The digitization of legal currency is coming, and Bitcoin unexpectedly becomes the corner

In any case, the digital currency revolution is already here.

On May 22, 2010, American programmer Laszlo Hanyecz spent 10,000 bitcoins to buy two pizza coupons, giving BTC its price and purchasing power for the first time. No one would have thought that 11 years later, the Republic of El Salvador, a country in northern Central America, would include Bitcoin in its national legal currency system, adding an unexpected chapter to the history of Bitcoin.

El Salvador's bold attempt has caused a sensation in the world financial system. The International Monetary Fund has directly warned that this decision will cause many problems. However, in the eyes of financial professionals with an open mind, small countries choose Bitcoin as legal tender, which means they do not have to maintain an independent monetary system and will not be "harvested" by the US dollar.

El Salvador's move can be regarded as an alternative attempt in the process of digitalizing legal tender in various countries. Looking around the world, central banks in countries such as China, Switzerland, France, and Russia are exploring the digitalization of legal tender, and the Federal Reserve is also carefully evaluating whether to issue central bank digital currency.

Some scholars call digital currency the fourth currency revolution after metal currency, legal tender, and credit currency. Bitcoin, which was launched as a "peer-to-peer electronic cash payment system", has now been included in the discussion of legal tender due to its adoption in El Salvador.

In the view of some industry insiders, the decentralized and anti-regulatory properties of Bitcoin are both advantages and disadvantages. For large economies, its price volatility and anti-censorship are both destabilizing factors, while for small countries, Bitcoin may help them break free from the constraints of large countries and free themselves from currency wars.

El Salvador is at the center of a Bitcoin controversy

On June 9, the El Salvador Congress passed legislation to use Bitcoin as legal tender, becoming the first country in the world to do so. The bill will allow Bitcoin to be used as a form of payment in all forms in the country, including taxes.

This bold attempt caused a sensation in the entire financial field. As we all know, the price of Bitcoin fluctuates violently. On May 19, it dropped more than 30% in one day.

Shortly after the approval of El Salvador’s Bitcoin Act, the International Monetary Fund warned that the adoption of Bitcoin in El Salvador could cause many problems.

Wang Yongli, former executive director, member of the board's risk policy committee and vice president of Bank of China, said that using fully decentralized digital encrypted assets such as Bitcoin as legal tender will seriously disrupt economic and social operations due to their own sharp price fluctuations. The country has no means of regulation and can only seek its own destruction.

El Salvador Makes Bitcoin Legal Tender

But in the view of some open-minded financial experts, El Salvador's decision has positive significance.

Liu Changyong, a doctor of economics from Peking University and founder of Zhimi University, believes that El Salvador's use of Bitcoin as legal tender is a milestone in the crypto economy. He said that the operating costs of the monetary system of small countries are relatively high, and in the open international market, they are also easily "manipulated and harvested" by financial predators. Many small countries use the US dollar standard, but when the US dollar is flooded, these small countries will be harvested more severely. The market value of Bitcoin has reached the level of the monetary system of small countries. It is a very wise choice for small countries to choose Bitcoin as legal tender, so that they do not have to maintain an independent monetary system and will not be harvested by the US dollar.

In fact, El Salvador's original national currency was the colon, but due to poor sovereign credit endorsement, the Salvadorans had already used the US dollar as a circulating currency. According to statistics from the Central Bank of El Salvador, 90% of the currency currently circulating in the market is the US dollar. However, due to the continuous over-issuance of the US dollar, El Salvador has to bear the economic losses caused by inflation. When it incorporated Bitcoin into the legal currency system, the Salvadoran colon, the US dollar and Bitcoin became the country's three parallel legal currencies.

In Liu Changyong's view, small countries have greater long-term advantages in using Bitcoin as legal tender. This decision will quickly introduce other cryptocurrencies and related economic activities into the country, giving it a first-mover advantage in the crypto-economy wave. In addition, the inherent logic of the free and open operation of the crypto-economy will also accelerate the economic operation and innovation of these small countries, thereby achieving rapid economic growth and rapid social change in a relatively short period of time. "As for the negative impact of Bitcoin price fluctuations, as long as these small countries adopt more open economic policies, the market will evolve solutions."

