Babbitt Column | New Macroeconomics Emerging: How to Become a World Reserve Currency in the Future?

Author: Cai Weide

Editor's Note: The original title was: "How to Become a World Reserve Currency in the Future? ——The emergence of new macroeconomics》

1.U.S. action, global hot debate on new world reserve currency

Since the Bank of England Governor delivered a speech in the United States on August 23, 2019, the impact of digital fiat currencies on countries and economies has been recognized [11]. From the first sentence of the article [20] of Harvard University Professor Kenneth Rogoff in November 2019, it can be seen that the United States' opinion on the matter has been set:

"Just as technology has changed the media, politics, and business, technology is destroying US confidence in its currency to pursue its broader national interests." (Just as technology has disrupted media, politics, and business, it is on the verge of disrupting America's ability to leverage faith in its currency to pursue its broader national interests.)

Professor Rogoff's statement shows that a new situation has emerged in the world, and some long-controversial views have been settled and no longer need to be discussed:

  • Technology (blockchain, digital currency) changes financial markets;
  • Technology (blockchain, digital currency) affects the national currency (USD);
  • Because the national legal currency (USD) affects national interests, it has reached the level of national security.

In an article less than a thousand words, he mentioned that the new digital currency war is a new technology war, and made a number of policy recommendations for this new technology war. So the technology here refers to the digital currency technology based on the blockchain. We have discussed these points in the Digital Fiat War [1].

If anyone suspects that the views of Harvard professors do not represent the US government, look again at the US Congress preparing legislation in January 2020, which introduced 22 bills at once [22], some of which are directly derived from short passages, such as the regulation of digital currencies.

2. Highlights of the Bank of England Governor's Speech

Professor Rogoff wrote that essay because the former governor of the Bank of England gave a speech on August 23, 2019, so we need to study the theoretical basis of the speech. That talk was mainly about US currency policy affecting the world because the US dollar is the international reserve currency. He used data to prove that this is not the best pattern in the world, because the United States accounts for a lower and lower proportion of the world economy. He exemplified that developing countries will account for 75% of the world economy by 2030. It is not appropriate to be affected by the US national monetary policy. In response to this situation, he proposed to solve the problem in three stages. In the first stage, the original state remained unchanged, and each central bank acted under the current system; in the second stage, reform was carried out under the original system; in the third stage, it was a comprehensive reform.

He believes that in the third stage, there are two options. One is to use RMB as a reserve currency. However, he believes that for various reasons, the RMB is still a long way from becoming the world's reserve currency. The second is to create a digital fiat currency based on multiple fiat currencies as a reserve currency. Under this new system, the central banks of several major powers can “jointly manage” world monetary policy, rather than just the United States. This makes Americans unacceptable. After his speech, many national central banks were discussing this possibility.

3. The Theoretical Basis of the Governor of the Bank of England

The Bank of England Governor's speech cited the digital currency theory of Princeton University. The governor of the Bank of England is smart. His speech in the United States cited the latest theories of American scholars in 2019 instead of citing numerous research reports published by the Bank of England since 2015. Maybe he just wanted to show that the theory was created by the United States itself, we just follow this theory. This is why we analyze the Princeton University thesis. Professors at Princeton University have given numerous lectures and dissertations in 2019. A translation of a passage [21] published in July 2019 is attached.

A September 2019 article by a professor at Princeton University [24] also quoted the views of the governor of the Bank of England, Professor Rogoff of Harvard and Gita Gopinath, chief fund scientist at the International Monetary Fund. These experts cite their points of view, but they still differ. The Bank of England's perspective is comprehensive. Professor Rogoff's perspective is on the relationship between taxes and digital currencies. Gopinath studies the relationship between transactions and mainstream currencies.

4. Author of American Digital Currency Theory

Markus K Brunnermeier is a professor at Princeton Edwards Sanford, a faculty member in the Department of Economics at Princeton University, and the director of the Princeton Bendheim Financial Center. He is or has been a member of several advisory groups, including the European System Risk Committee, the IMF, the Federal Reserve Board of New York, the Federal Bank, and the U.S. Congressional Budget Office. He is also a research assistant at the National Bureau of Economic Research, a researcher at CEPR and CESifo, a researcher at the Econometric Society, and a member of the International Economics Bellagio Group. His research focuses on financial economics, macroeconomics, and monetary economics.

Harold James is a professor of history and international affairs at Princeton University, Professor Claude Kelly of European Studies and a senior researcher at CIGI. He was educated at Cambridge University, spent eight years as a researcher at Peter Horse University, and came to Princeton University in 1986. His books include research on the inter-war depression in Germany, the depression in Germany (1986), analysis of the changing characteristics of German national identity, German identity from 1770-1990 (1989) and international monetary cooperation since the Bretton Woods system (1996 ). He is also a co-author of "Deutsche Bank History" (1995), which won the Financial Times Global Business Book Award in 1996.

