Research | Experts interpret the development status and trends of global digital currencies

Source: Financial Reading Club

Editor's Note:

Digital currencies first appeared in the form of private digital currencies, which changed the form, circulation and payment methods of traditional currencies. At present, countries have mixed attitudes towards the regulation of private digital currencies. The threat posed by private digital currencies to the legal currency market has prompted central banks to actively participate in the research of legal digital currencies. It can be found that the model design of digital currencies of central banks in various countries has generally reached a consensus on the issuance model, delivery mechanism and regulatory design. This article explores the development trend of legal digital currencies in various countries, which will help clarify the future development pattern of legal digital currencies and provide ideas for reference for the future development direction of legal digital currencies. Please read.

Authors: Professor Ba Shusong, Zhang Daichao (School of Finance, Shanghai University of Finance and Economics), Zhu Yuanqian (Peking University HSBC Finance Institute)

As one of the important innovative products of financial technology, digital currency has brought far-reaching impacts on the entire financial industry and its regulatory field. Digital currency first appeared in the form of private digital currency, which changed the form, circulation and payment methods of traditional currency, and generated different intrinsic values ​​according to its design. While private digital currency is developing, on the one hand, central banks of various countries (hereinafter referred to as central banks) have also tried sovereign digital currency, which has achieved the requirements of convenience and security while reducing the cost of issuing currency, improved the efficiency of payment and clearing and settlement, and enhanced the control of supply and circulation; on the other hand, regulatory authorities of various countries have improved regulatory rules, refined regulatory requirements, and introduced new regulatory concepts in line with the times to meet the challenges of digital currency to regulation.

1. Private digital currency and its supervision

Private digital currency refers to privately issued digital currency, mainly including Bitcoin, Ethereum, Litecoin, Ripple and other digital currencies. Private digital currency originated from Bitcoin invented by Satoshi Nakamoto in 2008, and has the characteristics of decentralization and anonymity. Since then, the scale of the global private digital currency market has shown exponential growth. According to the data of cryptocurrencies website, as of May 27, 2020, there are 5,516 types of private digital currencies in the world, and the total market value of private digital currencies has reached 250.58 billion US dollars, of which Bitcoin has a market value of 117.46 billion US dollars, with a significant head effect.

1. Main categories of global private digital currencies

Depending on the method of assigning value, private digital currencies can be divided into two categories: one is the native token based on the blockchain, which refers to the digital currency that relies on the blockchain system and is generated and used within the system, also known as encrypted digital currency; the other is the digital currency issued and operated on the blockchain but supported by off-chain assets, also known as stablecoin.

1. Cryptocurrency. Cryptocurrency is decentralized and anonymous. It is not backed by national sovereign credit, has zero intrinsic value, and has large fluctuations. Their value comes only from the public's belief that they can be exchanged for other goods, services, or a certain amount of sovereign currency across time, that is, value consensus. Value consensus mainly comes from two aspects: first, the speed and cost of cryptocurrency mining. The supply of digital currency is through block formation rewards, which consumes energy and time. A reasonable block reward mechanism can ensure a stable supply of cryptocurrency. Second, the dark web and cryptocurrency are naturally compatible in terms of encryption and concealment. Cryptocurrency is often used as a means of payment in dark web transactions, and there is a demand for cryptocurrency. Once people lose their value consensus, the trade system built by cryptocurrency will collapse instantly, which is similar to a bank run.

2. Stablecoins. Stablecoins use assets denominated in a series of legal currencies as reserve assets, and their value is more stable than that of cryptocurrencies. On the one hand, stablecoins can take advantage of the instant transactions, programmability, openness and anonymity of distributed ledgers; on the other hand, stablecoins are linked to off-chain values, providing a practical carrier for "hybrid anchoring" to alleviate the "Triffin dilemma" of sovereign currencies as international currencies (Zhou Yonglin, 2018). However, since the issuers of stablecoins are non-official institutions and are not restricted by national borders, there is no credibility to ensure the security of reserve assets, the transparency of reserve asset management, and the rights and responsibilities of issuers and holders in the absence of a global unified regulatory framework. All of these will lead to unstable value of stablecoins. For example: In April 2019, the New York Attorney General's Office sued Tether for misappropriating stablecoin USDT reserves to make up for a loss of US$850 million, causing a sharp drop in the value of USDT.