For crypto asset supporters, El Salvador's bold attempt has brought an excellent opportunity to prove Bitcoin. An article published in the Securities Times pointed out that the full legalization of Bitcoin in El Salvador is a perfectly controlled experiment. In El Salvador, both the US dollar and Bitcoin are foreign objects, and due to transaction costs, most of a country's payment currency functions will eventually be borne by one currency. If Bitcoin's stability (anti-inflation properties), anonymity and security are better than traditional currencies as its believers say, there is no reason why Bitcoin should not replace the US dollar.

In any case, El Salvador has set a precedent, and its decision not only affects the crypto asset industry, but is also enough to be written into the history of the development of world currency. According to foreign media reports, Panamanian Congressman Gabriel Silva said he is developing a proposal to include Bitcoin and other cryptocurrencies in the country's legal currency.

A new monetary revolution is slowly unfolding.

The trend of digitalization of legal currency spreads to many countries

Expanding our perspective from El Salvador to the world, superpowers are also carrying out currency reforms, with the digitalization of legal tender being the main direction.

The People’s Bank of China has become the first major central bank in the world to distribute a public digital currency.

In August last year, the website of China's Ministry of Commerce published the "Notice of the Ministry of Commerce on Issuing the Overall Plan for Comprehensively Deepening the Pilot Program for Innovation and Development of Service Trade", and launched a digital RMB pilot program in the Beijing-Tianjin-Hebei, Yangtze River Delta, Guangdong-Hong Kong-Macao Greater Bay Area and other qualified pilot areas in the central and western regions.

Up to now, the digital RMB has been piloted in Shenzhen, Suzhou, Xiongan New Area, Chengdu, Beijing, Shanghai, Changsha and other places.

As early as 2014, the People's Bank of China established a special team to conduct special research on the digital currency issuance framework, key technologies, issuance and circulation environment, and related international experience. At the end of 2017, the People's Bank of China organized some commercial banks and relevant institutions to jointly carry out the research and development of the digital RMB system (DC/EP). Under the premise of two-tier operation, cash (M0) substitution, and controllable anonymity, DC/EP has basically completed the top-level design, standard setting, function development, joint debugging and testing.

Today, with more and more digital RMB pilots, it can be inferred that its technology and issuance system have matured. In April this year, Wang Xin, director of the Research Department of the People's Bank of China, introduced that the digital RMB will be mainly used for domestic retail payments, while considering cross-border payment transactions when conditions are ripe and in line with market demand.

Digital RMB has been piloted in many places

From the perspective of attributes, the goal of digital fiat currency is to become a digital substitute for cash. JG Collins, an expert at Stuyvesant Square Consulting in the United States, believes that digital currency is theoretically safer than bank deposits, because if a bank goes bankrupt, user deposits may "disappear", while digital currency is equivalent to cash and is kept on the balance sheet of the central bank, which has unique advantages.

Collins believes that the digital RMB will affect the entire global financial payment system, especially challenging the excessive economic and geopolitical privileges enjoyed by the US dollar as the world's reserve currency. Other experts emphasized that the digital RMB may have an impact on the dominant position of the US dollar in the monetary system.

The trend of currency digitization set off by China is causing other economies to follow suit. On June 8, the Hong Kong Monetary Authority announced the "FinTech 2025" strategy on its official website. Eddie Yue, chief executive of the Hong Kong Monetary Authority, said that it will explore retail Hong Kong dollar digital currency and will continue to cooperate with the People's Bank of China to conduct technical tests on the digital RMB in Hong Kong to provide convenient cross-border payment services for residents of the SAR and the mainland.

Recently, the Swiss National Bank and the Bank of France also stated that they will pilot Europe's first cross-border central bank digital currency payment. This trial will focus on the interbank wholesale loan market rather than daily public transactions. Digital euros and Swiss francs will be used as settlement units.

The United States is also eager to try. On May 20, Federal Reserve Chairman Powell revealed that the Federal Reserve will release a report on central bank digital currency (CDBC) this summer to provide a reference for the Federal Reserve to decide whether to issue CDBC.

