Depth | Financial Innovation and Currency Evolution

The concept and origin of money

For more than 2,500 years, currency evolution around the world has been an intrinsic and typical component of the development of human, social and social governance. In China's earliest historical record, Shennong, one of the Three Emperors and Five Emperors who created the Chinese civilization, is said to be the ancestor of pioneering agriculture and inventing Chinese herbal medicines. It is also the first market “manager” – establishing standards for weighing and measuring goods. Paying for transactions and storing wealth establishes value standards. In other words, he pioneered the original currency form.

In a generalized unit of measurement, the evolution of money begins with tokens of intrinsic value, such as gold, silver, jade, shells, and the like. In human society, these symbols have intrinsic trading value. The generation of such tokens (ie, coinage) facilitates convenience. It materializes the amount of value in people's hands and no longer needs to be weighed or used to determine its value.

It is widely believed that the earliest period in which China began to use currency dates back to the Neolithic Age, when people used shells as currency. The archaeologists restored China's first documentary-completed dynasty—the copper shell currency of the Shang Dynasty (1500–1046 BC). Copper plating of shells is equivalent to plating a certain value, which may be the earliest currency with clear specific and legal value.

Although the rapid development of society in the second half of the 20th century made the process of currency evolution elusive, it is certain that money is beginning to be virtualized – a testament to today's reality. In a society, once a currency is created with a specific value, the issuer does not have to change its size and shape, and simply reduces the amount of its material, which can easily weaken the intrinsic value of the currency. In other words, currency issuers can make money without shells. Before the invention of pure copper coins in China's early Zhou Dynasty, copies of shell currency were circulating in the market. It is made of copper, lead, stone, bone and wood without any shell components.

A similar thing happened in the United States. In 1965, the United States began to be silver-free, that is, 170 years after the birth of the silver metal currency, the US government removed the silver component from the 25-cent coin. Although it weakens the intrinsic value of money, it does not affect its market (or inherent) value. Because of the inherent exchangeable value of coins, the value of a 25-cent coin does not suddenly collapse, even if its existing intrinsic value is only a small fraction of the previous one.

The constant virtualization of money is the essence of most of the financial innovations we see today.

Virtualization and technology

In today's more connected and increasingly developed Internet, we think about the evolution of the future currency, it is necessary to review how the social consensus around market credit and social contract has evolved.

In the early days, money evolved toward the derived exchangeable value rather than intrinsic value, such as stamped/cast metal currency, and later printed banknotes. It is generally agreed by the society to link the intrinsic value of money with non-monetary goods that are bought and sold on a daily basis. More specifically, such non-monetary goods are general goods that can be exchanged with other goods of intrinsic value. Sellers accepting money need to have sufficient confidence in the market and believe that money can be exchanged with other goods and services.

Since money has no intrinsic value, two conditions must be met for the stability of the currency.

First, the total amount of money must be limited. The circulation of money must be related to the growth of economic productivity.

The impact of inflation does not destructively erode public confidence in the currency. If the public loses confidence in the currency, it will lead people to choose to store wealth and trade with other media, possibly using a different currency, or collecting other valuable assets such as gold, silver or platinum.

Second, there must be a single authorized issuer with sufficient technology to prevent fraud by illegal mints from creating new currencies. Further, it is to provide protection for the source of supply.

One of the major management measures implemented by Emperor Qin Shihuang, the first emperor in China, was to tighten and stabilize the control of the coin. He wiped out the growing number of other mints and growing regional differences during the previous Warring States period, and then announced that his government was the only institution that had the right to issue currency. He is well versed in the single-authorized "sovereign" currency as the cornerstone of an orderly market and a top priority for economic stability and growth.

These two basic conditions, as well as the government's key role in management, supervision and enforcement, are very useful for us to think about the evolution of the currency, especially today, affected by globalization and the Internet.

People take it for granted that currency virtualization is a recent phenomenon, but it has already begun when money has broken away from its intrinsic value. It is almost ridiculous that most of the world's tangible currency is based on paper (or plastic used for this purpose), and its intrinsic value is lower than in the past. However, it is necessary to consider in the future to encourage society to accept and agree on a tool with a small amount of intrinsic value or no intrinsic value, including the basic principles of transaction (or exchangeable) value.

