Source: Digital Fiat Research Institute The birth of the crypto digital currency Libra, which is owned by Facebook in June 2019, has accelerated the development of the legal digital currency of central banks worldwide. Since Libra, the attitude of international financial organizations towards cryptocurrencies has changed radically. In July 2019, Agustin Carstens, the president of the Bank for International Settlements (BIS), stated for the first time that he "supports central banks to accelerate the issuance of central bank digital currencies" and appointed the head of the BIS Innovation Center to host BIS in November Research and development of digital currency.
Former IMF President Lagarde also clearly stated that the IMF will launch a global digital currency (IMF Coin) similar to Bitcoin according to the special drawing rights (SDR) mechanism. Lagarde also affirmed the digital currency after taking up the presidency of the European Central Bank. In December, a report of the European Central Bank (ECB) entitled "Exploring the Anonymity of the Digital Currency of the Central Bank" was leaked. Currency (CBDC) payment system.
The change of digital currency to the payment system has basically reached consensus among central banks in various countries. At present, central banks of many countries are studying blockchain and encrypted digital currencies and conducting technical tests. Some central banks have officially introduced relevant policies for digital currency issuance and payment transactions: such as the European Central Bank, the Bank of Sweden, the Bank of Canada, the Bank of Japan, and the Monetary Authority of Singapore. The Central Bank of Uruguay has piloted the release of the Central Bank Digital Currency (CBDC) on a limited scale; the Philippine Central Bank supports the private sector fiat digital currency (DFC) for payments under a regulated sandbox system. In addition, some offshore financial countries or regional encrypted digital currencies have entered the technical testing stage, such as the Bahamas and the Eastern Caribbean Monetary Union. There are also some countries that provide tax incentives for the payment and use of encrypted digital currencies: For example, the Singapore Revenue Authority officially announced on July 5th that, from January 1, 2020, the supply of payment-type digital currency will be exempt from GST. But before that, the country's payment digital currency was double taxed when it was used to pay for goods and services. The pace of global central bank digital currencies is getting closer. If fiat digital currency is only used to expand the payment function of traditional fiat currencies, which is commonly referred to as cross-border Alipay, what are the advantages compared to open private cross-border payments? In what ways will the central bank digital currency reconstruct traditional fiat currencies?
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Advantages of digital currencies
Digital currencies are issued by super-sovereign institutions, such as the IMF's SDR coin (to be issued), legal fiat currencies issued by sovereign institutions (Venezuela's "petroleum"), and digital currencies issued by non-sovereign institutions (Libra). In 2018, the international authority "Payment and Market Infrastructure Committee (CPMI) and Market Committee (MC)" defined central bank digital currency as a new variant of central bank currency that is different from physical cash or central bank reserve or settlement accounts. Based on the four dimensions of the issuer (central bank or non-central bank), form (digital currency or traditional paper currency), accessibility (open or restricted), and technology, the global central bank's digital currency is divided into universal and wholesale.
The currency is divided into tokens or account-based currencies according to whether it is centralized. The person receiving the token will directly verify the authenticity of the token, which is a type of "decentralized" currency; and the intermediary agency will verify the digital currency of the account holder's identity. This type is a type of "centralized" currency. The "decentralization" feature makes central bank digital currencies more difficult to counterfeit than traditional fiat currencies issued by central banks. Unlike other types of digital currency distributed bookkeeping, the central bank digital currency has a ledger centrally managed by the central bank, which has the ability to track payments.
Third, the traditional cash management cost of banknotes is relatively high. The digital currency of the central bank can reduce the operating costs of fiat currencies, improve payment efficiency, and facilitate cross-border payments. At the same time, in developing countries with low bank penetration and backward financial depth and breadth, digital currencies can provide the public with a more secure and liquid payment method. This payment method is endorsed by the national credit. There are no defaults or "runs" under the circumstances. Finally, the emergence of endless private digital currencies has put pressure on regulation and monetary policy. Digital currencies of central banks can enhance market competitiveness and maintain market discipline. Because the central bank has the ability to track payments to digital currencies, legal digital currencies are conducive to the supervision of illegal activities such as anti-money laundering and terrorist financing, digital tax evasion, and legal digital currencies provide big data for regulatory technology. Issued before the birth of private digital currencies, the central bank can gain the initiative of digital currencies.