2. Main characteristics of global private digital currencies

First, decentralization brings cost reduction and efficiency improvement. Private encrypted digital currency adopts a decentralized point-to-point transaction model, which does not rely on financial intermediaries, can reduce transaction costs and improve efficiency. Traditional currency electronic transactions rely on intermediaries such as banks, and realize exchange receipts and payments through the payment system provided by the central bank. The domestic large-value payment system cannot guarantee the real-time arrival of funds. In international financial transactions, the Society for Global Financial Telecommunication provides the Swift system, which ensures the security of international capital flows through a highly redundant and cumbersome mechanism composed of hardware, software and personnel, and has low payment efficiency. Private digital currency runs accounting in the form of blockchain, and uses public and private keys to verify transaction signatures, eliminating the need for intermediaries, reducing transaction costs, and making transactions more efficient (Denis, 2019).

The second is the reliability brought by the consensus algorithm. Private digital currencies eliminate the need for trusted intermediaries through various consensus algorithms and mechanisms (such as proof of work or proof of equity), rely on predetermined algorithmic rules and complete and reliable databases to complete credit endorsement, and ensure that there are no problems such as "double spending". This self-proving credit paradigm greatly reduces the cost of trust. However, in reality, due to the lack of usage scenarios, there may still be problems with asset security and fairness. Because it maintains nodes through consensus mechanisms such as proof of work (POW) or proof of equity (POS), the POW mechanism requires a lot of computing power for node confirmation, and the currency throughput is limited, which cannot meet the high concurrency requirements of retail currencies. The POS mechanism requires a certain amount of digital assets to participate in bookkeeping, which has fairness issues.

The third is the security brought by the encryption algorithm. Blockchain achieves anonymity behind transparent data through asymmetric encryption technology, which can protect personal privacy. The asymmetric encryption mechanism adopted by blockchain uses a "key pair", in which the public key and the private key appear in pairs. The sender uses the public key for encryption, and the receiver uses the paired private key for decryption and signing. Both parties do not need to disclose their identities to gain each other's trust. The public key cannot be used to deduce the private key, which represents both the identity of the transaction party and the ownership of the assets in its account, thus forming a password protection and confirmation mechanism. However, due to the decentralized issuance of encrypted digital currencies in reality, the Bitcoin system identifies personal identities through private keys, which are only known to the account owner, and the owner needs to enter the code to transfer ownership to the other party. The loss or cracking of the private key means the loss of encrypted digital currencies, and the security of assets will no longer exist.

3. Supervision of global private digital currencies

At present, due to the decentralized and anonymous characteristics of private encrypted digital currencies, they may pose a threat to financial stability, causing regulators in many countries to be cautious about private digital currencies. In July 2019, the G7 group agreed that stablecoins must be prudently regulated in accordance with the highest regulatory standards, and any possible regulatory loopholes should be filled. The reason is that, on the one hand, the further development of private digital currencies may affect the monetary sovereignty of non-major international currency countries and further affect the stability of local financial systems. On the other hand, the decentralized and anonymous characteristics of private digital currencies have created fertile ground for money laundering, terrorist financing and other illegal financial activities (Long Baitao, 2019).

Some countries consider private cryptocurrencies to be legal. For example, private cryptocurrencies are legal in the United States. The U.S. Financial Crimes Enforcement Network (FinCEN) classifies cryptocurrency exchanges as "money transmitters" and defines private crypto assets as currencies, which are subject to currency-related laws; the U.S. Internal Revenue Service classifies cryptocurrencies as valuable property and taxable goods; the U.S. Securities and Exchange Commission (SEC) believes that digital assets are securities and should be regulated by it; the Commodity Futures Trading Commission (CFTC) also classifies it and its derivatives as commodities and regulates them. Cryptocurrencies are also considered legal in the European Union, but the specific regulatory rules vary among member states. At present, the European Parliament has not passed specific laws on cryptocurrencies at the EU level. Only the Anti-Money Laundering (AML) Directive requires cryptocurrency exchanges to comply with the EU's anti-money laundering regulations.

