Opinion | Wang Qian of Jilin University: The Central Bank will definitely face fierce competition between private and fiat currencies in the future

Author: Wang Qian
Source: Zero One Think Tank

Editor's Note: The original title was "Wang Qian: Digital Currency and Financial Governance of the Central Bank"

In order to deeply understand the impact of digital currency on domestic and global macroeconomic systems, and to reasonably forecast the future development trend of digital currency and make corresponding suggestions, on March 27, the Digital Asset Research Institute, Hengqin Smart Finance Research Institute and Zero One Finance Zero One Think Tank co-hosted an online closed-door seminar on "The Impact and Prospect of Digital Currency on Macroeconomics".

Professor Wang Qian, deputy dean and professor of the School of Economics of Jilin University, brought the sharing entitled "Digital Currency and Financial Governance of the Central Bank". In his speech, Wang Qian mentioned that digitization has expanded the influence of private currencies, and the central bank will definitely face very fierce competition between private and fiat currencies in the future; private digital currencies invalidate the division and statistics of monetary levels, and accelerate monetary policy from quantitative to Price-based turnaround; The virtual nature of digital currencies and the complexity of their systemic risks necessitate the international cooperation of macro-prudential supervision and cross-border financial governance.

The following is the speech record

Hello everyone, I am very glad to have such an opportunity to share and report some thoughts on digital currency. I mainly cut through the financial governance of the central bank from digital currency. From the perspective of currency history, I explained that digital currency will inevitably promote the reform of financial governance of the central bank. This change is mainly reflected in the private currency and fiat currency facing the central bank. Competition will be fiercer and monetary policy will shift faster from quantitative to price. At the same time, in the digital currency environment or the digital economy environment, whether it is macro-prudential supervision or cross-border financial governance, international cooperation is even more required.


Digital currency will drive change in central bank financial governance

The first question, from the perspective of monetary history, why do we say that digital currency will definitely promote the reform of central bank financial governance? Readers who study international finance should know that the human monetary system is divided into the gold standard system and the credit currency system. In terms of time, the gold standard system corresponds to classical economic thought. This classical economic thought manifests itself as a kind of inaction in financial governance.

When the currency is gold, the reason for having classical economic thought is that under such a form of currency, it has its own unique operating mechanism. For example, the mechanism of price gold flow, such as the point of gold output and gold parity. It is precisely because under such a monetary system, the economic operation mechanism will allow the economy to automatically achieve the balance of payments and exchange rate balance. Therefore, when the market mechanism can work, there will naturally be an invisible hand put forward by Adam Smith.

After Adam Smith, we have entered a new stage in the history of financial doctrine, which is Keynes's visible hand (the hand of government intervention). Keynes's thought actually had an institutional premise. Before Keynes' General Theory of Employment, Interest, and Currency, that is, the "Monetary Reform" and "Monetary Theory" between 1923-1930, pointed out that the restoration of the gold standard system in the United Kingdom made gold a shackle of economic development and restricted economic development .

Therefore, the credit currency system is advocated, and only under the paper currency standard system can the country implement the counter-cyclical monetary policy through the issuance of credit currency. In other words, the counter-cyclical monetary policy of the central bank's financial governance in the modern sense of "seeing and seeing the hand", its system premise from the history of money requires the credit currency system of banknotes to replace the metal currency system. Just as paper money replaces gold coins, it is driving change in financial governance. Digital currencies will also drive changes in the financial governance of central banks.


Competition between private and fiat currencies facing central banks

In the current digital currency development process, we can see that the central bank will definitely face very fierce competition between private and fiat currencies in the future. Teacher He mentioned the history of money in the Ming Dynasty and explained private money. In fact, even if we do n’t look at it from a long history, readers of colleges before 1990 may have realized that the tickets in the school cafeteria have actually formed an internal currency. The definition of internal currency and external currency has long been discussed in the history of financial doctrine.

Therefore, in this sense, private digital currency, which is what we call private digital currency, and even digital currency of the second-tier financial institutions, we can call it community currency or internal currency. At present, private digital currencies have become a prominent problem because digitalization has made the impact of internal private currencies no longer confined to a small community. Due to the infinite nature of the network, its influence has expanded. This expanding influence has caused banks to face competition for private currency and fiat money in the right to issue currency.

Although there is a lot of controversy in the current academic community about the monetary nature of private digital currencies. Some scholars believe that Bitcoin is money, but some scholars think that Bitcoin is not money, it is an asset. When I see this argument, I think of two equations in finance. One is the trading equation and the other is the Cambridge equation. No matter what kind of equation is the demand for money, or the object of research is money. The thinking of the two is different. One thinks that currency is the medium of transaction, and the other thinks that currency is an asset. From this perspective, we can also think that the current debate about whether Bitcoin is a currency stems from these two different ways of thinking. But no matter which way of thinking, I don't think it is possible to deny that Bitcoin has played some functions of currency, so in this meaning, I think Bitcoin is a currency to some extent.