Recently, he authored The End of Globalization: Lessons from the Great Depression (2001) and The Rebirth of Europe: A History from 1914 to 2000 (2003); Family Capitalism (2006); Rome's Dilemma: International How the Order Rule Creates Empire Politics (2006); Value Creation and Destruction: The Cycle of Globalization (2009). The results of his research "Establishing the European Monetary Union" were published by Harvard University Press in the fall of 2012. In 2004 he was awarded the Helmut-Schmidt Prize for Economic History, and in 2005 he was awarded the Ludwig-Ehard Prize for Economics. His current work involves the history of the European Monetary Union. He is the director of the European Center for Politics and Society in Princeton. He is also a guest professor of Mary Curie at the European University Institute, writing monthly columns for the Syndicate project.

Jean-Pierre Landau, who spent most of his career in senior positions at the French Treasury and the Bank of France, was a former deputy governor of the Bank of France. He has served as executive director of France at the IMF and World Bank. Mr. Jean-Pierre Landau has also been a visiting professor at the Johns Hopkins University School of Advanced International Studies in Washington, and an associate professor at the Paris Institute of Political Science. His main research areas are monetary policy, financial regulation and international macroeconomics.

5. New Digital Currency Theory

Economists at Princeton University in the United States have proposed that digital currency brings a new ideological framework, which is very different from traditional currency thinking. The three functions of currency have different meanings in different scenarios, so the conditions for becoming a world reserve currency are also different. It is under this theoretical support that the Governor of the Bank of England believes that a basket of hegemonic digital currencies will replace the US dollar as the world's reserve currency.

5.1 Digital Currency Areas (DCA)

Traditional currency has three functions of measurement, storage and trading, and the three need to coexist. Digital currency is different from traditional currency: 1) these functions can be separated; 2) digital currency has a platform (traditional currency does not have a platform), the platform is on the Internet, and there are no restrictions on traditional currencies, such as cross-border payment needs to pass banks and SWIFT But the bank is only open for 8 hours a day; 3) the platform can provide other functions, such as Facebook's Libra coin, in addition to trading and metering, it also has social functions; 4) the platform also creates a closed environment where platform currency can be used To trade, and expel other currencies, including other digital currencies. This closed environment is DCA. Here is the author's definition of DCA:

"We define the Digital Currency Area (DCA) as a network in which payments and transactions are made digitally using currencies specific to that network. 'Specific' means one or both of the following two characteristics:

1) The network runs a payment tool, a payment medium that can only be used internally by participants. Therefore, even if the network still uses the official fiat currency as the unit of account and supports payment instruments, the instrument cannot be used for transactions and exchanges outside the network. This is usually the case when the systems of some large electronic money issuers are not interoperable with other systems. Today, mainly in China, both Tencent and Ant Financial have developed such networks, with hundreds of millions of users, but without interconnection or interoperability.

2) The network uses its own accounting unit, which is different from the existing official currency. For example, Facebook recently announced the launch of Libra. It is designed as a digital representation of a basket of existing currencies, so this is a new unit of account. "

DCA is different from the existing mechanism. It can cross borders or within a country. It can also have its own regulations and agreements. And this closed environment can be very large, even larger than the country. This is similar to the concept of "blockchain group, block chain empire, and block chain United Nations" that we proposed in 2018 (Note: Because a block chain project has its own rules, it is equivalent to a group; the larger the group becomes, the empire becomes The empire and the empire can cooperate to become the United Nations, because each empire has its own rules, and the blockchain United Nations needs cross-border technology [16]). You can use the smart contract on the platform to manage transactions on the platform to ensure legal compliance, no double spending, identity authentication, and preservation of evidence.

When this group or platform is large enough, it can fight against the real national chamber. This is why the World Central Bank and commercial banks have shaken since Facebook Libra came out. The IMF has also discussed this point of view. You can read "Ambush in Ten Sides: Are Commercial Banks Really Wanting to Be Affected?" Interpretation of the report on the rise of the IMF's "digital currency" in 2019 [8].

Since digital currencies are based on platforms, they are not based on banks (unless this platform company is a digital bank). The two sets of currencies operate with different logics and ideas. Figure 1 is derived from Princeton's article, and its views are consistent with the IMF's view. In the digital economy, banks are no longer the world's financial center, but platforms. The IMF believes that banks must change to survive in the digital economy.


