Babbitt column | Digital currency: a new global currency under asymmetric regulation

The development of digital currency entered the era of digital legal currency after experiencing a spiral rise. In the process of combining with national credit, the digitization process of money provides a huge technological impetus for the globalization of money, and it also brings new types of regulatory issues. The asymmetric regulation model issued by a country and used globally has opened up new horizons for the future development of digital legal currency, and has also raised many regulatory challenges for the digitization of legal currencies in countries around the world.

First, the spiral of digital currency development

China's legal currency is the renminbi. As a kind of credit currency that is not honored, the renminbi is the only legal currency in China and it is forbidden to operate foreign exchange circulation. Money has country attributes and is expressed as a sovereign currency. The role of the "Monetary Finance" on the central bank is the state's banks, banks' banks and issued banks. The core of the various roles of the central bank is sovereign currency, behind which is the support of national credit. Sovereign currency is the core tool for the central bank to implement monetary policy. Currency thus has multiple attributes such as geography, economy and politics. Affected by inertial thinking, even under the digital Internet information technology, people's imagination of digital legal currency is still limited to the currency used in the territory of a country for the circulation of goods and services of the territorial economy and society. According to this logic, when encountering situations such as cross-border trade and personal exit, it is necessary to conduct currency exchange. However, miracles always appear in the blank space of imagination, and the development of science and technology brings us more imagination. What is the process of forming a digital trend of fiat money? What are the advantages of digital currency? Why is there a regulatory asymmetry in digital legal currency?

From the concept sprouting to the development of ideas, from the research of the Bank of England scholars in 2014 to the design of the 2019, the digital legal currency is finally possible to achieve. The core of this is that the change in speed has brought about a qualitative leap – the digital currency must become a global currency. Under the guarantee of Internet infrastructure, it can be traded 24 hours a day, 365 days a year, and settled in real time. As a global currency, digital legal currency has a large number of advantages in cross-border payment, transaction, and trade finance, so that payment can be realized safely and efficiently. Digital currency, which is efficient, safe, and low-cost, will continue to strive for new market share. As the scale of users expands, it will become the world's reserve currency. Moreover, the currency has no liquidity risk as the national credit currency, and it fully retains its own characteristics of sovereign currency. The replacement of the US dollar by the Bank of England Governor in August 2019 is the best interpretation of this idea.

Digital legal currency (legal digital currency) is not only a national currency, but also a global currency. It is an important tool to reflect a country's global competitiveness [1]. Compared with traditional national credit currencies, digital currency can reflect more advantages in design.

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Digital currency has a very obvious advantage in structure:

(1) It is not necessary to change the current law to be used in various fields such as payment circulation; (2) It does not affect the national monetary policy; if it has an impact, it can also establish a separate monetary policy for the digital legal currency; (3) customer protection, no credit risk;

(4) merchant protection, no credit and liquidity risk;

(5) For cross-border transactions, the same digital legal currency can be used for loans.

Financial technology can easily change the financial market without changing the existing legal framework, and the market share is not dependent on traditional production factors such as manpower, capital, land, etc. The core of which is high technology.

Second, the inevitability of digital legal currency to become a global currency

1) Digital currency can circumvent the credit risk and liquidity risk of a centralized national credit currency issuance system. Under the financial system, the original bank is the circulation center of the national currency. However, even in the financial crisis, even large commercial banks may have credit risks. In the subprime mortgage crisis and the European debt crisis in 2008, large-scale finance such as banks appeared. Institutional credit risk and liquidity risk events. In fact, the liquidity risk of financial institutions is a frequent occurrence. Sometimes banks have enough deposits, but because of the restrictions of Japanese-Chinese transactions, they cannot complete transactions. However, the digital tokens represented by Bitcoin can be traded 24 hours a day, 365 days a year. Without the support of the central bank or large financial institutions, there is no credit risk and liquidity risk, even the transaction speed is faster than that of the bank. be quick. These phenomena that made most people ridiculous made the Bank of England scholars in 2014 extremely surprised. So in the Bank of England's 2014 report " Innovations in Payment Technologies and the Emergence of Digital Currencies" [6], by Roble Ali, John Barrdear, Roger Clews, James Southgate, If the national currency endorsement of the legal currency, such as the number of pounds, can appear in the form of digital currency. Just like digital tokens, trading in real time 24 hours a day, 365 days a year, then, as long as the digital currency in the account exists, digital currency transactions can circumvent credit risk and liquidity risk under the national credit endorsement, and trade at high speed. The report opens the world's first digital legal currency program, positioned as a global currency, real-time settlement, and 24/7 non-stop trading. This report directly triggered the Bank of England's repeated plans for the number of pounds in 2015-2016, becoming the first echelon and leader in digital currency research and development.

2) Digital legal currency will support global 365/7/24 large-scale real-time payment settlement in the future. The Bank of England launched a new RTGS (Real-Time Gross Settlements) blueprint to open up the existing RTGS system to experiment with technology companies. This new blueprint program supports large payment systems based on blockchain real-time settlement, and large real-time settlement systems can support global digital currency support and settlement. Some of the ideas in the blueprint were written into the cross-border payment report of the Bank of England, the Bank of Canada, and the Central Bank of Singapore in November 2018.