Obviously, if the advanced nature of the central bank's digital currency is limited to expanding the boundaries of the payment system, legal digital currency is not indispensable. The central bank can choose to open the functions of the cross-border payment system to existing private payment systems that are technically very mature. Given that most of the current private digital currencies are payment functions, the central bank can also choose to allow the issuance of private digital currencies. So what exactly is it for central banks to actively develop digital currencies? For developed economies, payment security and financial stability, and the regulation of non-sovereign digital currencies are the main driving forces for the issuance of digital currencies. Emerging market economies place greater emphasis on payment efficiency and financial inclusion. Digital currencies are also one of the means to cope with the crisis of exchange rate depreciation and rely on "going to the dollar." The non-central bank digital currency is mostly issued to improve payment and settlement efficiency, such as JMP coin; there are also virtual assets, such as Bitcoin; and inclusive finance, such as Libra. Taken together, the issuance of digital currencies by central banks in various countries can be divided into the following scenarios: The first is to issue digital currencies to improve the efficiency and security of the payment system, typically Singapore, which uses digital currencies to improve the efficiency of the existing currency cross-border payment system;
The second offshore financial country or region issues digital currencies for the purpose of anti-money laundering and supervision of illegal activities, or to prevent the transfer of illegal assets. European countries, such as Norway and Sweden, issue digital currencies in order to supplement digital currencies with fiat currencies to maintain the stability of the existing monetary system. In addition, some petro-dollar countries such as Venezuela, in order to break the US dollar blockade and reduce their reliance on the US dollar, issue digital currencies that can be converted into fiat or gold as a reserve tool to maintain currency stability and the normal operation of the domestic economy. The primary functions of the central bank's legal digital currency are more likely to favor retail electronic payment, pursuing the convenience and convenience of the retail payment system and the low cost of cross-border payments.
If the central bank's digital currency is merely an extension of the scope of payment and valuation methods, or the evolution of its functions, the central bank's digital currency is not indispensable. A cross-border payment function similar to China's Alipay or WeChat has very limited significance for central bank digital currencies. If the issuance of central bank digital currency is only a cross-border payment function of electronic money, it is better to release the cross-border payment function to private payment institutions; or at least the central bank cooperates with private institutions to implement the cross-border payment function. But obviously the central bank's digital currency is not limited to primary payment functions. In terms of weakening the hegemony of the US dollar and the supervision of illegal activities such as anti-money laundering, fiat digital currencies have incomparable advantages over traditional fiat currencies.
The emergence of Libra has made the world see some defects of the traditional fiat currency system, especially the structural problems embodied by currency. But can digital currency solve everything? Firstly, fiat digital currency is a kind of currency, so it should have four basic functions of currency: four functions of transaction medium, pricing unit, storage means and deferred payment. Currency stability is the prerequisite and necessary condition for digital currency as a storage means and reserve asset. Currency stability is the key to the sustainable development of digital currency. In 2018, Venezuela issued the world's first digital currency with a country as its issuing unit, the Petro Coin. The country issued the "Petroleum Coins White Paper", announcing the use of petrocoins as the country's international bookkeeping unit. At the same time, petrocoins are also the country's domestic wage and benchmark for the pricing of goods and services. Petroleum coins can also be used as an exchange medium for investment tools, savings mechanisms and public services, for direct exchange and free circulation with domestic goods. The Venezuelan government defines that every petroleum coin has a barrel of crude oil in Venezuela as physical collateral. Each oil coin has 1 barrel of crude oil (about 137 kg) from Venezuela as physical collateral, and is supported by the national resources and mineral resources as the currency value, of which oil currency value support accounts for 50%, gold accounts for 20%, iron accounts for 20%, and diamonds Assets account for 20%. It can be purchased in fiat currencies such as USD and RMB or digital currencies such as Bitcoin and Ethereum. Due to the downturn in Venezuela's domestic economy and US sanctions, inflation is severe and the price of petroleum coins is extremely unstable. The volatility of petroleum coins, that is, the CBOE Volatility Index (VIX), far exceeds the legal tender of each country. In the case of the collapse of the Venezuelan government, there is also the possibility that petroleum coins cannot be exchanged. The Venezuelan digital currency has failed. Secondly, the stability of the value of digital currencies depends on domestic economic fundamentals and national credit. Digital currency is an exogenous variable that cannot solve economic endogenous problems such as high inflation and economic downturn. Secondly, digital currency is a total amount tool that cannot solve the structural problems of single industrial structure and inequality of wealth. Thirdly, the mechanism of digital currency design is related to the stability of currency value. The currency's trading medium and pricing unit are basic functions, and the storage means are related to the sustainability of digital currencies.