Figure 1 Digital currency is platform-centric, unlike traditional finance, which is bank-centric

However, the platform must also comply with the law. Because it is transnational, the platform will be regulated by multiple countries. Like Facebook, the parent company is in the United States and the subsidiary is in Switzerland. Harvard University believes that the United States and Switzerland cooperate to complete the work of regulating Facebook's Libra coin. But if Libra coin operates in other countries, these countries will also participate in the regulation. This is the attitude of the Bank of England, and the United States also holds this idea. The digital fiat currency of any country, as long as it operates in the United States, the U.S. regulators must regulate it. This is one of the systems proposed by Harvard University to prevent the dollar from losing its status as the world's reserve currency. Because digital currency is on the Internet, to implement it, it also needs technology, which is to supervise technology. This is why Harvard University believes that technology, market, and regulation are the three major competition areas, but all are dominated by technology.

5.2 Digital currency competition is different from traditional currency competition

Princeton University believes that digital currency competition will be different from traditional currency competition. It will no longer be based primarily on traditional macroeconomics (inflation). For example, Hayek (1976) believes that macroeconomic performance is the most important factor in determining the application of the currency. But digital currency competition is not. DCA will compete in many ways, and some networks may offer different types of automatic conditional payments ("smart contracts") or interoperability with other financial services. The competition between digital currencies will effectively become the competition between the bundles of information services provided by each network.

The IMF believes that people will choose the most convenient and fast financial system, and consumers will not care about the message that traditional banks pass to consumers: banks are more secure and reliable than online companies. When banking services are worse than digital banking, consumers will automatically switch to digital banking. This is an important message passed by the IMF to current commercial banks.

The views of the Princeton University IMF, the Bank of England and other scholars are summarized below.

Table 1: Comparison of traditional currency and digital currency



When the digital currency is calculated with the local currency as the value, the digital currency becomes a complete currency. For example, a digital currency is pegged to the US dollar, which is not an independent and complete digital currency because it depends on another currency. For example, Alipay and WeChat Pay are not full currencies because they are priced in RMB. Those who leave the platform cannot afford to spend money.

Digital currencies usually have laws that guarantee the integrity of payments. If something goes wrong, the platform company is the first to take responsibility.

An important function of digital currency is privacy, and privacy is also an indicator of digital currency competition. DCA currencies can be distinguished from each other by the way the network manages user data. Some networks use or sell user data, while others prioritize absolute privacy.

Regulatory approaches in Europe, the United States, and China are quite different. Different regulatory frameworks may make it difficult for network operators to take full advantage of the economies of scale and scope provided by big data. It is possible to use the same digital currency in different jurisdictions. This is also a tool for Harvard's proposed digital currency war: the United States will kick threatening digital fiat currencies out of the US market.

These views are in line with ours, that is, the four elements of the new digital currency competition: speed, regulation, policy, security (including privacy) [10].

5.3 Digital fiat currency can be attacked and retreated

Can penetrate where traditional fiat currency cannot be reached (attack): Princeton University professors believe that “the existing cross-border system is currently pure infrastructure. They use their national currency as a medium of exchange and a unit of account. However, this may Change. As shown in Libra's example, private networks may be created to enable people in many countries to use new and specific account institutions. Even fiat currencies may gradually evolve with strong digital network support (such as digital fiat currencies). Penetrate the economies of other countries. "

This is in line with our views. Our point of view is: 1) A stable currency like Libra is a synthetic digital fiat currency, it is also the 2 army of digital fiat currency, and it is a tool of the national fiat currency. 3) The digital fiat currency 2 army can reach places where traditional fiat currency cannot. [8] This is consistent with the discussion above.

Can protect domestic fiat currency (Shou): A professor at Princeton University believes that the development of a digital fiat currency in a country will adapt its currency to a new technological state, and in the process protect its currency from external competition based on digital advantages. Digital fiat currency protects the country, which is the concept of the moat of the national fiat currency. This is consistent with our previous views [9].

5.4 Conditions of World Reserve Currency

A professor at Princeton University believes that currency can be internationalized in two ways: by becoming a global value storage tool for reserves; or by being used for international payments as a medium of exchange. He believes that the two roles have gradually merged. This distinction becomes relevant and important in the digital environment. The requirement to be a reserve asset is high because it means, in particular, that full and unconditional capital items are convertible. However, if international status can be gained through trade, a country with a large digital network can find new ways to internationalize its currency by using the integration effect of DCA. In digital currency, being able to be used as a tool for trade payment is the key.

A professor at Princeton University also suggested that a synthetic international currency linked to several different account institutions could play a role in making up for the shortage of security assets, as the value of debt denominated in multiple official currencies would fluctuate with the value of the synthetic currency. However, no official currency is completely secure, which means that debt issuers denominated in synthetic currencies may bear exchange rate risk if their assets are denominated in local currencies.