Some countries strictly prohibit encrypted digital currencies. For example, Namibia cited the research of encrypted digital currencies by multiple international organizations, explaining that encrypted digital currencies are not legal tender and may threaten the central bank's decision-making position in monetary policy, so it explicitly prohibits encrypted digital currencies as a means of payment, and Bitcoin transactions are considered illegal. The People's Bank of China also banned financial institutions from participating in Bitcoin transactions as early as 2013. In 2017, the People's Bank of China and seven other departments jointly issued the "Announcement on Preventing the Risks of Token Issuance and Financing", which clearly stated that the initial coin offering (ICO) initiated by non-monetary authorities is actually unauthorized financing and is illegal. In terms of private cryptocurrency transactions, the announcement explicitly prohibits so-called token financing trading platforms from converting legal tender into cryptocurrency, prohibits platforms from setting prices for cryptocurrency or providing other related agency services, and platforms that do not meet the requirements will be rectified or banned.

2. Central Bank Digital Currency

Faced with the threat of private digital currencies to legal tender, in order to actively respond and take the initiative in the future international monetary field, central banks of various countries have actively participated in the research of legal tender digital currencies. At present, there is no unified definition of central bank digital currency (CBDC) in the world. Most of them refer to a new form of currency issued by the central bank, which is different from physical cash and central bank reserve funds or funds in clearing accounts. Central bank digital currency can replace cash and be active in various scenarios of financial transactions. According to the different receptors and technologies, the Bank for International Settlements distinguished three forms of central bank digital currency in relevant reports, two of which are based on the token system and one is based on the account system. Among the two central bank digital currencies based on the token system, one is a payment tool for the public, mainly for retail transactions of the public, that is, the retail model; the other is the payment, clearing and settlement and delivery business for financial institutions, that is, the wholesale model.

1. Current status of development of global central bank digital currencies

In 2019, the Bank for International Settlements and the Committee on Payments and Market Infrastructures conducted a survey on the current status of central bank digital currency research in various countries. A total of 66 central banks responded to the survey, covering 75% of the world's population and 90% of economic output. The survey data shows that 80% of countries are actively studying sovereign digital currency issues, of which about 50% are studying both retail and wholesale models, 35% are only studying retail models, and 15% are only studying wholesale models. Most of the current research involved is conceptual, mainly focusing on the release of sovereign digital currencies and the potential impact of reshaping the payment system on the country (Codruta et al., 2020). Combined with the above surveys and studies, we have sorted out the current status of central bank digital currency research in various countries. See Table 1 for details.

Table 1: Current status of central bank digital currency research in various countries

2. Main features of global central bank digital currencies

At present, the digital currencies of central banks of various countries are still in the research and development stage and have not yet been fully issued. However, judging from the existing public information, various countries have generally reached a consensus on the model design of central bank digital currencies (see Table 2), which mainly has the following characteristics:

