Guangming Daily: Does digital currency replace banknotes?

Author: Chen pose with (legal risk prevention and control of smart technology laboratory researcher at Beijing Institute of Technology)

Source: Guangming Daily

On January 3, 2009, Bitcoin came out. With the popularity of bitcoin, the blockchain technology is also widely known. As the underlying technology supporting Bitcoin, the blockchain is believed to lead the development of the fourth industrial revolution, with a major impact on the social, economic and political realms, as evidenced by the emergence of digital currencies. In June of this year, Facebook (Facebook) announced the Libra white paper, announcing the development of a cryptocurrency-based payment system. In August, the People's Bank of China stated that it will accelerate the pace of research and development of legal digital currencies. The central bank’s digital currency is ready to go.

The digital currency based on blockchain has duality. On the one hand, it can replace the existing inefficient cross-border payment and settlement system to promote trade development. On the other hand, due to its decentralized, autonomous and anonymous nature, it is easy to cause economic fluctuations. And encourage criminal activities to take place. How to use the "angel" characteristics of digital currency to dispel its "devil" characteristics, how the future finance led by digital currency is going, is a problem that needs to be faced now.

The emergence of digital currency

Payment and settlement are the cornerstones of economic interaction. In the past, people used to pay and settle through the real money issued by a central bank. The advantage is that they are stable and have credit guarantees, but the problem is that the procedures are complicated and slow. Later, electronic payment and settlement systems emerged, but efficiency has not improved substantially. With the emergence of online payment and settlement, efficiency has increased, but it is costly. In the central payment and computing system described above, currency payments and settlements must be set up at the bank and subject to various rules.

Bitcoin is a digital currency known for peer-to-peer and decentralization. It can be used for payment and settlement by bypassing various central controls. Bitcoin itself is transnational in nature and is not subject to any geographic restrictions and can be sent worldwide in minutes. In addition to payment and settlement, Bitcoin also has the function of currency exchange. In addition to Bitcoin, there are a large number of blockchain-based digital currencies around the world, such as Ethereum and Ripple, which are decentralized.

Virtual currency's own defects

Such digital currency represented by bitcoin is not based on tangible credit, but is generated through incentive and consensus mechanisms. This mechanism is called “mining”. Bitcoin is not a real currency because it is not supported by real estate. It is just a string of characters that exist on the blockchain. It is essentially a “virtual currency”. Once users and people who buy Bitcoin lose trust, their systems It may collapse at any time.

Bitcoin is easy to induce systemic risk. A country usually adjusts monetary policy by the central bank. However, when virtual currency is heavily used by people, the central bank may lose the ability to influence the economy by regulating the money supply. At the same time, the issuance conditions for virtual currency are predetermined and completely determined by the code, lacking the necessary flexibility.

Bitcoin lacks the necessary privacy protection. The blockchain operates in a transparent manner, using technology to identify and track digital currency payments, not only to identify the identity of these account holders, but also to identify financial transaction history, account holder identity exposure can lead to hacker attacks, financial transactions Historical exposure will reveal trade secrets.

In addition, Bitcoin operates outside the scope of national control and creates tensions with existing laws. For example, in order to control the use of currency for crimes, national laws require users to set up accounts and provide basic personal information in banks. However, the Bitcoin system is open to anyone, and users are basically registered under a pseudonym and can be obtained without strict procedures. Bitcoin payments facilitate money laundering, terrorist financing, drug trafficking, tax evasion, etc. In this regard, in 2017, the People's Bank of China and other seven ministries jointly issued an announcement prohibiting all kinds of token financing and illegal financial activities related to “virtual currency”.

Based on various problems of virtual currency represented by bitcoin, some economic entities began to introduce stable coins based on blockchain. If Libra Coin is supported by credit as a real reserve fund, it is essentially a proof of rights. The so-called payment is the payment of the reserve share. As a result, such digital currencies began to return to real credit, and because they belong to securities, they no longer operate completely outside the law like bitcoin.

Advantages of the central bank's digital currency

Digital currency such as Bitcoin has both the characteristics of angels and devils. One way to get rid of its essence is to issue the official digital currency by the central bank. Because the central bank's digital currency is not generated by “mining”, nor is it a combination of assets as a credit guarantee, but based on national credit.

It is the digitization of cash currency, unlike the currency in Alipay and WeChat wallets, and does not need to be tied to a bank account. Compared with other digital currencies, the central bank's digital currency can be separated from the Internet and paid online like a banknote. The central bank's digital currency can run on the blockchain or not on the blockchain, and can still play the role of peer-to-peer and anonymous payment. Therefore, the digital currency issued by the central bank is a real currency, which returns to the essence of the currency and can achieve the results of decentralized payment and settlement.

In a nutshell, bitcoin is a virtual currency, which is not a currency in nature. It is a series of symbols with property value that people run on the blockchain based on cognitive consensus and has a high credit risk. Libra coins are essentially a kind of securities. Compared with virtual currency, they are based on 700 billion US dollars of credit assets. However, based on the openness of blockchain, their transactions are likely to break away from reserves and induce new ones. risk. The central bank's digital currency is the national credit guarantee and the legal currency issued by the central bank. It runs on the legal track and can effectively curb illegal digital currency payment activities. For example, illegal activities such as money laundering and tax evasion based on blockchain digital currency are difficult to detect payers. This problem can be easily solved under the central bank's digital currency. The method is to track the electronic wallet and find relevant payers through big data mining. .

The central bank's digital currency can not only transform the shortcomings of traditional currencies, but also enjoy the benefits brought by digital currency. Like banknotes, it is the legal currency of the country and an inevitable outcome of the digital economy. In the future, whether digital currency will replace banknotes depends on the degree of digitization of society. This is the material basis for the full digitization of legal currency, and it also depends on the provisions of the law. This is the formal requirement for the replacement of banknotes. Both are indispensable.

Guangming Daily (November 17, 2019, 07 edition)