If international trade is invoiced in a unit of account of a synthetic digital currency, the relevance of global trade flows would also decrease. At present, international trade prices are sticky on the US dollar, so the impact of US shocks and monetary policy in stimulating or hindering international trade is huge. In a world with synthetic currencies, this shock to the dollar would cause a small deviation from trade efficiency. Of course, a synthetic currency will have spillover effects on other base currencies, but if countries face special shocks, diversification may suppress these spillover effects. This clearly shows the digital currency competition with fiat currencies in the market.

Traditional thinking holds that for a country's fiat currency to become the world's reserve currency, the country must have a very large market size, depth, and liquidity. The article argues that "the way and strategy for a currency to gain international status and use in the 21st century is different." In analyzing the current dominance of the US dollar in the international monetary system, some economists believe that the size, depth, and Liquidity makes the US dollar the world's reserve currency, and value storage plays the biggest role.

But IMF chief economist Gopinath has paid more attention to its role in the valuation and settlement of international trade and transactions. Gopinath received his PhD from Princeton University. Before becoming chief economist, Gopinath co-authored a Harvard research article, "Banking, Trade, and the Making of a Dominant Currency), exploring this exact topic: "The role of currency as a unit of account for pricing decisions is complementary to its role as a secure store of value."

When deciding which currency to use, the factors to consider are liquidity, stability, and convertibility. However, Gopinath recognizes that in the future, due to concerns about the privacy and security issues of digital currencies, the technological advantages of the issuing country may become very important. (Note: The Bank of England's blueprint for the next generation of RTGS in 2016 and 2017 is to solve this liquidity problem.)

International status can be achieved through trade, and digital networks are a means of currency internationalization, which is an important point of the "Revival of the Hundred Years Pound Plan" [4]. It is also the real reason why the Bank of England has been advancing the digital pound since 2015. Because the United Kingdom cannot compare with the United States and China in terms of market size, it ranks only third in Europe. Britain must adopt a new strategy to raise the status of the pound.

The Governor of the Bank of England said in his speech that the world's reserve currency should be determined by the transaction medium and that digital currencies are used because of the need for multi-national participation. His original words were "History shows that the rise of the reserve currency is based on its utility as a medium of exchange. It reduces the cost of international payments and increases the convenience of international payments. Other functions of money, bookkeeping units and wealth storage Added later, these functions strengthen the function of payments. (History shows that the rise of a reserve currency is founded on its usefulness as a medium of exchange, by reducing the cost and increasing the convenience of international payments. The additional functions of money – as a unit of account and store of wealth – come later, and reinforce the payments motive. ”” This clearly shows that the Bank of England has long had a new economic concept, and it also has technical results. At the same time, this is consistent with the theory of Princeton University professors.

Table 2: Comparison of world reserve currencies


This means that in international trade, the mainstream digital currency will be the new world reserve currency. And if there is no universal digital fiat currency, even tickets are not obtained. This is the same as thinking on the Internet. Without a website, there is no entry yet.

5.5 Fierce debate

The IMF's Gopinath joined the discussion in January 2020, arguing that the date for digital currencies to replace the US dollar as the world's reserve currency is still very far away. In fact, there is no need to argue, because even the governor of the Bank of England who mentioned this concept said that this was the third stage and it is still in the first stage. The basis of her objection is that payment technology and the demand for global reserve currencies are two separate topics, and that the way to become a global reserve currency by means of payment is unlikely. She also suggested that the countries participating in the "world hegemonic currency" plan will not be united because of their own interests, so the plan is unlikely to succeed. And the euro has been tested, and has not (challenge the dollar) succeeded.

But another point put forward by Princeton University is network effects. This view supports payment as a way for digital currencies to become the world's reserve currency. Once a merchant uses digital currency, he often reserves part of the funds in this digital currency, which is convenient for the next transaction and avoids conversion. Therefore, the digital currency area will design incentives to encourage businesses to leave funds. A large country can use the large digital currency area to encourage world trade to use this digital currency. This is also our theory that digital currency is a tool of fiat currency. According to this view, big powers should support private issuance of (regulated) digital currencies and establish "digital currency zones".

In addition, Gopinath may not pay attention to the digital fiat currency report of the Bank of England, the Bank of Canada, and the Bank of Singapore in 2018 (the report of the three central banks) [23]. The report proposes that each country controls its own fiat currency and is independent of each other, but jointly issues digital currency, which can quickly and securely carry out cross-border transactions, real-time settlement, without liquidity risk and credit risk. The USC system and structure proposed by British company Fnality [5, 6, 7] is the "one currency, one chain, one account" structure, which is also based on this idea: united digital currencies, but each participating fiat currency has only one chain control, and central banks Control your own digital fiat currency issuance and trading, each fiat currency has only one current account, see Figure 2.