On the road to currency virtualization, paper money has always played a major role and has been enduring. Although there are many theories that describe the origin of paper currency, it is most likely that it originates from a promissory note that one party has against the other. This ticket originally contained a specific payer and payee.

When the party issuing the currency is recognized as trustworthy in society, the handwritten ticket can be circulated among other parties (excluding the original issuer). Naturally, such bills will evolve into “currency to pay debts”, which can be circulated between the payer and the payee, and the issuance of bills becomes a responsibility and monopoly power of the government. But it is not credible because of the signature, seal and seal of the payer, but because of the approval of the government. Therefore, to measure the intrinsic value beyond the intrinsic value, two conditions must be met—limitation of supply and prevention of forgery, which is ultimately borne by the government.

This also reflects the role of checks and similar payment instruments, which are verified by signature, stamp or seal, and the payee and the institution (usually the bank) acknowledge the verification and ultimately file a claim.

Interestingly, paper currency still plays this role today, with its ancient and non-functional characteristics that remain at the root of such promissory notes. For example, a 100 yuan denomination of the renminbi will be stamped with the vermilion seal of the central bank, while the US Federal Reserve banknotes will be jointly signed by the finance minister and the treasury chief.

The vast majority of ordinary checks have the original issuer, payee and bank, and the three parties jointly recognize and authorize the intrinsic value of the transaction. However, there is a technical possibility of "handing over" a check, that is, the original payee transfers the redemption value to the new payee. As it turns out, this can cause poor operation because it is very difficult to verify a series of signatures. Therefore, relying on the trust of third parties such as the king and the treasury is a major innovative way to improve the utilization of banknotes/tickets/banknotes, and reduces the complexity, cost and risk of transactions.

Once the currency is removed from its intrinsic value, technology will continue to change the fundamental elements of tangible currency as never before. Trust in currency instruments can only be guaranteed if it is not easy to copy and it is difficult to track down the authorized issuer. As a result, currency manufacturing processes have become increasingly sophisticated, including metal stamping, milling coin edges, unique alloy and paper formulations, advanced gravure printing, inventing optical inks, and developing methods for containing metal, plastic, and invisible images in the inner layers of banknotes.

All of these technologies have enabled tangible currencies to grow even more by simplifying verification (and thus providing protection for the money supply).

When we think about financial innovation today, we must also consider the role of technology in the evolution of money. Advances in technology have not only increased convenience, but have also widened the gap between the intrinsic value of materials and the value of their market acceptance.

End of paper money and metal currency

Over the past 30 years, we have witnessed a gradual reduction in reliance on physical banknotes and metal currencies, even though they have served the market for more than 3,000 years.

Alternative payment notes in the form of various types of promissory notes date back to the 9th century. However, in the 20th century, bills in the form of “cheques” gradually occupied a prominent position. A check is a lending facility that not only requires funds to be deposited in the issuer's account, but also requires the bank to transfer funds from the payer's account to the payee. Only through supervision can the recipient of the check obtain some form of protection and ensure that the funds are in place.

In the 1940s, with the growing popularity of credit cards (mainly in the United States), paper currency and checks began to accelerate. The original credit card was issued by the goods and services provider itself as a purpose-built tool dedicated to settlement of transactions related to gasoline, aircraft travel, specific department stores, etc. Its birth history is very similar to the recent emergence of third-party online payment systems. The payment system is developed and promoted by online retailers, auctioneers or gaming and entertainment providers for transaction settlement involving its goods and services.

In the 20th century, money continued to evolve into virtualization, and we witnessed the rise of trading instruments such as credit cards, debit cards, and debit cards. As trading ranges expand, these trading instruments reduce the use of paper currency and metal currency.

The evolution of these cards has undergone several major milestones, with Internet-based currencies continuing to evolve and re-enacting revolutionary moments.

First, these cards are recognized and accepted by merchants or other parties outside the issuer, and even extended to US government agencies and agencies, such as the US Postal Service and tax authorities, who accept credit cards issued by banks as payment means instead of the United States. Real banknotes issued by the Federal Reserve.

Second, people can use these cards over long distances without actually showing the physical objects. In the early days of using a credit card or "shopping card" (a common name for people at the time), the issuing merchant would usually reserve a shopping card for the customer, and the customer could check the shopping card at the store's credit card and confirm the transaction amount. It quickly developed to use the card to conduct transactions by phone, without the need to provide a physical card for authentication, just by long card number, confirmation code, and corresponding personal information, such as ID number, address information, date of birth, etc. Confirm it.