Bitcoin has experienced a recent plunge, and it has been suggested whether the value of Bitcoin as a currency still has meaning. It can be said that whether the recent Bitcoin, gold, and national debt plunge in the United States and the rise in the US dollar index mentioned by Teacher He earlier. The reason is not because the asset itself has a problem, but because the stock market in the United States faced a plunge in liquidity due to the impact of the epidemic. Since the United States proposed the Walker Rule after the financial crisis, which restricted commercial banks from providing financial support to the stock market, the face of the stock market crash caused the United States to face liquidity problems. The liquidity dilemma caused by the stock market crash caused investors to need funds, and they would sell all risky assets and repatriate funds from the world. When investors repatriated funds globally, the dollar would rise.

By the same token, as a risk asset, when the United States faces liquidity difficulties, it will naturally suffer a sell-off. However, this selling behavior is, I think, a short-term, liquidity problem caused by external shocks under the Walker Rule. Since then, the Fed has issued a series of liquidity support programs for different levels, and has eased the difficulty of liquidity to some extent. Therefore, it is impossible to deny Bitcoin's monetary attributes with the Bitcoin crash.

Let's go further. Why do I think the central bank will face fierce competition between private and fiat currencies? Because currency issuance has a huge mintage tax revenue, this huge revenue will attract the private sector to participate in the currency issuance competition. If the size of the internal private currency is relatively small, the impact on the central bank will be small, and it may be silent. However, when private currencies are developing rapidly, such as when China has entered a cashless society, private currency will have a huge impact on the central bank's coinage tax revenue and even include the management of the macro economy. Naturally, countries will promote the issuance of legal digital currencies.

So what the teacher said is that private money and fiat money are a game between freedom and monopoly, when the impact on the existing monopoly management system is not great. Private digital currencies may exist, or even encourage free innovation. But once it is too big to affect the country's macroeconomic management, it will inevitably be squeezed out by legal digital currency. Because the central bank of a country can manage its own macroeconomics, whether it is a bank or a government bank, its premise must be the issuing bank, which means that between the legal digital currency and private digital currency of each country The competition will be fierce.

In addition, due to the network effect of digital currencies, and the first-hand effect of the digital economy, that is, the effect of "no longer big fish eats small fish, but fast fish eats slow fish", which has also led to competition in legal digital currencies of various countries. It will also become intense. Therefore, we may face a situation where private digital currency and legal digital goods coexist slightly, just as free will and monopoly coexist.


Conversion of monetary policy from quantity to price

The rapid development of private digital currencies has challenged the central bank's monetary policy. Some scholars have suggested that after the emergence of digital currencies, the monetary policy of the central bank will be invalidated, at least the traditional monetary policy will be invalidated. Some radical scholars advocate the idea of ​​free banking and directly propose that the central bank no longer needs to exist, and that the currency should be denationalized. However, other scholars believe that the impact may be small. Some scholars believe that there is an impact, while others believe that it brings new opportunities to monetary policy. For example, Mr. Zhu mentioned that digital currency will break the liquidity trap, because legal digital currency provides the central bank with new monetary policy means, which can more effectively manage the operation of the entire digital economy.

So, in this sense, I personally think that the future monetary policy will still exist. It is only because private digital currencies invalidate the money supply policy and caliber. The monetary policy will change from quantitative to price. It will accelerate with the rapid development of private digital currencies.

Why do I think monetary policy must exist? In this chaotic state caused by the epidemic shock, we can see that various countries have begun to adopt more policies to intervene in the market. This is similar to when the market is efficient, or the market is more conducive to resource allocation, the "invisible hand" of the market will play a greater role. But once the market fails, the role of government will strengthen. In the future, under the environment of strengthened government role, the central bank system will also strengthen macro financial governance. The central bank will definitely adopt corresponding measures to strengthen monetary policy. In addition, digital currency issuance will have a series of economic benefits. When the competition between various communities is disorderly, it will inevitably make people pursue an orderly state. In this sense, the central bank's unified management of monetary policy May exist.


Macro prudential and international cooperation in cross-border governance highlighted

Under the impact of the epidemic, the environment for international cooperation is actually deteriorating, but from the perspective of an optimal solution, it is difficult for countries to survive alone. The current epidemic has no national borders because the virus cannot see the national borders, and cooperation is inevitable choice. In the same way, digital currency is actually a basic medium in the digital economy, and digital virtual space is not as clear as a geographical border.

In addition, the systemic risks of digital currencies will be stronger. This kind of systemic risk is not only confined to a certain community or a certain country, it will lead to greater herd effect and resonance effect due to the rapid transmission of information flow. From the impact of the epidemic this time, the increase in the linkage between the stock markets of various countries can be seen in the crisis. Therefore, the development of digital currencies requires the cooperation of countries in strengthening macro-prudential supervision.

In this sense, it also means that if the development of the digital economy is further deepened, the development of digital currencies will require central banks of various countries to cope with global financial issues in a cooperative manner. In addition, we previously emphasized that the existence of coin tax revenue for digital currency issuance involves the ability of a country to manage the macro economy, and even the right to influence the pricing of international financial products. The issuance of legal digital currency between countries also faces very fierce competition. Regardless of the United Kingdom, or Australia, Canada, the United States, China, and Japan, statutory digital currency projects and plans have been proposed. When the fiat digital currency issuance is faced with the battle of the heroes, the chaos it will cause also requires financial cooperation to strengthen the governance of international finance.

That's it for my sharing today, thank you.