The Impact and Challenge of Fiat Digital Currency on Central Bank and Monetary Policy
Whether it is a legal digital currency or a private digital currency, it affects the monetary policy and supervision of central banks around the world to varying degrees. Cryptocurrencies first affect the country's money supply and the central bank's balance sheet. Secondly, the digital currency of the central bank has a certain crowding-out effect on the traditional business of banks. Digital currency will cause financial intermediaries such as banks to gradually de-intermediate.
Therefore, in order to prevent digital currency from causing excessive pressure on traditional banks, digital currency development may be combined with bank retail business in the early stages. Once again due to the existence of encryption technology, each digital currency has a certain monopoly, which has brought coinage rights to the institutions that issued the currency. Taking Libra as an example, Calibra is the only "coin" institution in Libra, resulting in other institutions not having the coinage right for that currency. Libra's issuance is based on a basket of fiat currencies and government bond reserves, so using a Libra requires a set of fiat currency reserve assets, and users of Libra need to pay a cost to the currency creator, that is, a mint coin. Because the association does not pay interest to Libra users, Libra's direct minting tax is a gain on its basket of fiat currencies and short-term government bonds. Because Libra's reserve assets are a combination of fiat currency and government bonds, the coinage tax consists of two parts: one is the interest margin of the commercial bank and the cost of the reserve deposit paid by the commercial bank to the central bank; the other is the revenue of the government bond portfolio. The weight of the two parts depends on the proportion of legal currency and government bonds in the currency basket of Libra's reserve assets. The Libra Association will enjoy most of the coinage tax. Since the coinage tax has always been the exclusive power of fiat currency issuers, private digital currencies compete with fiat traditional currencies and challenge the status of fiat currencies while the main impact comes from weakening the fiat currency's coinage rights. This is one of the main reasons for the US Congress to stop the Libra project.
Digital currencies in China
As early as 2014, the People's Bank of China established a special research group on fiat digital currencies to study the feasibility of issuing fiat digital currencies. According to central bank officials, the digital currency developed by the central bank is called "DC / EP" digital currency / electronic payment. In October 2019, the Governor of the People ’s Bank of China Yi Gang stated: “The central bank ’s digital currency will replace some cash (M0).” Regarding the design of China's digital currency mechanism, Mu Changchun, director of the Digital Currency Research Institute of the Central Bank of China, said recently: "The central bank's digital currency uses a two-tier operating system. The so-called two-tier operating system refers to the two-tier operating system of the Central People's Bank and commercial banks. The upper layer is the People ’s Bank of China to the commercial bank, and the lower layer is the commercial bank or commercial institution to the common people. ” The central bank's digital currency is expected to be piloted in some cities.
In order to ensure the smooth advancement of the central bank's digital currency, China currently needs to further strengthen the construction of financial infrastructure and establish an information data system for digital currency. Second, establish a unified digital currency index system and collection system. At the same time, the principles of openness, uniformity and transparency are implemented for the statistics and publication of related digital currencies. Simultaneously develop regulatory technology, improve the laws and regulations of financial technology, and improve the comprehensive analysis and monitoring capabilities of big data and information. Thirdly, we will effectively protect the legitimate rights and interests of users, and promulgate data privacy protection laws in line with international standards. Finally, a stable mechanism for the value of digital currencies is established. Pay close attention to the impact of digital currencies on the basic structure of the traditional financial system. Accurately identify the risks of digital currency transactions, conduct regular stress tests, and provide timely early warning of risks. Intensify penalties for digital currency crimes and strengthen cooperation with international regulators. (Source: FIT Chinese website)
(The author is a postdoctoral researcher in applied economics mobile station, chief analyst of fixed income of Great Wall Securities, part-time researcher of Fudan University Development Institute)