In terms of the issuance model, it is issued in a centralized form, and the reserve fund is paid in full. The value of digital currency comes from the public's belief that they have the ability to exchange for other goods, services or a certain amount of other sovereign currencies across time. Although private digital currency has the characteristics of decentralization, it can avoid the possibility of excessive issuance of currency by the issuer, but it also leads to the lack of value basis for private digital currency and the inability to maintain currency stability. Unlike private digital currency, the central bank's digital currency has the characteristics of centralized issuance, and the digital currency is endorsed by the national credit to avoid drastic fluctuations in currency value. At the same time, the central bank's digital currency is issued in the form of 100% reserve funds to avoid hyperinflation caused by excessive issuance of digital currency, which is conducive to maintaining the value of digital currency and the stability of the financial system.
In terms of the release mechanism, a two-tier release mechanism is basically adopted to avoid impact on the financial system. The two-tier release mechanism means that the central bank is responsible for the release and withdrawal of digital currency, but the central bank does not directly connect with consumers. Instead, it applies to the central bank for the exchange of digital currency through commercial banks, and commercial banks provide central bank digital currency and corresponding services to the public. The two-tier release mechanism does not require direct contact between the central bank and the public. While avoiding a series of problems such as the establishment of a new financial infrastructure and financial disintermediation, it can fully utilize the advantages of commercial banks in resources and technologies such as service outlets, and will not cause excessive impact on the existing financial system.
In terms of regulatory design, a multi-level anonymous regulatory design is generally adopted to meet the dual needs of compliance and anonymity. Although most countries are still at the stage of conceptual discussion on central bank digital currency, it can be found that there are certain commonalities in the design of anonymous regulatory frameworks, and a multi-level anonymous regulatory design is generally adopted. For example, some central banks use distributed ledger technology (DLT) to provide a digital solution for anti-money laundering and counter-terrorism financing (CFT) compliance procedures. Anti-money laundering related institutions will regularly issue anonymous certificates with time limits to each central bank digital currency user. Within a certain limit, users can choose to maintain the anonymity of transactions, and the central bank or intermediary institutions will not be able to view the user's identity and transaction history, meeting the objective needs of the user group and the regulatory requirements of the law. However, transactions exceeding the limit cannot use anonymous certificates and must be subject to review by anti-money laundering related institutions (Benoît, 2019).
In terms of underlying technology, the distributed ledger is used as the underlying technology, and it evolves over a long period of time based on this technology. Private encrypted digital currencies generally use decentralized blockchain technology, while the central bank's digital currency has centralized characteristics. Blockchain cannot currently meet the high concurrent transaction requirements of the central bank's digital currency in retail scenarios. Therefore, the central bank's digital currency generally considers using distributed ledger technology to ensure the efficiency and programmability of the payment system. The technical framework for the issuance and circulation of the central bank's digital currency will evolve based on the market competition environment, and the optimization will be achieved through the selection of the essentials. However, in the technical iteration, it is still necessary to ensure that the underlying technology of the central bank's digital currency meets the following four points: First, cooperative accounting, that is, a large number of third-party institutions participate in the maintenance and update of the ledger (such as transactions), and through the "consensus process" to ensure that all nodes of the ledger store the same information synchronously; second, data sharing, that is, distributed ledgers provide access to a wider range of ledger reading permissions and permissions to update (write) ledger data; third, encryption technology, including a series of features of encryption technology, such as the use of public keys to verify the authority of the sender of payment instructions; fourth, programmability, that is, the creation of "smart contracts" to automatically execute the terms of the agreement and initiate related transactions without human intervention.

Table 2: Main characteristics of central bank digital currencies

3. Main advantages of central bank digital currency

In terms of cost control, the central bank's digital currency can provide a faster means of payment and reduce costs. As the country's legal digital currency, sovereign digital currency is easier to be accepted by the public than private digital currency. Through top-level design, it can avoid the anti-counterfeiting and loss costs of physical currency, and reduce the third-party fees and friction costs of intermediaries in value exchange. Internally, it can resist the erosion of sovereign currency by private digital currency, improve the efficiency of payment and clearing infrastructure, and boost public confidence in the country's financial system. Externally, it can provide customers with more convenient and lower-cost cross-border payment methods, and enhance the internationalization of the country's currency.
In terms of monetary policy, the central bank's digital currency can improve the monetary policy transmission channels and enhance the effectiveness of monetary policy. Sovereign digital currency can restrict credit entities and usage scenarios through smart contracts with "conditional trigger mechanisms", achieve precise loan placement, and avoid idle funds. At the same time, the application of distributed accounting technology can promote the flattening of central bank digital currency transaction intermediaries, increase the liquidity of the financial market, and dredge the interest rate transmission channels.
In terms of financial supervision, the central bank's digital currency is conducive to the implementation of financial supervision and reduces the possibility of economic crimes. Paper money cannot be tracked by regulatory authorities due to its physical properties, and some encrypted private digital currencies are anonymous due to their decentralized design, which leads to endless economic crimes. Unlike paper money and private digital currencies, the central bank's digital currency is centrally issued and leaves transaction records through distributed accounting technology. With the help of big data analysis, it can conduct anti-money laundering, payment behavior and regulatory control indicator analysis, which can effectively reduce the possibility of economic crimes.
In terms of financial services, sovereign digital currencies can enhance financial inclusion and help develop inclusive finance. On the one hand, central bank digital currencies can improve credit information and reduce information asymmetry. For small and medium-sized enterprises and individuals who have difficulty obtaining credit in traditional financial services due to lack of credit data and fewer fixed assets, central bank digital currencies can effectively improve this phenomenon and increase credit availability. On the other hand, central bank digital currencies can provide a more convenient way to access financial services. Merchants have the motivation to improve the application scenarios and ecological service chains of digital currency accounts to grab customers, thereby potentially solving the restrictions set by banks on financial services and many problems faced by communities with insufficient bank outlets.

