takeover)

The third scenario is a fundamental shift in the banking model, where banks rely primarily on financing and the market increasingly acts as a credit intermediary. Although we think this is the least likely scenario, this possibility is worth considering in order to better prepare for the future and work to shape the future.

“Banks rely mainly on financing” – the author's view may be optimistic. Some of the functions of the future Stabilization Coin project now encountered are financing loans and will compete with commercial banks. If this is the case, the gap between the traditional bank and the stable currency project will be very small. Although the author still believes that in the short term, traditional banks still have a very large advantage over stable currency projects.

Commercial banks' ability to absorb deposits and loans can be split. Deposits we hold for payment purposes can be transferred to electronic money, which in turn can be held abroad in the form of government bonds or central bank currencies. The savings we hold can flow to mutual funds, hedge funds and capital markets for the distribution of credit. Or, these savings can remain in the bank, but the bank itself relies heavily on wholesale financing.

The result will be a completely different world, and a completely different banking model (Figure 5), which will greatly limit some of the reserve banking system. Some reserve banks absorb deposits, but only hold a small portion of their current assets, such as central bank reserves and government bonds; the rest are loans to households and businesses to promote economic growth.

“The result will be a completely different world, and a completely different banking model.” In this scenario, the future financial market and the current market are too different, and now commercial banks will become “private investment funds” in the future.

Will this be an ideal world? It depends on whether we consider part of the reserve banking model to be a historical contingency, an effective social solution, and whether technological innovation has changed their relative efficiency.

However, the field feels strong but lacks experience. How much liquidity will be locked in e-money and no longer be able to lend to the private sector? Currently, banks can provide us with liquidity buffers to cope with unexpected needs, such as looking at teeth or repairing cars, on the premise that We will not encounter unexpected events at the same time. Only these buffer funds will flow to electronic money, or will there be more funds? What about uninsured deposits? Can monetary policy offset this effect? Since mutual funds and hedge funds must be funded before loans are issued, will corporate and household credit be limited or become more costly? But, while banks can create loans and deposits on the books at the same time, do they not need to follow the same prudential rules in practice? Will special funds be developed to provide and hold non-standard and non-liquid loans, such as mortgages? Can these measures lock in funds for a long time, even in times of economic hardship? Which parts of these loans can be securitized and common? Can the monitoring functions provided by banks be replaced by funds, professional institutions involved, or just technologies such as artificial intelligence and big data analytics? So what about shadow banking? We generally believe that the shadow banking industry is risky and under-regulated. Will funds flow from shadow banks to e-money providers? Can this increase benefits? Whatever the answer to these questions, this shift can be difficult.

The authors believe that stable currencies may also compete with mutual funds and hedge funds, as well as other competitive relationships.

We urgently need to find answers to these questions. With these, we will be able to better assess the costs and risks associated with having more electronic money. Only then will we be able to formulate a policy for policy, support or oppose this new model, and it is now in front of us.

The role of the central bank and synthetic CBDC

What will we use as a means of payment and value storage in the future: is it electronic money, or potential I-Money issued by a large technology company, or a commercial bank deposit? Will electronic money eclipse some of the reserve banks we know today? Policymakers will not be able to continue to stand by. In particular, central banks in various countries may play a key role in shaping this future picture.

Today's world

So far, central banks have been favoring some of the reserve bank models. As mentioned earlier, central banks and other regulators will oversee banks and provide liquidity when necessary to help ensure the safety of our deposits.

Importantly, the central bank also settles interbank payments. Otherwise, interbank payment costs will be high, slow, and may be controversial. In fact, due to the lack of cash or gold exchange, banks have to provide credit to each other in order to settle transactions between themselves and their customers.

This is the role of the central bank. All banks have accounts at the central bank, and payments from one account to another are done by transferring fully secure funds (called central bank reserves) from one account to another. This not only eliminates the credit risk of interbank transactions, but also ensures that payments are interoperable across banks. Therefore, banks with larger network sizes do not have an advantage in allowing more customers to make payments. Inter-bank interoperability is critical for fair competition between banks.