In the era of globalization and online transactions, regardless of the different terms of use of credit cards, debit cards and debit cards, they all have common characteristics, and these characteristics have become a constraint.

Due to the potential cost of service, we must weigh these characteristics based on relatively high transaction costs. These features include:

First, the card and related accounts are denominated in a single sovereign currency, which involves exchange rate risk and usually requires settlement in a currency other than the original currency;

Second, the clearing system is subject to geographical restrictions, which often involves regulatory complexity and cost, and restricts cross-border liquidation.

As history changes, money has continued to evolve, just as we have witnessed the innovation of financial services today and the financial services innovation we are committed to tomorrow.

Although financial innovation is evolving at an unprecedented rate, the two foundations of its development process remain the reliance on issuers and the close symbiosis with technology development.

Banking and progressive innovation

The era of progressive innovation we are in is constantly being promoted by a series of closely related advances. The appearance of financial service innovation is a major development in the launch and support of traditional banks. As the guardian of authorization and regulation of tangible currencies, banks are at the heart of innovation and systems development, promoting the use of credit, debit and debit cards worldwide. The current banking system is very large and can no longer afford the risk of bankruptcy. They look to commercial and retail customers and will develop into a global network that offers a broader range of transaction settlement, risk management and wealth reserve services.

Thanks to the rise of the Internet, the pace of innovation has gradually expanded to online banking. Online banking can manage traditional accounts, eliminating the need for customers to go to the physical bank to wait for withdrawals. Synchronized innovations include the popularity of automated teller machines (ATMs), which are available 24/7 in many locations, some of which are difficult to set up at physical bank branches, such as airports and convenience stores. Due to the development of technology, the development of the credit card, debit card and debit card will be accompanied by relevant information, recording every change in the card's credit financing and settlement options.

The order of development of financial services will follow the two trends of self-service and remote access. Today, in the synchronous development of e-commerce, our daily life, from flight boarding to self-service supermarket checkout, almost every financial transaction involves This one or two trends.

Although primarily within the framework of traditional banks, these innovative tools continue to offer other new solutions to traditional trading mechanisms. In this regard, these innovations are gradual.

In the context of a larger and more closely related plan, it may be more appropriate to refer to these financial innovations as “significant improvements in services” that are gradual, rather than subversive, in traditional banking organizations in an acceptable order. Replacement of paper checks with electronic payment systems, personal banknotes with credit and debit cards, and replacement of credit and debit cards with mobile communication devices, biometrics and various tokens for identifying and verifying parties to a transaction. The key technology here is to invent a two-way wired or wireless network that securely connects individuals and service providers.

Online mortgage companies have already taken up a significant market share in certain economic sectors. They rely not on providing new products, but on the efficiency of complex processes through online communication, file management and payment services. In fact, online mortgage terms and traditional face-to-face mortgage terms are not fundamentally different in terms of core structure and legal requirements, but there are great differences in user interface and convenience. Online services can eliminate the need for banks and customers to meet in person. trouble.

Similarly, as a proprietary physical credit card machine, credit and debit cards have been rapidly virtualized, no longer need to be used, just by verifying the code and password to protect suppliers, merchants and their customers. Secure Transaction.

The main capital transactions (such as mortgage mortgages) have really caught people's attention as to the extent to which legal coins and bills have withdrawn from the market in a mature economy.

In any real estate market in a developed economy, cash transactions are unusual, just as special transactions occur, and even confusing. Buying a home means that the client has to start a 30-year relationship with the bank, during which time there will be a large amount of transactions per month, but no tangible currency will be involved.

Traditional banks, whether local, regional, national or international, regardless of retail or business services, believe that the new competitors are not from the banking industry. The subversive competitors they will face are fast-growing companies with abundant capital in e-commerce, and these companies are gradually entering the market and breaking the original market structure.

In this context, the traditional reformers who are regulated and adopt a gradual approach will face the challenge of competitors. In other contexts, they can use technology to restore traditional services. Competitiveness.