3) The design of the digital legal currency corresponds to a 100% reserve. Moreover, the digital legal currency is different from the general credit currency and can exist directly in the central bank. This concept was proposed by the British company Fnality in June 2019 and the International Monetary Fund (IMF) in July 2019 [4]. This is the "synthesized digital currency" (sCBDC) supported by the central bank. Fnality proposes wholesale synthetic digital currency (wCBDC), and the International Monetary Fund discusses retail synthetic digital currency (rCBDC). Unknownly, Fnality's predecessor was a member of the Bank of England's 2018 RTGS pilot program.

4) Synthetic digital currency follows the “one currency, one chain, one account” criterion. Fnality also designed a utility stable currency USC (Utility Settlements Coins) based on the important idea of ​​a three-country central bank cross-border payment report [3]. However, due to the existence of counter-coins supported by the legal currency of many central banks, in August 2019, Bank of England Governor Mike Carney published a speech in the United States that surprised the world – using the "synthetic hegemonic digital currency" to replace the dollar Become the world reserve currency.

5) An all-weather payment system under a two-tier architecture. Fnality also proposed two important system design concepts: one currency account, one currency chain, and a two-tier structure, which supports a high-speed real-time settlement payment system. This is because the risk of liquidity in the day is greatly reduced, which can greatly increase the transaction speed. The time period of liquidity risk in the day also expanded from 7-8 hours of daytime market transactions to 24 hours [2].

The digital legal currency is a global currency, but it is regulated by the country corresponding to the currency, thus forming an asymmetric regulatory relationship. That is, the currency is global, and the regulation is state, not international. For example, the number of pounds is the UK's digital currency, payment and circulation can be directed to all other countries, and technically open to other countries (for example, the Bank of England has published several technical reports and other countries to share), but the UK will obviously not Agree to other countries to intervene in the currency of their own country, which is the same for each issuing country. Therefore, this asymmetrical relationship will exist for a long time objectively.

Third, the study of asymmetric regulation of digital currency

After digital legal currency became the universal currency, regulation faced a new test. Generally speaking, the digital legal currency is issued by the state and is paid by the national credit guarantee. Even with the central bank-private cooperation approach proposed by the International Monetary Fund, digital currency is still a financial product of a central bank and a company registered in the country, and other countries cannot have regulatory power. The important reason for the UK to create a digital pound is to get back the regulatory power. If the number of pounds is completed, if the currency becomes the world's universal currency, other countries will worry that their monetary and financial systems are threatened. Therefore, there may be several situations for this asymmetric regulatory relationship:

1) Sovereign Exclusive : A single country has full regulatory power because it is a digital legal currency issued by a single country, supported by the country's central bank, and operated by the country's currency reserve. Other countries, businesses or individuals must comply with the laws of the country. However, as a global currency, this institutional penetration and financial hegemony model must be rejected by other countries. Libra is a typical example of the strong resistance of Germany and France. At the same time, countries headed by Germany have begun to establish their own strategic deployments in the blockchain and digital currency fields, establishing a national digital legal currency system, not specifically indicating that digital legal currency is a potential global currency, encouraging businesses and individuals in various countries. Registration and trading, when the rice has become porridge, will throw out the system, regulatory and legal issues. This mechanism takes national sovereignty as its top priority and is called sovereign exclusive.

2) Fully shared : The issuer and the participating countries fully share regulatory power, which is another extreme. Digital legal currency issuers and participating countries share data. But the system itself has a lot of imbalances. The largest investment and use in issuing infrastructure is the issuer. If all the transactions are visible to all participating countries, the issuer cannot be persuaded from the security mechanism and economic interests. Accepted, other participating countries may also have objections, which we call fully shared supervision [3].

3) Partial sharing : The issuing country can see all the transaction information, and the participating countries can only see the relevant transaction information with the country. Such participating countries may be acceptable and acceptable to the issuing country. But such a regulatory mechanism can lead to system complexity. For example, if there are 100 countries participating in the system, each country's regulatory mechanism must have various differences. Corresponding to the need to establish 100 sets of regulatory mechanisms, the core operation is a system, but corresponding to 100 sets of regulatory mechanisms, The system will not be able to load such complexity. To solve this problem, it is necessary for participating countries to establish a coalition-style regulatory mechanism and establish a “big regulatory mechanism” to accommodate the regulations of many countries. However, whether such a "big regulatory mechanism" can be successfully completed and under what conditions can be achieved. These are all issues that must be considered in the development of digital currency. Such a mechanism has actually been used in the US medical blockchain [3], but such a mechanism does not involve sovereignty and only involves regulated drugs. In addition, how to distinguish whether the transaction belongs to that country is still a problem that needs to be studied. Whether the object of supervision is physical address or network address remains to be discussed. Under the existing network architecture, how to solve the problem of multiple physical addresses and multiple network addresses, and ensure how the existing mechanisms can ensure that the participating countries can receive the information they should receive, while not seeing the transaction information of other countries. However, under this mechanism, participating countries have reason to suspect that the issuing country is cheating and deliberately do not send some important information. Because the participating countries under this mechanism can only obtain part of the information, we call it partial sharing.