Tomorrow's World: How will an electronic money provider have a central bank reserve?

If providing a level playing field also means providing settlement services to e-money providers, what if they can hold the central bank’s reserves like large banks, they meet certain standards and are regulated What will happen?

“Providing settlement services to e-money suppliers”, on behalf of the central bank, recognizes that stable currency project parties and commercial banks have almost equal status and need protection support.

Stabilizing coins actually require two settlement functions, one is the settlement of stable currency transactions, and the other is the settlement of legal currency (or other stable currency) held by the stable currency project party. The author here is the second one.

The settlement of stable currency transactions is now carried out by the relevant units of the stable currency. This is equivalent to transferring the traditional banking business that uses French currency as a trading medium from the bank to the stable currency-related unit, which is definitely not good for the bank. Another advantage of banks is that they have central bank support, but if the stable project side also has central bank support, commercial banks have almost no advantage in competitiveness.

This suggestion is not new. In fact, some central banks such as the Reserve Bank of India, the Hong Kong Monetary Authority and the Swiss National Bank have issued special-purpose licenses to allow non-bank financial technology companies. Hold the reserve balance, but subject to the approval process. The Bank of England is discussing such a prospect. At the same time, China has gone further. The People's Bank of China has asked Alipay and domestic WeChat payments, large domestic payment service providers, to hold client funds in the form of reserves in the central bank. Although there are some examples, there are still many details to be made about the proposal to allow e-money suppliers to use central bank reserves.

The ability to hold central bank reserves will enable e-money suppliers to overcome market and liquidity risks, set sail and turn these institutions into narrow banks. Narrowly defined banks (as opposed to some reserve banks) are financial institutions that use the central bank reserve to pay for all debt and not to lend to the private sector. They are just for the convenience of payment.


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Figure 5. Case of separating bank payment and credit functions

Some reserve banks will feel more pressure. First, as mentioned earlier, they will no longer benefit from the wholesale financing of electronic money providers. Still, banks should still be able to counterattack by offering more attractive services (as shown in scenario 1), and some e-money providers may insist on funding banks to seek higher returns (if this option is available) Words, or develop into a bank by itself (as shown in scenario 2).

Here, the author once again warned the commercial banks that “partial reserve banks will feel more pressure”, and then the author uses “counterattacks” to describe the bank’s reaction, and the competition is fierce.

Although banks should be able to hold their positions during normal times, there was a significant problem during the crisis. In times of crisis, will there be a large amount of funds flowing from bank deposits to electronic money? If the client funds supporting electronic money are held as wholesale funds of the bank, the turn of the funds may be reversed as customers seek protection from bank deposit insurance. , from electronic money to bank currency. However, if the client's funds are deposited in the central bank as a reserve, the risk of funds flowing from bank deposits to electronic money cannot be ignored. Of course, uninsured deposits may be transferred from banks to e-money providers.

“If the client's funds supporting e-money are held as wholesale funds of the bank, as the customer seeks protection from bank deposit insurance, the turn of this fund may be reversed and become from e-money to bank currency,” the author describes the business here. The complex relationship between the bank and the stable currency project. "But if the client's funds are deposited in the central bank as a reserve, the risk of funds flowing from bank deposits to electronic money cannot be ignored." If the central bank supports stable currencies, the advantages of commercial banks will be greatly reduced.

However, there are several points that have weakened this apparent threat. First, in many countries, systemic bank runs are related to foreign exchange runs, so whether or not electronic money is considered, it will happen. Second, many countries already have safe and liquid assets, such as funds that only invest in US Treasury bonds, but did not see large inflows during the global financial crisis. Third, although bank runs may lead to instability, as long as the impact is temporary, the central bank can protect it by providing loans to banks. In this case, lending to the bank will balance the funds flowing into the central bank's reserves. In any case, the risk of the banking sector quickly de-intermediation should be taken seriously.

Potential advantage

Providing electronic money providers with access to central bank reserves, or potentially requiring electronic money providers to do so, has more important benefits to consider.