It's easy to list the challenges facing traditional financial institutions, but it's not easy to provide a solution. There are some interesting points about the differences between traditional banks and newcomers. For example, looking back on the past few years, international banks have profited from the flow of income derived from the “floating” of investment for several weeks, during which time trading tools created in one currency are in another corner of the world. The currency is liquidated. Such a settlement process takes 45 days if it is changed to banknotes. But today, this settlement process has been reduced to 1 day, up to 2 days, thus avoiding the floating of commercial banks, and also reducing the opportunity for commercial banks to profit from floating.

Online merchants that provide settlement services for internal or external dedicated suppliers have used the same technology to create floats and become new channels for their profits. When a transaction is confirmed and settled by the buyer, the payment system can obtain the funds in an instant (regardless of where it is stored), and then the payment system will hold the funds through a third party until the delivery of the goods or services is confirmed.

In this process, the art of innovation lies in the use of technology to remove old sources of profit in a new way while creating new sources of profit. This innovative approach is partly due to the shifting of the settlement process from being driven by a lending system to being driven by a value-storage system, an evolution that can be seen as an important part of financial services innovation.

Digital technology drives innovation in the financial services sector, and we should continue to focus on the close relationship between technology and currency.

A significant trend in the form of tangible currencies for coins and bank notes is that they fall back to the market and eventually, any form of tangible tool will disappear. Online payment systems, stored value cards and mobile device-based payment services make it a matter of course. You should think about the direction of these technological developments.

As digital functions mature, technologies such as near-field communication and big data management improve the accuracy of content customization, reliability of verification and security, overall convenience, and efficiency of value transfer settlement. Large banks can benefit from technological innovations, but with the residual role of “authorized regulators of tangible currencies”, what are the costs?

Interestingly, despite major incremental changes in the banking industry that have occurred and irreversibly improved the efficiency of service delivery, such as transaction settlement services for buyers and sellers, these changes have not yet led to changes in the underlying business model. There is no inevitable reduction in service costs. The subversive effects of booming e-commerce are everywhere, and the real impact has begun to emerge.

New participants and new business models: the end of plastic cards

The initial phase of disruptive innovation driven by e-commerce tends to focus on alternatives to the transfer of funds, with a primary focus on the premise of long-standing transaction settlement. In the early stages of development, this transfer was often carried out through traditional channels, mainly the expansion or renewal of credit and debit cards. Online payment systems and their supporting technologies link buyers and sellers to existing credit or debit instruments, and sometimes add bank card settlement services to small sellers who do not have such tools. Due to the surge in Internet transactions and the increased automation of credit card and debit card settlement, card issuers use advanced closed-end payment systems to support the trading cycle to generate substantial returns at a lower cost than traditional entities.

What may not be foreseen at this time is how this trend will focus on customer relationships and drive the growing use of cards by Internet merchants.

However, it is undeniable that Internet commodity pricing is extremely competitive, eliminating the cost of physical location and distribution points, and improving the profitability of settlement services. Internet merchants will inevitably change or adopt such trading methods. The transfer mechanism is gradually being seamlessly integrated with the main e-commerce interface.

The third-party settlement agent, which is completely Internet-based, continues to evolve, greatly reducing the cost of settlement and monetization of buyers and sellers.

The e-commerce platform assumes the settlement function by acquiring the Internet “bank-like” service. They either deploy funds already in the system or directly enter the bank accounts of buyers and sellers associated with the e-commerce website.

For consumer-to-consumer (C2C)-based websites, it is more convenient and efficient for customers who are buyers and sellers to send and receive funds (manage deposit balances or use credit lines) with a unified online account.

With such a convenient channel for funds transfer, what is the significance of entering a traditional bank trading platform through external channels such as card issuers or banking service providers?

The close relationship between Internet merchants and their customers enables them to quickly change the settlement structure and make a profit. Innovations in this area are simply described as the non-intermediation of settlement networks by direct entry into the banking system by major product and service providers, or even bank non-intermediation through their own bank-like settlement and transaction services.

In other words, e-commerce merchants speculate banking functions to reduce transaction settlement costs. But because they realized the sweetness of holding deposits and issuing loans, they further invaded the banking services that traditionally had nothing to do with transaction settlement. As a result, we have found that many popular e-commerce sites and payment channels are rapidly expanding their “bank-like” services.

Future technological innovations that focus on lower cost will promote more forms and more effective non-intermediation. The online transfer channel stores funds in its own system for the immediate completion of trading activities without the need to recourse to external agents or accounts of the traditional payment and clearing system of the global economy. In this case, the ultimate form of non-intermediary form.