In addition, the Bank of Israel drafted a model of a digital version of its legal currency in May; the Central Bank of Russia plans to build a digital ruble platform by December this year; the Bank of England announced that it will jointly set up a central bank digital currency working group with the Ministry of Finance to explore the development of its own digital currency.

The digitalization of legal currency has become a trend of the times. This trend is bound to bring an impact to the existing world monetary system. So can Bitcoin occupy a place in this torrent?

The future of censorship-resistant Bitcoin is uncertain

Compared with the central banks of various countries that independently developed digital currency payment systems, El Salvador, which directly incorporated Bitcoin into the legal currency system, is like an outlier. It gave Bitcoin, an "alien object", the endorsement of national sovereignty. As a crypto asset, Bitcoin was labeled as a "currency" for the first time.

El Salvador is not the only outlier.

In 2019, the US social networking giant Facebook also revealed its ambition to issue digital currency, which was originally named Libra. According to the white paper, Libra is a cryptographic digital currency that does not seek a stable exchange rate against the US dollar, but seeks a relatively stable actual purchasing power. Initially, a basket of low-volatility assets denominated in four fiat currencies, namely the US dollar, British pound, euro and Japanese yen, was used as collateral. Its goal is to establish a lower-cost, more accessible and more closely connected global financial system.

Soon, the issuance of digital currency by companies directly put Facebook and Libra on the "trial table" of regulators.

A few hours after the Libra white paper was released, French Economy and Finance Minister Bruno Le Maire warned against Libra becoming a "sovereign currency." The next day, Australian Reserve Bank Governor Philip Lowe said there were still many issues to be resolved before adopting Facebook's proposal, and they must come up with a solid business case; while the U.S. Senate Banking Committee called on Facebook to attend a hearing on "the company's ambition to create a virtual currency."

Strict regulatory scrutiny has gradually extinguished Facebook's ambitions. PayPal, Mastercard, Visa, Stripe and US e-commerce giant eBay have announced their withdrawal from the Libra Association, and the development of Libra has stagnated. Until the end of last year, Facebook renamed Libra to Diem. It is only anchored to the US dollar at a 1:1 exchange rate. It no longer exists as a "super-sovereign currency", but more like a crypto stablecoin such as USDT.

Libra stranded due to regulatory pressure

Under regulatory pressure, the Libra dream was shattered. This precedent also makes the fate of Bitcoin in the global currency revolution even more uncertain. Although El Salvador has made a bold attempt, the international influence of this small Central American country is obviously very limited. To put it another way, whether its currency reform experiment can succeed still needs to be tested in reality.

In reality, the most notable feature of Bitcoin compared to other currencies is that its total amount is constant and its price fluctuates greatly. Therefore, as it continues to develop, more and more people in the industry regard it as "digital gold" rather than a substitute for currency.

On June 11, Zhou Xiaochuan, president of the China Society for Finance and Banking, said at the 13th Lujiazui Forum that cryptocurrencies, according to their original design ideas, may still become useful tools for serving the real economy, such as playing a certain role in the payment field. However, some cryptocurrency participants see it as a means of making quick money, and will turn cryptocurrencies into digital assets. "Now it seems that some cryptocurrencies have lost the opportunity to return to the payment field."

In the eyes of some crypto asset industry insiders, Bitcoin's decentralized and anti-regulatory properties are both its advantages and disadvantages. For large economies, the value circulation of Bitcoin is difficult to regulate and is often used for money laundering and illegal transactions. It is an unstable existence from both the perspective of price volatility and regulation; but for many small countries under sanctions, Bitcoin may provide a way out. Its decentralized properties can free small countries from currency wars and escape the constraints of large countries.

In any case, the digital currency revolution is already here.

Jia Jinjing and Liu Yushu, scholars from the Chongyang Institute for Financial Studies at Renmin University of China, pointed out in the article "Digital Currency Unveils Global Currency Changes" that digital currency has become the fourth currency revolution after metal currency, legal tender, and credit currency. Traditional currency does not carry information and is difficult to trace. Its value scale function will gradually weaken in the digital age. Digital currency can carry information and has its own stability. It can serve as an "anchor" for data assets instead of being "carried away" by data assets.