Figure 2 The joint digital fiat currency architecture proposed by the United Kingdom, participating in the independence of each fiat currency

The Bank of England Governor did not explain how synthetic digital fiat currency works in his speech in the United States, but only discussed the needs and conditions of world reserve currencies. Criticism of his views may be based on traditional financial systems, digital token systems (such as Bitcoin), or stablecoins (such as Libra), but these are not ideas designed by the Bank of England. For example, the Libra coin design has not considered the system design difficulties caused by liquidity risk, credit risk and real-time settlement requirements, but a few years ago, the Bank of England report has discussed or experimented with this issue. 5,6]. Each country can issue its own digital fiat currency, but different system designs behind the digital fiat currency will form different currency attributes. This is why we have always believed that the development of digital fiat currency requires experimentation and also the study of financial transaction technology. Financial transaction technology is a part of financial technology and regulatory technology. It studies the problems encountered in financial transactions based on blockchain systems [5, 6, 7] and belongs to one of the top ten research directions of blockchain [3].

In addition, according to our analysis, platform institutions and countries have asymmetric advantages, see "Digital Fiat Currency: A New Global Currency under Asymmetric Regulation" [17]. Four types of supervision models are proposed in this paper: sovereign exclusive, fully shared, partially shared, and hierarchical sharding. Even if the most democratic model is used, platform institutions and countries still have great advantages, which is why the author has repeatedly proposed that digital fiat currencies are a must-have for the military in 2018 in the financial field. Whoever does it first has the advantage. Now that the United Kingdom has proposed this platform first, the United States has also agreed to participate in the British platform, so the United Kingdom has taken the lead. From a short article by a professor at Harvard University, the United States may use Libra as a pioneer of digital fiat currency. In fact, the legislation prepared by the US Congress in January 2020 actually contains a bill named Libra, which shows that the United States does need Libra now. This is a platform competition.

This theory has just begun, but the debate is fierce, because the results will affect the national movements of the great powers. The Harvard professor's point is very clear, whether the theory is correct or not, but the United States must act immediately. Because if this theory is correct, it will have too much impact on the United States, and it may be the biggest challenge the US has encountered in a century. . With the strength of American science and technology, the size and experience of the market, the United States should soon surpass the United Kingdom in related technology.

5.6 The best way to defend against foreign digital fiat currency is to issue your own digital fiat currency

Probably the best way to prevent digital dollars from replacing their currencies is to create digital currency (CBDC) in each country. But issuing digital fiat currency is not the only goal. In the words of a professor at Harvard University, this is a comprehensive war. It is not just the development of a digital currency system. This competition includes technology, markets, and regulation, and it is fully launched. It is estimated that the United States will mobilize the scientific, legal, and economic communities in the same way as the Soviet Union ’s lunar program competition. The United States has driven the development of American technology by landing on the moon. The last time was space competition, and this time it was the US dollar defense war. The United States will lead the way with fintech and regulatory technology.

The U.S. Congress was the first agency to start, and the U.S. Congress and regulators had no interest in blockchain legislation in the past. In 2019, with the strong request of relevant US industry players, the US regulator, the SEC, still insists on using existing regulations to govern and refuses to establish new regulations. But after a Harvard article, 22 related bills were suddenly introduced in January 2020.

In terms of technological competition, the United States also proposed a new blockchain architecture in 2018, thinking that this will completely change the current Internet architecture (see "From the era of big data to the era of blockchain"). We also hold similar views in this regard, thinking that the current blockchain is only an application on the network, not the network, and the current blockchain is also a "Dumbo" model, or that all blockchain software is built on the current Some networks and operating systems. There is a huge risk in this model. In the future, there must be problems. The foundation will be unstable like building a high-rise on a beach. In the "Blockchain China Dream: Blockchain Internet Leads China's Scientific and Technological Development" [18], we mentioned in 2018 that a new infrastructure needs to be established, including a new operating system, a new database, a new network protocol and architecture.

6. Summary

Digital currency opens new macroeconomics. Even if the digital currency issued by a country with a small market size, if the transaction value is large and the profit is stable, it can be better than the much larger currency, so-called four or two pounds. Because of this new currency war, the way to win is not on scale, but on technology.

This is the conclusion derived from our study of the Bank of England report. Professors from Princeton University, who are thousands of miles away, analyze it from different perspectives, and from the perspective of basic currency theory, derive a new digital economics theory, the digital currency area. (DCA). One east and one west, the starting point of the research is completely different, but similar conclusions are derived.

Blockchain brings new macroeconomics, which is also one of the 10 research directions recommended by the blockchain [3]. Another important research direction is financial transaction technology. After August 23, 2019, many economists and currency scholars around the world began to actively research, including Harvard University. Princeton University published related articles for discussion in early 2019. The Bank of England has continued to publish research reports as early as 2015. The IMF has been actively researching since 2017. The Beihang Digital Society and Blockchain Lab have been focusing on numbers since 2016 The development of fiat currency in this regard puts forward China's first scalable and supervisable digital fiat currency model, the Panda model, and the world's first homogeneous blockchain Internet (inter-chain network) model.