4) Hierarchical fragmentation : Both the issuing country and the participating country can only see the transaction information related to the country. The fairness of this mechanism has been greatly improved, but new problems have emerged, who is the most appropriate information transmission leader. It is possible to return to the current SWIFT environment where a center dominates the information. The issuing country must become the leader of its own digital legal currency, and it is unlikely to take the initiative to sell and share the dominant power. However, if the issuing country is very keen to vigorously promote the digital legal currency of its own country, it may agree to this mechanism. Because this mechanism may bring a great marginal effect on the digital currency of a country [1], it is worthwhile to make large concessions in other aspects. In the design of the mechanism, the information is hierarchically stratified and data is sliced, so that each country only sees its own relevant information, and through the ownership of the information, the countries can do their own work in data sharing, avoiding the full sharing. It involves the issue of data sharing in other countries, which we call stratified fragmentation. This is the closest regulatory mechanism to symmetry, but this is not symmetry. The issuer still has more power because the system is manipulating on the issuer.

In both shared and hierarchical shards, a mechanism is needed to adjust and share the information and ownership of decision information. Because the transaction is high-speed and real-time settlement, the corresponding regulatory mechanism must be real-time and automated. In Western countries, a committee is usually set up, which is set by the committee and then handed over to the software system for automatic processing. In the blockchain field, Code is law, software automatically enforces smart contract content, so the development of the system is crucial, and members of the committee have a lot of power. On the Digital Currency Committee, the issuing country occupies most of the seats in the committee, just like the initial sponsors in Libra. Therefore, the issuer still has very large powers in the operation control of the entire mechanism.

Similar problems will also arise in the supervision of Facebook Libra Libra, and countries around the world are discussing whether Libra can be incorporated into the regulatory system of its own regulatory system. In contrast, a more important issue is how countries “co-regulate” the operation of Libra coins. The idea of ​​blockchain center is a consensus mechanism, but sovereign supervision itself is a central decision-making. How consensus-based regulation can be realized in the financial systems of various countries will be a difficult problem.

Digital legal currency is a new stage in the development of digital currency and a gift brought by science and technology to the financial community. The competition of national credit will be reflected in the operation of digital legal currency in a new dimension. The digital currency with excellent operating mechanism will be favored by the market and users in operation, and the immature digital currency system will automatically lose users. There is competition between digital legal coins, French currency and digital legal currency. Competition may be more intense due to the catalysis of technology. In August 2019, the Bank of England Governor proposed in the United States to replace the traditional US dollar with the traditional hegemonic digital currency as a new world reserve currency.

This brings at least three important pieces of information: 1) the dollar should be replaced; 2) the dollar is not another legal currency, nor a basket of legal currency; 3) the replacement of the dollar is a synthetic digital currency, and is based on a basket of legal coins. Synthetic digital currency. Digital legal currency is no longer just a digital national currency, nor is it the world's universal currency, but it may also be the future world reserve currency. This is very significant, affecting the world's currency and financial markets. Therefore, the research and development of digital legal currency is a process of digitalization of global currency, a process of reshaping the financial structure by science and technology, and an important event in the application of new technologies in economic and social development.

references

[1] Cai Weide Jiang Xiaofang "The big plan to hide the revival of the century-old pound – uncover the mystery of the Bank of England digital currency plan" 2019.10.19.

[2] Cai Weide, Jiang Xiaofang, "W-CBDC-based payment system architecture: Fnality white paper interpretation (on)" 2019.10.6.

[3] Cai Weide "2018 US version of unified weights and measures – chain network medicine supply chain management" 2011.4.55.

[4] Cai Weide, Jiang Xiaofang, “The ambush on the ten sides, is the commercial bank really going to be embattled? — Interpretation of the 2019 IMF's "Rise of Digital Money" Report 2011-09-18.

[5] Bank of England, MAS, the Bank of Canada, "Cross-Border Interbank Payments and Settlements: Emerging opportunities for digital transformation", Nov. 2018

[6] Robleh Ali, John Barrdear, Roger Clews, James Southgate, "Innovations in Payment Technologies and the Emergence of Digital Currencies", Bank of England, 2014.

Author: Cai Weide Northern digital society and the block chain laboratory director, day-Tech Chief Scientist, Ministry of Science major project leader, National Data (Guizhou) comprehensive experimental zone block chain of Internet lab director, the day China (Qingdao) International Dean of Sandbox Research Institute, Honorary Dean of CCID (Qingdao) Block Chain Research Institute, President of China Asia Economic Development Association Blockchain Industry Professional Committee, Director of North Mujin District Block Chain Committee

Wang Juan

Ph.D. in Applied Economics, Xi'an Jiaotong University (post), Ph.D. in Systems Engineering, University of Florida, USA

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