The first is to ensure the stability of electronic money. As mentioned earlier, defaults, markets, liquidity and foreign exchange risk, as well as potential over-issuance relative to client funds, may shake people's trust in e-money. All of this can lead to costly runs and currency devaluations, undermine confidence in the payment system, destroy huge amounts of wealth, and ultimately put financial stability at risk. Electronic money supported by the central bank's reserves can eliminate liquidity and market risks, thereby reducing default risk. It also promotes issuance regulation when client funds are spread across many banks. Assuming that the risk of default is eliminated through appropriate legal structures and potential regulatory reforms, electronic money can be converted into a credible national currency in the face value of the local currency.

“Breach of contract, market, liquidity and foreign exchange risk, as well as potential over-issuance relative to client funds, may shake people’s trust in e-money. All of this can lead to costly runs and currency devaluations, undermining people’s payment systems. Confidence, destroying huge amounts of wealth, and ultimately putting financial stability at risk.” The event of default is hard to happen under a consensus economy. It is not a blockchain that can solve this problem alone, but a blockchain plus a real-time regulatory and margin system. For example, bitcoin transactions rarely occur in this way, and most of the problems are on the exchange. The author is quite familiar with this aspect. “Assuming that the risk of default is eliminated through appropriate legal structures and potential regulatory reforms, then electronic money can be converted into a credible national currency in the face value of the local currency.”

Second, the central bank can ensure the interoperability of payments, thereby protecting consumers from the growing influence of electronic money monopolies. Payment in the form of electronic money must be accompanied by the transfer of funds from one electronic money provider's trust account to another provider's trust account. Only then will the newly held electronic money be fully supported and redeemable. If the simultaneous transfer of such client funds is made on the central bank's accounts, it will be seamless and smooth. In addition, the central bank may require electronic money providers with access to their accounts to adopt technical standards that allow e-money wallets to be compatible with one another, thereby enhancing interoperability and promoting competition.

“The central bank can ensure the interoperability of payments, thus protecting consumers from the growing influence of monopoly of electronic money.” This means that the central bank system interacts with any stable currency, which would be a huge system. The author's idea is consistent with the Chinese panda model, in which the central bank has nodes on each financial institution's blockchain system. This node is used for supervision and interaction.

"Payment in the form of e-money must be accompanied by the transfer of funds from one e-money supplier's trust account to another provider's trust account. Only then will the newly held e-money be fully supported and redeemable. This means that the blockchain system must be a "blockchain Internet" in the future, and it is a panda model in China. The Panda model is the world's first homogenous or homogeneous blockchain internet model that connects each chain system.

“If the simultaneous transfer of such client funds is carried out on the central bank’s accounts, it will be seamless and smooth. In addition, the central bank may require electronic money providers with access to their accounts to adopt technical standards, allowing electronic money wallets to Compatible with each other to enhance interoperability and promote competition. This is the hallmark of the Panda model.

Third, central banks and regulators may not be able to curb the development of large electronic currency monopolies. Given the importance of network effects, the rent of data access, and the sunk costs of entry, these companies may be large international companies operating in a near-natural monopoly. In this case, the central bank may wish to prioritize domestic e-money suppliers under their direct supervision, by providing them with a fully secure, liquid currency that is more attractive than overseas institutions. This will also allow national central banks to retain the revenue of the seigniorage tax without paying interest on the reserves held by the e-money supplier.

“Central banks and regulators may not be able to curb the development of large e-currency monopolies. Given the importance of network effects, the renting of data access and the sunk costs of entry, these companies may operate in a near-natural monopoly. International company." This seems to refer to Libra on Facebook.

“The central bank may wish to prioritize domestic e-currency providers under its direct supervision, by providing them with a fully secure, liquid currency that is more attractive than overseas institutions.” And China is in progress.

“It’s more attractive than overseas institutions.” This is a country-to-country competition. Central banks will only support their own currencies, including stable currencies based on their own currency. “This will also allow central banks to retain their seignior tax revenues without paying interest on the reserves held by e-money suppliers.” The central bank still has income on it.

These views are consistent with the Bank of England's idea for 2015-2016: the central bank itself issued digital currency to counter third-party payment systems.