This macroeconomics also requires financial transaction technology. Traditional macroeconomics does not need to consider computer system issues, but new macroeconomics takes platforms as the starting point. Different platforms and systems will lead to different economic models. The digital fiat model based on the Ethereum system, the digital fiat model based on Libra, and the digital fiat model based on Panda Chain are different in performance, function, security, supervision, privacy, and payment mechanism. It is even more different if these systems have blockchain-based RTGS support. When digital currency becomes a large system, problems that do not occur in some small systems may arise, mostly because of problems arising from the interaction between the system and financial transactions. Most of the research on these issues has not yet started, because compliant blockchain financial applications have only recently begun, and evasion techniques cannot be used in the compliant market.


Digital currency area

Markus K Brunnermeier, Harold James, Jean-Pierre Landau

July 3, 2019

Thanks to digitization, we can now save money on mobile phones and transfer wealth to almost every corner of the world in real time. Money can be exchanged on smartphones in a few milliseconds, and people can hold multiple currencies simultaneously in digital wallets. This column discusses how digitization will affect the international monetary system and proposes a new type of currency area that will be brought together through digital interconnection. These digital currency fields will cross national borders, increase currency competition, and in the process may redefine the international monetary system.

Digitalization has fundamentally changed the nature of social, economic, and information interconnection. The digital age has also completely changed the currency and payment system. Now we can hold funds with mobile phones and transfer wealth to counterparties anywhere in the world through a peer-to-peer network. As a result of these developments, the barriers that define traditional currency areas may be broken (Mundell 1961).

What is the digital currency area?


We define the Digital Currency Area (DCA) as a network in which payments and transactions are performed digitally using currencies specific to that network. "Specific" means one or both of the following characteristics:

  • The network runs a payment tool, a payment medium that can only be used internally by participants. Therefore, even if the network still uses the official fiat currency as the unit of account and supports payment instruments, the instrument cannot be used for transactions and exchanges outside the network. This is usually the case when the systems of some large electronic money issuers are not interoperable with other systems. Today, mainly in China, both Tencent and Ant Financial have developed such networks, with hundreds of millions of users, but without interconnection or interoperability.
  • The network uses its own unit of account, which is different from existing official currencies. For example, Facebook recently announced the launch of Libra, which is designed as a digital representation of a basket of existing currencies, so this is a new unit of account. "
Similarities and differences with traditional OCA concepts

Obviously, DCA is very different from OCA defined in the literature. OCA is typically characterized by geographic proximity and the exemption of participants from exchange rates as a tool of adjustment. In turn, this means some commonality of macroeconomic shocks and sufficient elemental liquidity. In contrast, DCAs are connected together through digital interconnects. When participants share the same form of currency, whether or not they use their own accounting institutions to make a price, a strong currency connection will be formed. Prices are more transparent inside the network, price discovery is easier, and there is less likelihood of conversion to other payment instruments, but sometimes this is technically impossible. These monetary links have further stimulated the accumulation of online currency balances.

However, apart from these differences, DCA and OCA have strong similarities. They arise for the same underlying reason: to minimize transaction costs and, more broadly, to minimize friction in transactions.

How did DCA emerge and what kept them together?

In the digital economy, DCAs often appear on integrated, multifaceted business and social platforms. The business models of these platforms are economies of scale and scope created by data-intensive development and complementarity between different activities.

Adding payment capabilities significantly enhances these complementarities, as payment, social, and messaging activities all rely on the same network externalities. In fact, a universal digital currency may be the only way for network participants to take full advantage of the interconnectedness.

A decisive evolution will occur when the network allows direct transfers between participants, not limited to the purchase of goods and services. These bilateral payments are made through mobile technology. Debit and credit cards (even contactless) can only be used for purchases, they do not allow direct transfers between individuals. Mobile payments can do it, and this is the key to technology. The emergence of mobile payment is the main driving force for the formation of the digital currency field.

Digitalization and the International Monetary System

Digital networks are large, and actually larger than the economies of many countries. They are not restricted by national borders. In the future, the international monetary system may be built around the digital currency field. Even if this does not happen, digitization will reshape international monetary relations through new ways of increasing currency competition and currency internationalization.

New currency competition

In the digital world, (new or existing) currencies compete more easily with each other for two reasons. First, currencies supported by digital networks may quickly gain widespread acceptance at home and abroad. Second, conversion costs (traditional barriers to currency competition) are lower. There are programs on your mobile device that you can use to manage currency conversion. Some fintech companies have opened accounts where users can exchange and pay in more than a dozen currencies in the account. Existing and future applications should allow simple, instant calculation of relative prices, conversion of currency balances from one currency to another, and automatic arbitrage.