Overall, this powerful emerging trend is driven by two forces:

First, there is no need to allocate transaction fees to an intermediary billing network such as a primary account holder such as a bank or a credit card company.

Second, and more importantly, it encourages the use of stored value services to replace credit services.

The economic benefits of moving customers from credit-based systems to debit-based systems are compelling.

Instead of being charged by a bank or credit card, the settlement agent obtains cash in advance, some of which is used to support the monthly float of the bank to fund the transaction;

The settlement agent (not the customer) receives a floating return, which helps to significantly reduce costs and provides operating or investment funds to the settlement agent.

Of course, for users who have not settled their monthly balance and owed money, this does not eliminate high-interest credit options, but it can greatly ease the burden of bank credit fluctuations when credit card users settle accounts and have no debts. For credit-based buyers, all online settlement systems are now available, even encouraging “post-payment” or credit card binding, which is another way to invade the traditional banking service provider market.

Debit-based service development is particularly suitable for emerging economies compared to credit-based services. Compared with mature economies, credit information and collection processes in emerging economies are certainly not perfect. The stored value debit system provides consumers with the convenience of non-cash transactions while avoiding the expansion of credit risk of financial institutions and therefore developing rapidly in emerging economies.

For example, in China, stored value systems are ubiquitous, including transportation cards, telecommunications and data services, online games, media, entertainment, boutique retail and large supermarkets, dry cleaners, nail shops, restaurants, electricity meters and gas meters.

As a compensation for loss of interest on customers' prepaid purchase cards, equipment and services, most stored value products offer some form of discount, rebate, or other computable incentives. The originators of products and services also benefit further from the loyalty effects of stored value, which will provide customers with other benefits beyond storing cash investments.

There are currently a large number of cards, large card distributors and online markets in China. Through these online markets, you can buy cards, renew cards, and purchase a variety of services, digital goods, and even physical goods that are least relevant to the original card issuer.

The most popular cards are based on the huge user base of online games, blogs and chat providers. Although this is difficult to measure, the scale of related service providers (including current integrators and factorers) is rapidly expanding, and the number of sellers willing to accept such card payments is also rapidly increasing.

Obviously, such cards are becoming an important part of Chinese consumer funds. Although the face value of the current card is purchased by the consumer in full or at a small discount, there may be some form of leverage to enter the Chinese system, which actually expands the liquidity and purchasing power. Ultimately, the future development of existing banking services, other forms of transaction support, and currency regulation will significantly affect the overall development of China's stored value card system.

Although we use the word "card", the card itself has a strong momentum of virtualization. Plastic cards can be easily replaced by card numbers, ID information, verification passwords, and verification codes sent to registered mobile phones or small electronic receivers.

China's stored value cards initially exist as physical cards and are sold in newsstands, convenience stores and telecom offices. Now, when consumers buy a stored value card in the online market, they will see various types of cards, each with different colors, with flowers, cartoon characters, landscapes, etc., but they are not able to get the physical form of the purchased card.

The stored value system in turn brings another major evolution. Once a network merchant has configured a technology that can store funds and debit the settlement funds, it is logical to provide relevant expansion services for storage funds, basically including all deposit services provided by traditional banks (of course affected by any potential regulatory obstacles). These include interest-bearing deposits, wealth management products, mutual funds and other securitized assets and other investment products.

With the efficiency advantages of management and distribution, these products designed and developed in the digital environment may be highly competitive and remain competitive. In China, several successful e-commerce sites have been licensed to expand banking services. Their prospects of profiting from banking services may far exceed their initial e-commerce activities.

Finally, the tradable trend between the stored value systems of special physical tools such as magnetic cards, radio frequency identification cards (RFIDs), numbering cards or tokens basically replaces the actual sovereign currency and helps to form a large amount of circulation. The shadow of the currency system.

If the regulations allow for the anonymous transfer of gift cards and other things (this phenomenon may change, so the global efforts to crack down on illegal means, China also strengthens the review), then the transfer of large amounts of funds can be free of cash, and does not remain in the banking system. Any clues. Since these tools generally have discounts and rebates, they usually cannot be converted directly into cash at the issuer, which promotes factoring agents who make profits by cashing them to the cardholders at different discounts.

