Deputy Director of the Institute of Finance of the Development Research Center of the State Council: Opportunities and Challenges of Digital Currency

Source: China Economic Net

Editor's note: The original title was "The Opportunities of Digital Currency and the Challenges of Itself and Outside"

The writer is Zhang Liping, deputy director of the Institute of Finance of the Development Research Center of the State Council.

I mainly talk about three aspects: First, the opportunity of digital currency, both sides of supply and demand support the era of digital currency with the development of digital economy. The second is the challenge of digital currency, including its own challenges and external challenges. Third, there are four immature opinions on the future development of digital currencies.

Opportunities for digital currencies

The biggest opportunity of digital currency comes from the development of digital economy. Digital currency is an inevitable product of the development of the digital economy era. I would like to draw your attention to the two recent messages. The first one was on October 8th. UNICEF established the Cryptocurrency Fund. Its main task is to accept donations of cryptocurrencies. The second is on November 16th, the BRICS considered the use of crypto for payment settlement of trade transactions within the five countries. It can be seen that the figure of digital currency is no longer confined to the private sector and has begun to appear on the stage of international organizations and cooperation between countries.

At present, both the supply side and the demand side have supporting factors to advance the advent of the digital currency era. On the supply side, the rapid and continuous advancement of technology is the driving force behind the development of digital currencies. In my research, I deeply felt that emerging technology fields such as big data, artificial intelligence, blockchain, and the Internet of Things often gather a group of technical elites with a utopian complex. Their ultimate goal is to achieve decentralization and inclusiveness. Performance and efficiency, full of enthusiasm in technological progress and iteration. On the demand side, the G7 Working Group's report on stablecoins has stated that there are still a large number of people in the world who have not obtained banking and financial services. The implementation of stablecoins will help these people to access the account system and enjoy financial services. This increases the availability of financial services. This is just one of the requirements. With more and more application scenarios, the demand for digital currency will become more and more abundant. In short, demand and supply interact. Sometimes supply creates demand, and sometimes demand drives supply, and ultimately drives the development process of the entire digital economy era.

Challenges of digital currencies

Regarding challenges, I want to talk about two major aspects, internal challenges and external challenges.

Internal challenges: First, the challenge of digital currency at the conceptual level. First, digital currencies currently lack a standardized definition. What is digital currency? I am afraid there is no unified concept. When foreign countries discuss digital currencies or digital currencies issued by the central bank with the Token paradigm, the concept of cryptocurrencies is usually given to it. In an article by the Australian Taxation Office, cryptocurrency was defined as a digital asset. The encryption unit was used to generate and verify transactions on the blockchain. The concepts of encryption and blockchain are emphasized here. The Swiss regulatory authority FINMA divided the token into three categories in the ICO regulatory guidelines: payment, function, and asset. The payment token refers to the current or future payment means intended to obtain goods / services, or the means and functions of currency / value transfer Token is intended to provide digitally obtained applications or services based on blockchain infrastructure. Asset tokens are creditor's rights or equity to the issuer. Second, the definition of legal digital currency is not very clear. What exactly is a fiat digital currency? Is the central bank's electronic and digital currency called fiat digital currency? Or can only the digitalization of the Token paradigm be used to calculate the digital currency? Or will the private sector issue a cryptocurrency with a wide range of influence in the future, which can also be considered as a legal digital currency through the authorization of the state to perform part of the legal currency function? We can't conclude here, this is another difficulty in the definition of digital currency itself. The third problem is that stablecoins may not be stable. Stablecoins emphasize that they are associated with asset pools and have stable value. The Swiss Financial Market Supervision Authority (FINMA) classifies stablecoins into four categories associated with currencies, commodities, real estate and securities. But the question is whether it is stable? In reality, under great external shocks, the currency's stability mechanism will usually face huge challenges. When the situation is serious, a currency crisis will erupt.

Second, there are difficulties at the issue subject level. One of them is to answer the question, is the issuer of digital currency better than the central bank or the private sector? I think from a practical point of view, central bank issuing is better. Mainly because digital currency issuance is subject to the checks and balances of currency supervision, and digital currency issued by the central bank will naturally be subject to regulatory approval, so there will also be a wider range of applications. However, the private sector as an issuer also has his advantages, which are mainly reflected in innovation.

In addition, the digital currency has challenges in terms of technology, diverse technologies, and variable development paths. Due to the intricate path of technology, with continuous development and iteration, the path of technology will continue to branch out, the degree of intricateness of technology will continue to stack up, and the subordinate relationship between the branches will become more and more chaotic. There is no uniform answer. In addition, the path of technology is far more changeable than constant branching. In practice, if the new technology encounters a bottleneck in its application, it will turn to another direction.

External challenges: There are two main aspects: one is regulation, and the other is infrastructure. Current concerns about digital currency risks focus on data privacy, consumer protection, money laundering, counter-terrorism financing, on-chain governance, payment system security, efficiency, and integrity, cyber security and operational flexibility, market integrity, taxation, monetary policy, and financial stability , The international monetary system, fair competition, and many other aspects. In response, monetary authorities in many economies have strengthened supervision of digital currencies. Digital currency infrastructure mainly includes communication conditions, data foundation, credit environment, and legal environment. Here I want to focus on communication and data issues.

The survey results found that the current blockchain technology, which is closely related to the development of digital currencies, faces some restrictions on communication conditions. One of them is the problem of insufficient computing power as nodes increase. Even with 5G now, the role in solving this problem still needs to be practiced. In terms of data foundation, issues such as the authenticity of the original data and data privacy protection need to be addressed. The blockchain can solve the real problem of the data on the chain, but the authenticity of the original data cannot be solved by the blockchain, so the quality of the basic data is very important. What needs to be emphasized here is that, while improving the convenience of data access, a strong data privacy protection mechanism must be established to avoid data abuse.

Finally, I would like to make four immature opinions on the future development of digital currency. First of all, the challenges of current digital currencies are largely due to the uncertainty they face and the need to find answers in experimental practice. Secondly, the functions of non-statutory and legal digital currencies should be different, and they should not be substitute or opposite, and they can coexist. Third, for large countries, legal digital currency can be described as a mobilization of the whole body. It is very important to study and demonstrate actively and seriously, and it needs to be extremely careful to promote it. Fourth, we must attach importance to the practice of illegally deciding digital currencies within a limited range.

Just like Libra, in fact, I do not value its detailed technical issues, what is important is that it may lead the relevant rules and standards in the world. In this regard, is it possible to allow qualified institutions and enterprises to try to issue illegal digital currencies that do not use money, do not make money, have practical applications, and have stable mechanisms, and explore rules and standards that lead the development and application of digital currencies. At present, there are more than 2,000 illegal cryptocurrencies or assets in the world. I believe that only by our own actual attempts can we better grasp the rules and standards of digital currency technology in the world.