Digital currency competition will be completely different from traditional currency competition. It will no longer be based primarily on macroeconomic (inflation) performance. Hayek (1976) believes that macroeconomic performance is the most important factor determining the application of the currency. DCA will compete on many fronts. Some networks may provide different types of automatic conditional payments ("smart contracts") or interoperability with other financial services. The competition between digital currencies is actually the competition between a large number of information services provided by each network.

A particularly important aspect is privacy. DCA currencies can be distinguished from each other by the way the network manages user data. Some networks may heavily utilize or sell user data, while others may prioritize absolute privacy.

The digital currency field may lead to an unstable monetary system. If the conversion cost is low, then people may be part of multiple different DCAs at the same time, using each DCA for a specific purpose, even if they are all attached to the same unit of account. Although it is easy to switch from digital currency to other currencies, the additional information and social connections provided by digital networks have promoted DCA's greater cohesion and surpassed the cohesion in the traditional currency field. In economically active networks, competition between exchange media may no longer be "winner-take-all", at least in the early stages.

Currency internationalization

In short, currency internationalization can be achieved in two ways: as a storage tool to become a global value reserve; or as an exchange medium for international payments. Historically, the two roles have gradually merged. However, the ways and strategies for a currency to gain international status and use in the 21st century are different. After analyzing the current dominant position of the US dollar in the international monetary system, some economists have emphasized the function of the US dollar as a reserve asset based on the size, depth, and liquidity of the US financial market. Others (such as Gopinath and others 2016) pay more attention to their role in the valuation and settlement of international trade and transactions.

This distinction becomes relevant and important in the digital environment. The requirement to be a reserve asset is particularly high, as it means in particular that the fully and unconditionally convertible capital account. However, if international status can be achieved through trade, then countries with large digital networks can find new ways to gain international recognition for their currencies by leveraging the integration effect of DCA. As a result, digitization may become a powerful tool for internationalizing some currencies as a medium of exchange.

Digital currency replaces national currency (Digital Dollarization)

Accordingly, other countries may face more intense currency competition from foreign currencies due to cross-border payment networks.

Existing cross-border systems are currently pure infrastructure. They use their national currency as a medium of exchange and as a bookkeeping institution. However, this may change. As the Libra example shows, a private network can be created that will allow people in many countries to use new specific accounting units. If there is a strong digital network, even official currencies may gradually penetrate into the economies of other countries.

Importantly, while small economies (especially those with high domestic inflation or instability) are susceptible to the traditional dollar and digital currency replacement of national currencies brought by stable digital currencies, the economics of large DCAs Or society with an open economy will be particularly vulnerable to digital currencies replacing their national currencies. As the importance of digital delivery services increases and social networks become more closely linked to the way people exchange value, the impact of large DCAs in smaller economies will grow.

The best defense may be that countries issue their own currencies in digital form by creating a central bank digital currency (CBDC). There has been fierce debate on the CBDC from the perspective of monetary policy and financial stability. However, they may have a more fundamental reason: adapt their currencies to new technological conditions and protect them from external competition based on digital advantage in the process.

The New Boundary of the International Monetary System: A Paradox

One might think that digitization will lead to "global currencies." but it is not the truth. Because digital currency is inseparable from other basic characteristics of digital networks, it is subject to specific friction.

Digital currency covers a wide range of payment and data services. The provision of these services will face unequal types of regulation in different countries. A key issue is privacy. Regulatory approaches in Europe, the US and China are quite different. Different regulatory frameworks may make it difficult for network operators to take full advantage of the economies of scale and scope provided by big data. The same digital currency may not be available in different jurisdictions.

This may be the ultimate paradox of digitization. Technically, digitalization will break down barriers and cross national borders. However, due to its many indivisible aspects, it may eventually lead to a more fragmented international financial system.


Adrian, T (2019), "Stablecoins, Central Bank Digital Currencier, and Cross-Border Payments: A New Look at the International Monetary System", remarks at the IMF-Swiss National Bank Conference, Zurich.

Brunnermeier, MK and D Niepelt (2019), “On the Equivalence of Private and Public Money”, Journal of Monetary Economics (forthcoming).

Gopinath, G, E Boz, C Casas, FJ Diez, PO Gourinchas, and M Plagborg-Moller (2016), “Dominant Currency Paradigm”, NBER Working Paper No. 22943

Hayek, FA (1976), Choice in Currency.

Issing, O (1999), "Hayek – Currency Competition and the European Monetary Union", BIS Review 1999/66.

Mundell, RA (1961), "A Theory of Optimum Currency Area", American Economic Review 51 (4): 657-665.