Fourth, monetary policy transmission may be more effective for two reasons. The first one comes from the above point of view. By providing an attractive payment method in domestic currency, the substitution ("dollarization") of foreign currency issued by a global e-money supplier is less likely. Second, the central bank can pay interest on the reserves held by the electronic money provider. Doing so will more directly convey monetary policy interest rates to consumers – as previously stated – putting more pressure on banks to provide policy rates close to policy rates to avoid deposit losses.

Negative interest rates can even be implemented for electronic money. If there is, this will alleviate the constraint on the lower bound of the effective interest rate. Conversely, zero-return e-money will make it easier for households and businesses to obtain loans and avoid negative interest rates on bank deposits.

We believe that monetary policy is the fourth element of new currency competition. “Monetary policy transmission may be more effective for two reasons. The first one comes from the above point. By providing an attractive payment method in domestic currency, the substitution by foreign currency issued by a global e-money supplier (US dollar) It is less likely. "This is very obvious. Every country must cultivate its own legal currency, stable currency, digital legal currency, and resist foreign currency. This also clearly indicates that this is also a new type of currency competition.

“The central bank can pay interest on the reserves held by e-money suppliers. This will more directly transfer monetary policy rates to consumers – as previously stated – putting more pressure on banks to demand them. Providing close policy rates for deposits to avoid deposit losses.” For commercial banks, this is another blow. It shows that if the commercial bank does not change and can compete directly with the stable currency project, even the IMF will think that such a commercial bank should be closed.

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Finally, the central bank can establish clear conditions for issuing licenses to electronic money providers, including strict supervision and supervision by the central bank or other institutions. For example, selected suppliers will be responsible for appropriate customer screening, transaction monitoring and reporting based on “know your customer” and anti-money laundering regulations, as well as the security of wallet and customer data. For example, controlling who can receive and hold electronic money may also help limit the spread of electronic money across borders.

“The central bank can establish clear conditions for issuing licenses to electronic money providers, including strict supervision and supervision by central banks or other institutions. For example, selected suppliers will be responsible for 'understanding your customers' and anti-money laundering regulations, and Security of wallet and customer data, appropriate customer screening, transaction monitoring and reporting. For example, controlling who can receive and hold electronic money may also help limit the spread of electronic money across borders. This is a key point of this article. The stable currency project can enjoy the bank's treatment and the bank license, but it needs to comply with stricter supervision. This is a key point of this article. Digital currencies are fast, so regulation should be stricter.

Please note that several advantages of having an e-money provider use a central bank reserve can be achieved in other ways. However, many of the measures are still incomplete and may be even worse. For example, e-money providers are still a less regulated shadow banking model. Countries may find it difficult to implement appropriate regulations, such as requiring disclosure of risks to customers, adequate capital and liquidity buffers. As we found in the CNAV fund after the bankruptcy of Lehman, even if the risk is fully disclosed, the customer may not be well understood. As another example, client funds in a escrow account or bank deposit may not be transferred immediately after electronic money is sold from one supplier to another, thereby limiting interoperability.

Synthetic central bank digital currency

Allowing e-money suppliers to hold central bank reserves will be a major policy choice with a variety of advantages and risks, along with potentially far-reaching effects, such as stimulating innovation, promoting blockchain-based asset trading and promoting Cross-border payment, which is a subject of research by the author (2019).

The more direct result is obvious: create the digital currency issued by the central bank! After all, if the e-money supplier can hold the central bank reserve and trade in the central bank reserve, if it can protect other creditors and issue electronic money in a one-to-one ratio with the reserve when it goes bankrupt, then These electronic money holders can also hold central bank liabilities and trade in central bank liabilities. (Figure 6) That's right! This is the essence of CBDC.

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Figure 6: Central Bank Digital Currency Mechanism

But this form of CBDC is not a mature type that has been discussed in detail by policymakers. In this form, the central bank is the main operator of CBDC and is responsible for many aspects: conducting customer due diligence, providing or reviewing wallets, developing or selecting supporting technologies, providing settlement platforms, managing customer data, monitoring transactions, responding to customer requests. , complaints and doubts. These will increase the risk of failures and cyber attacks, bring huge costs, and put the reputation of the central bank at risk.