The anonymity of a stored-value card to complete a transaction is one of its greatest attractions. Personal checks, debit cards, or bank transfers leave written clues that many buyers are trying to avoid for a variety of reasons. This may be for legitimate reasons, such as to prevent identity theft or fraud associated with information that must be disclosed in non-anonymous transactions, or for countless other improper reasons for anonymity. It is not difficult to understand that many of these reasons have attracted the interest and attention of monetary regulators and tax authorities.

Our review of the current currency and its alternative markets will help us move better into the future. We have recently seen the emergence of purely digital or virtual currency, not affiliated with the legal tender of any country, and are not regulated by any monetary authority. In the huge global virtual market that the Internet has spawned, this currency is completely priced by the market. As they are generated and promoted, transactions in this virtual currency become completely invisible to any regulatory agency.

The frontier of currency evolution

We are facing a deeper change, and the currency form that is not restricted by any government agency and its legal currency has emerged. These currencies may have no intrinsic value or physical form at all; their value comes entirely from the underlying asset reserve, or more abstract, from a clearly defined limit and the existence of a trading agent group willing to accept them for the exchange of goods and services.

It is worth pondering that the two principles of the earliest forms of money still exist – control over supply and control over supply credibility. Although the business prospects of these currencies are still unclear, their emergence and development highlight several major features of financial service innovation in the digital age.

These characteristics are not derived from the nature of globalization, that is to say, the rapid growth of trading volume and investment amount ignores the borders of monetary regulation and issuer operations.

For suppliers and consumers, borderless virtual currency has great appeal, which can increase the efficiency of large-scale transactions and mitigate the potential risks of today's turbulent global currency markets. Financial service innovators should view virtual currency as the basis for strategic planning.

Virtual currency is the forefront of currency evolution, and it poses many unprecedented challenges not only for regulators but also for the concept of money itself.

Stored value cards, retail store gift cards, online game cards, casino round or rectangular chips, prepaid telecommunications or transportation cards, and e-commerce payment system balances are all denominated in sovereign currency. Their actual reference cash value may vary, depending on their liquidity or ultimate transaction value, but their value in their home market is not affected by the daily foreign exchange market dynamics and will not fluctuate significantly.

The distinctive feature of virtual currency is that it has no fixed value denominated in sovereign currency and is completely outside the jurisdiction of any government. It is no exaggeration to say that this changed the basic rule established by Qin Shihuang and later, that is, the currency distribution rights are linked to the core powers and responsibilities of the government.

In a sense, virtual currency returns to the roots of all currencies, as a convenient tool for peer-to-peer (P2P) non-cash trading services, regulating value and expanding the market.

Ven is a transitional form of virtual currency created by the adventure traveler social network Hub Culture, initially linked to the US dollar and then linked to a basket of currencies, carbon credits and commodities.

Originally used as an application for Facebook in mid-2007, Ven made it easy for users to “pay” for virtual services such as travel information to maintain a balanced market for the participants' communities, with participants helping each other. Vendors of useful information earn Ven, so they can purchase additional information from their Ven account. Ven can be traded after one year.

Vennmoney.net provides key information about Ven, and the developer's instructions are as follows:

“Ven's value is determined by the financial market's package of weighted currency, commodity and carbon futures trades, which are exchanged for other major currencies through floating exchange rates. Ven is the first free-floating digital currency and the first pricing system to include carbon. Make it the only currency linked to the environment. Ven is 100% supported by the same amount of reserve assets as the total circulation Ven."

In some respects, Ven is similar to Zhou Xiaochuan, the governor of the People's Bank of China, after the global financial crisis, suggesting that the International Monetary Fund expand the use of special drawing rights. The SDR is supported by a package of global currencies and is decoupled from any single sovereign currency and can be used for global transaction settlement and reserve holdings.

According to reports, about 20 million Vens are circulating in the market and have been used for actual commodity purchases and carbon trading. Derivatives based on the Ven reserve have been bundled with the Ven fund.

BTC is a big step on the basis of Ven and is more widely recognized by the media and the market. Given Ven's stability on the basis of the underlying reserves, BTC's value proposition is based on the absolute upper limit of the target total circulation and the complex virtual “mining” process, which requires a large amount of computing resources to expand the BTC's liquidity. This absolute limit is 21 million.

The value of BTC is based entirely on the balance of supply and demand, and its level of volatility has exceeded that of almost all previous currencies.