Landau, JP and A Genais (2019), Digital Currencies: An Exploration into Technology and Money, Report to the French Minister of Economy.


[1] The classic reference is Mundell (1961).

[2] BIS (2019) states that the business of digital platforms is based on a "data network activity" feedback loop: user data is used to provide services that drive network activities and are therefore adopted, thereby creating more user data.

[3] Adrian (2019) outlined the risks similar to digital dollarization and noted that digital currencies make the storage of foreign currencies safer, cheaper, and easier to trade.

[4] Brunnermeier and Niepelt (2019) provided the conditions under which the introduction of CBDC would not adversely affect macroeconomic and financial stability.

[1]. Cai Weide, Jiang Xiaofang. "Digital Fiat Wars": The "Big Trouble" Federal Reserve in Britain, Harvard Think Tank Simulated War ", 2019.12.25.

[2]. Cai Weide, Jiang Xiaofang. “No Breaking or No Standing——Interpretation of General Secretary Xi's Instructions on Blockchain”, 2019.12.16.

[3]. Cai Weide. "Top 10 Research Directions of Blockchain", 2019.12.08.

[4]. Cai Weide, Jiang Xiaofang. "The Great Plan for the Revival of Centennial Pounds-Unraveling the Mystery of the Bank of England's Digital Fiat Project", 2019.10.29.

[5]. Cai Weide, Jiang Xiaofang, "Wholesale Digital Fiat Currency Reconstruction Financial Market: Interpretation of Fnality White Paper (Part 2)", 2019.10.08.

[6]. Cai Weide, Jiang Xiaofang, "Payment System Architecture Based on Wholesale Digital Fiat Currency (W-CBDC): Interpretation of Fnality White Paper (Part 1)", 2019.10.06.

[7]. Cai Weide, Jiang Xiaofang. "Rebuilding the Global Financial System Based on Wholesale CBDC Digital Currency", 2019.10.01.

[8]. Cai Weide, Jiang Xiaofang. "Ambush in all directions, commercial banks really want to be surrounded?-Interpretation of the IMF's" Rise of Digital Currency "Report 2019", 2019.09.18.

[9]. Cai Weide, "Three Principles of Digital Fiat Currency: Important Information Brought by Facebook Libra", 2019.08.28.

[10]. Cai Weide, Jiang Xiaofang, "Analysis of 4 Major Elements of New Currency Competition", 2019.08.17.

[11]. Cai Weide, Jiang Xiaofang, "The Bank of England declares war on third-party payments and digital tokens-in the manner of a British gentleman", 2019.06.27.

[12]. Cai Weide, Jiang Xiaofang, "A new currency competition has come? Yes!", 2019.06.21.

[13]. Cai Weide, "Authentic and Stable Coins! Blockchain Needs Supervisability", 2019.05.30.

[14]. Cai Weide, Jiang Xiaofang. "The rise of the blockchain industry is true this time, but is it ready for supervision? (Next)", 2019.04.24.

[15]. Cai Weide, Jiang Xiaofang. "The rise of the blockchain industry is true this time, but is the regulation ready?", 2019.04.16.

[16]. Cai Weide, "Blockchain Reconstructs Financial Market", 2018.11.6.

[17] Cai Weide, Wang Juan, "Digital Fiat Currency: A New Global Currency under Asymmetric Regulation", 2019.11.12.

[18]. Cai Weide, etc., "One of the Chinese Dreams of Blockchain: Blockchain Internet Leads China's Scientific and Technological Progress", 2018.08.07.

[19] Cai Weide, "From the Big Data Era to the Blockchain Era: New Thinking and New Architecture of the Internet Network", 2020.01.07.

[20]. Kenneth Rogoff, The High Stakes of the Coming Digital War, December 2019.

[21] .https: //

[22] .https: //

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

[24] Markus K. Brunnermeier, Harold James, Jean-Pierre Landau, “The Digitalization of Money”, August 2019.

about the author:

Cai Weide: Director of Beihang Digital Society and Blockchain Lab, Chief Scientist of Tiande Technology, Head of Major Projects of the Ministry of Science and Technology, Dean of the China Information Industry Blockchain Research Institute, Blockchain Internet in the National Big Data (Guizhou) Comprehensive Experimental Zone Lab Director, Dean of Tianmin (Qingdao) International Sandbox Research Institute, Honorary Dean of CCID (Qingdao) Blockchain Research Institute, Chairman of China Asia Economic Development Association Blockchain Industry Professional Committee, Beihu Gold Block Director of the Chain Commission.

Jiang Xiaofang:

Doctoral candidate of Beihang Computer School, Chartered Financial Analyst (CFA), Founding Member of Beijing Financial Analyst Association

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