We advocate a different approach, a partnership of public-private partnership, and call it "synthetic CBDC" or simply "sCBDC." After all, the central bank only provides settlement services for electronic money providers, including access to central bank reserves. As mentioned above, all other functions will be handled by private e-money providers and regulated by relevant agencies. Of course, this is assuming that the public can understand the limited liability of the central bank and does not consider sCBDC to be a product of the central bank. Otherwise, there will be a reputational risk of the central bank, which has become a hot spot of public concern. However, like today's commercial banks, fraud or technical failures associated with personal debit cards should not be attributed to the central bank, although commercial banks can get central bank reserves.

Therefore, compared to the mature CBDC model, sCBDC is a lower cost and less risky CBDC model for the central bank. At the same time, it retains not only the private sector's comparative advantage in innovation and customer communication, but also the central bank's comparative advantage in providing trust and efficiency.

“SCBDC is a lower-cost, less risky CBDC model for the central bank. It not only retains the private sector’s comparative advantage in innovation and customer communications, but also preserves the central bank’s trust and efficiency. The relative advantage." Note that the author said that the cost is lower and the risk is smaller. This explains a common misunderstanding that people often think that digital currency will increase financial risk, but the author believes that digital currency will reduce financial risk. The author has always held the same view as the author. When all transactions can be tracked in the blockchain, there is no way to change the record. Under such circumstances, will the financial risk increase or decrease?

This public-private partnership to issue CBDC is also our model, and digital currency does not need to be completely processed by the central bank. Just as the legal currency is not completely issued by the central bank, many legal coins are generated by commercial banks.

We believe that the Libra currency against Facebook can learn from the story of Tian Ji horse racing and strategically deploy in the field of stable currency competition. It does not need to stabilize the currency of civil society organizations at the national level. It is recommended that private companies or commercial banks come forward. can.

Is this good or bad? The first depends on whether countries can see the advantages of CBDC. If possible, we believe that sCBDC will be a more efficient way. But the pros and cons of discussing CBDC are beyond the scope of this article. Mancini-Griffoli et al. (2018) delved into relevant factors, including inclusive finance and cost efficiency, as well as the security of payment systems and consumer protection, if the cash disappeared and the settlement services were gradually provided by large private companies.

Today, when we do research, we often find that industry practice is ahead of academic theory. In the past, the theory came out before it came out. Nowadays, in the field of computers, it is often the practice of the relevant theoretical basis. For example, there was a cloud computing system, and later the academic theory of cloud computing appeared. When Google has released Google Cloud, there is no academic paper on cloud computing in academia. This trend has now come to the financial world. Stabilizing coins have appeared in the past few years, and even the government-supplied stable currency has been announced for more than a year, but the academic papers and theories of stable coins have begun to slowly emerge.

In 2019, the international central bank meeting was just held. Some participants came back and reported that most of the central bank economists who participated in the meeting did not know how the stable currency would operate. He therefore strongly doubts how people engage in digital economy research and development based on blockchain in this situation?

Will sCBDC become the future central bank currency? Will it be comparable to B-Money or I-Money? This is more in the hands of central banks, regulators and entrepreneurs, and remains to be seen. But what is certain is that, as we know, innovation and change may change the landscape of the banking and monetary sectors.

Comprehensive discussion of the full text:

The author is an economist, a famous teacher, taught in the world's number one school, and later as the most important bank in the Federal Reserve, and now the IMF is an executive. The economy is strong and sensitive to new things.所以他在这篇文章提出许多新思想,挑战很多人的思维。笔者却是在中国独立研究,也提出一些想法,现在将笔者和作者提出的概念做一番比较。