Three digital currency case studies

Since the advent of Bitcoin, the development of digital currencies has been changing with each passing day. Digital currencies such as Ripple that focus on cross-border payments have emerged, as well as private digital currencies such as Libra that may have disruptive significance. At the same time, it has also attracted widespread attention from central banks and regulators in various countries, promoting the development of central bank digital currencies in various countries.

1. Case Study of Private Digital Currency

One is Bitcoin. Bitcoin is an anonymous digital currency generated based on an open source algorithm, relying on P2P network transactions, combining peer-to-peer technology and cryptography technology. It is characterized by decentralization, not relying on specific institutions to issue, and having an unlimited number of distributed nodes. In recent years, the controversy over whether Bitcoin is a huge speculative bubble or a monetary revolution has been escalating. Bitcoin verifies and stores data through a chain data structure, applies a distributed node consensus algorithm to generate and update data, uses smart contracts written in automated script code to program and operate data, and uses cryptography technology to maintain the security of data transmission and information access. Based on the blockchain, a new distributed infrastructure and computing paradigm, Bitcoin has creatively solved the "double-spending" problem and the "Byzantine problem" by constructing a positive cycle economic system with "competition-bookkeeping-reward" as the core.
The second is Ripple. Ripple is a system characterized by digital payment networks and transaction protocols. It is essentially a payment settlement, asset trading and remittance system. The system adopts a decentralized architecture, but the operating model and verification nodes show weak centralization characteristics. Ripple takes the inefficiency of the cross-border market, a pain point of the current monetary system, as an entry point and provides a more efficient cross-border payment method. Ripple is the only universal currency in the Ripple system, with a total issuance of 100 billion. It serves as an intermediary for the exchange of various currencies and is used for cross-border payments in the Ripple system. Transactions are recorded in the global ledger through the RPCA consensus mechanism and verification mechanism.
The third is Libra. On June 18, 2019, Facebook announced the launch of the cryptocurrency Libra, whose mission is to build a simple, globally circulated currency and financial infrastructure that serves billions of people. Libra will use blockchain as its underlying technology and a basket of assets denominated in strong currencies as credit support. It will be managed by the Libra Association, an independent non-profit organization headquartered in Geneva, Switzerland. The association members are composed of validator nodes of the Libra blockchain. Libra Association members include mainstream companies in the US payment, telecommunications, blockchain, and venture capital industries, as well as major trading platforms, non-profit organizations, and academic institutions. The introduction of Libra solves the problems of no sovereign credit endorsement and drastic price fluctuations that were common in private digital currencies before, but it also brings regulatory challenges such as super-sovereign supervision and impact on monetary policy.