In 2011, the price of BTC jumped from about $0.30 to $32, and then stopped at a market low of about $2. After a long period of appreciation, there have been periods of decline.

On December 5, 2013, the People's Bank of China issued a notice not to recognize the currency status of BTC and prohibited financial institutions from conducting BTC transactions. This news directly led to a 30% drop in BTC prices.

It is noteworthy that although the regulations stipulate that the RMB cannot be freely exchanged with any other currency, the BTC-RMB exchange is the first of its exchange transactions.

BTC transactions have many characteristics, among which confidentiality or untrackability is most prominent. BTC is not affiliated with any sovereign currency and is stored in an encrypted network library and does not go through mature banks or online trading channels.

It is these characteristics that make this stage of currency evolution particularly worth pondering and analyzing. To date, BTC is the most thorough anonymous settlement tool.

With a few exceptions, currency issuance is the monopoly power of sovereign institutions. The coin itself can be entrusted to one or more banks or other agents (which Hong Kong used to do), but sovereign institutions retain the monopoly power to entrust, recover and regulate monetary casting. This is essential for the development and implementation of monetary policy and provides a key lever for regulating the national economy.

It is not surprising that the emergence of globally circulated and seemingly viable virtual currencies has caught the attention of the world's major currency regulators. The scope and importance of the currency share is not an issue. At present, BTC accounts for a small proportion of the total global currency trading volume, and is not an order of magnitude compared with mainstream currencies such as the US dollar. Lack of regulation and lack of transparency in the trend are the concerns of regulators.

The overall concept of BTC not only challenges the monopoly power of national sovereignty and issuing currency, but also disrupts the intensive control of global currency flows. Since the "September 11" incident, countries have stepped up their scrutiny to hunt down and eliminate large-scale terrorist financing activities.

While some believe that the ubiquitous dollar makes the dollar more difficult to track, the reality is that BTC seems to have become the main settlement currency for illegal activities, as exemplified by the well-known e-commerce site Silk Road.

In September 2013, the FBI raided Silk Road, an electronic website engaged in the illegal trade in drugs, weapons, and assassinations (according to some reports). Affected by this, the BTC transaction price fell by about 15%. According to reports, the founder of the site has accumulated a $80 million BTC, which the FBI says is only a small fraction of the $1.2 billion that flows through illegal websites.

By confiscation, the FBI is now one of the main holders of BTC in the world.

Looking to the future

The viability of pure virtual currencies that are not associated with any country, especially those that are supported by reserves without measurable value, remains to be seen, but this is not the focus of their research.

Virtual currency represents the innovation of companies that enter the financial services sector from non-traditional backgrounds, helping us to map the potential development of financial services in the future.

The International Monetary Fund’s special drawing rights proposed by China have never played a role or constitute a reserve currency as China hopes. However, it is not unfeasible to create a new stable non-sovereign currency by the market and properly regulate it to meet the dual requirements of the government and consumers.

The biggest problem is, “In the virtual world of business, currency and foreign exchange, if no one pays, who pays?” This has not yet been resolved, and we will discuss it later because someone must pay in the end. In addition to the easier definition of credit risk, who is paying for the losses caused by security incidents, fraud or illegal transactions in an era of rapid technological change? How will the regulatory environment control this situation and limit consumer risk?

We cannot deny that credit risk will continue to be everywhere. When efficiency, convenience, and innovation have a place, the challenge for policymakers, legislators, regulators, and the world as a whole is that someone must ultimately balance the value gained from value creation.

To be sure, a variety of virtual currency and transaction settlement tools that are more conservative than BTC are providing more and more convenience to consumers around the world. Most people take out a few banknotes (which we used to call "money") from the wallet, and the number of coins in the piggy bank is getting less and less. This means that some banking businesses that we still consider to be innovative, such as ATMs, have been eliminated after 30 years of widespread use.

This is an effective measure of the speed of innovation and elimination cycles, and the power of these innovations and eliminations drives the transformation and transformation of financial services. Understandably, mature competitors are less and less threatening to banks, and newcomers are increasingly threatening. Newcomers are almost all from popular Internet companies.

However, mature banks are by no means the dinosaurs of today's financial services world, and they are preparing for fierce competition. We will witness that in the next few years of innovation, turmoil and reform, the market and consumers will definitely benefit a lot.

– END –

Deloitte author; Sonny Sun editor; Roy typesetting;