另外,区块链上的监管科技比传统监管科技要强大。区块链监管科技除了传统大数据分析外,还可以有链上实时监控,监管单位可以有全面数据, 并且所有参与方可以经过拜占庭协议和签名技术彼此实时监督(每一块建立时就彼此监督查验,而现在金融系统一秒内就可能建立一块)。现在基于区块链的金融系统花75%以上的时间在查验和检验上,而且90%算力在加解密计算上,只有10%算力在从事其他业务。要破解一个密码,可能需要超级计算机100年的算力才够,而区块链每一秒就可能要进行几万次到几十万次加解密来验证参与系统的身份和是否说谎(这数据来自天德开放平台,而不是天德最快的系统)。照这样看,要破解区块链一秒处理的信息,超级计算机需要100万年才能完成,而人类历史才只有6000年。在这种并行运行和监管机制下,作者提到的一些风险可能并不存在。

经济学者在文章中有一假设,市场有成熟的区块链技术,或是每种区块链技术都差不多,这是严重的认识误区。区块链技术之间差别非常大,使用不同区块链技术将会导出差距非常大数字法币和稳定币的模型。加拿大央行就表示一些大家都认为是区块链强项的区块链技术,在真实央行系统里面却是弱项, 因为这些区块链系统没有满足央行的需求,而只是考虑传统区块链系统例如比特币或是以太坊。加拿大央行带头使用PFMI来评估区块链系统。文中提到的一些金融风险,但是没有提到因为技术不足带来的金融风险.

另外著名的链超级账本被发现是伪链,连美国摩根大通银行在2019年也出文认为超级账本根本不是区块链系统。如果在数字法币或是稳定币系统内使用这样的伪链,会发生非常危险的“系统性风险”(Systemic Risk)。今天还有金融机构使用因为他们还不明白,伪链的特征是一旦中心被控制,整条链就被控制。所以破坏者只要攻击一个节点就可以,整个数字法币或是稳定币系统就被外力控制以至于瘫痪。因为数字法币使用人多,参与金融机构又重要又多,一旦系统被控制,一个国家很大部分货币支付系统就被控制,这就成为系统性风险,也就是国家或是区域经济危机来临。因此笔者从2017年一直强调在金融系统不可使用伪链。














2. Economics and computer technology have not yet merged: Many scholars have assumed that blockchain technology is mature enough to solve many problems, such as clearing, payment, loans, and regulation. Many white papers also give us inaccurate information, so that scholars believe that these can be done now. But is it really the case? There are only two experimental experiments based on blockchain-based liquidation in the world, and the established stable currency system is not based on these two systems. How can it be successful? For example, what system can make payments for billions of people? There are problems with the two most popular platforms, Superbooks and Ethereum. Among them, the super-books were not supported by 34 banks in 2018, let alone billion-level customers. And the speed of Ethereum, even if it is the enterprise version, the goal is far from supporting hundreds of millions of customers. One might think that it was not the case with the volume of transactions in the first few years, but the scalability of the blockchain is not so good, and it must be designed from the start. The initial architecture was wrong, and it was impossible to expand at the end. It could only be redone. The risks like this are now very large.

3. Improving services, including the acquisition of technology companies: Commercial banks still have great advantages. Commercial banks have very large assets and many customers, and they have a very strong foundation. If the stability of the stable currency can really challenge commercial banks, I am afraid it will take two or three years. Commercial banks have two or three years of time to adjust or purchase. This is the improvement service mentioned by the author, including the acquisition of technology companies. But banks can no longer keep it conservative. Commercial banks and central banks have always been known for their conservative and cautious attitudes. Now, in order to cope with the challenge of stabilizing the currency, they can no longer continue to be conservative, but actively embrace these subversive technologies.


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Cai Weide

Director of Digital Society and Blockchain Laboratory of Beihang University, Chief Scientist of Tiande Technology, Major Project Leader of National Ministry of Science and Technology, Director of Blockchain Internet Lab of National Big Data (Guizhou) Comprehensive Experimental Zone, Tianmin (Qingdao) International Sandbox Research Dean of the Academy, Honorary Dean of the CCID Research Institute of CCID (Qingdao), President of the Blockchain Industry Professional Committee of China Asia Economic Development Association, Director of the North Mujin District Block Chain Committee

Jiang Xiaofang

Ph.D. student of Beihang University of Computer Science, Chartered Financial Analyst (CFA), member of Beijing Financial Analyst Association