2. Case Study of Central Bank Digital Currency

Benefiting from the rapid development of domestic mobile payments and electronic payments, China's research progress in legal digital currency ranks first in the world; as a recognized world financial technology center, the United Kingdom also has great potential in the research and development of legal digital currency.
1. Development of China's central bank digital currency. China has made the fastest progress in the research and development of central bank digital currency. As early as 2014, with the support of the then-governor Zhou Xiaochuan, the People's Bank of China established a special research group on legal digital currency and clarified the strategic goal of issuing digital currency. In recent years, relevant research and development work has been launched one after another, and relevant research and development news has been continuously disclosed. In November 2019, Fan Yifei, deputy governor of the People's Bank of China, stated that China's legal digital currency has basically completed top-level design, standard setting, function development, joint debugging and testing. In April 2020, the first application scenario of the central bank's digital currency was implemented in Xiangcheng District, Suzhou City, Jiangsu Province. In addition to the main features of the global central bank digital currency described above, China's central bank digital currency also has the following characteristics:
First, the "one currency, two databases, and three centers" architecture is adopted. "One currency" refers to legal digital currency, that is, an encrypted string representing a certain amount of money issued and guaranteed by the central bank. "Two databases" refer to the digital currency issuance database and the digital currency commercial bank database. The former is the database where the central bank stores the legal digital currency issuance fund on the legal digital currency private cloud, and the latter is the database where commercial banks store legal digital currency on their local or central bank legal digital currency private cloud. The "three centers" are the authentication center, the registration center, and the big data analysis center, which are responsible for the centralized management of identity information, the circulation of digital currency, inventory verification and other full-process registration, and anti-money laundering and regulatory indicator analysis.
Second, adopt the "front desk voluntary, backstage real-name" supervision. Legal digital currency adheres to centralized management, realizes controllable anonymity of legal digital currency, and adopts the design of "front desk voluntary, backstage real-name". While protecting user privacy, it mainly provides regulators with new supervision methods through cloud computing, big data and other technologies, that is, it does not rely on identity recognition systems but analyzes transactions and fraud risks through user behavior, and realizes controllable traceability of digital currency through security and privacy protection technologies, supplemented by regulatory technologies such as compliance review, to strengthen supervision of illegal activities such as anti-money laundering and anti-terrorist financing.
The third is to focus on the failure of traditional monetary policy through smart contracts. According to the design of the Digital Currency Research Institute, the legal digital currency has built-in smart contracts, aiming to strengthen its support for macro-monetary policy and try to solve the problems of currency idleness and liquidity trap faced by traditional monetary policy. Smart contracts mainly refer to conditional triggering agreements. For example, digital currencies that contain smart contracts based on flow subject conditions can achieve precise monetary policy delivery. When the ineffective digital currency circulates to individuals, the digital currency will only take effect if the individual meets the subject category preset by the digital currency. The central bank has applied for four legal digital currency trigger conditions. Digital currencies with built-in smart contracts provide space for the implementation of structured monetary policy, which can avoid capital idleness or inflow into the hot money field (Zero One Think Tank, 2019).
2. Development of digital currency of the Bank of England. At present, the Bank of England has no plans to issue digital currency, but has begun to study the potential impact of issuing legal digital currency. In 2019, Mark Carney, Governor of the Bank of England, said in his speech at the Federal Reserve's annual Jackson Hole Symposium: The current international monetary system is not perfect, and the US dollar still dominates the global trade currency system. One possible way to replace the US dollar is to establish a new synthetic hegemonic currency (SHC) through the central bank digital currency network, which can weaken the dominant role of the US dollar in international trade and is conducive to economic development.
The Bank of England will establish a fast, highly secure and resilient technology platform - the core ledger as the center of the central bank digital currency payment system, responsible for recording value certificates and processing transactions using central bank digital currency (European Central Bank, 2019). The functions of the core ledger are limited to the basic functions required for payments using central bank digital currency. This move is conducive to building a simple, fast and flexible system. The core ledger comes with an application programming interface (API) that allows third-party payment interface providers to send payment instructions securely. Most payment innovation functions will be implemented by third-party financial institutions connected to the core ledger through additional services. At the same time, in order to ensure the resilience, security and integrity of the payment system, only approved financial intermediaries can connect to the core ledger, and the Bank of England will set relevant regulations to ensure the security of the payment system.
In response to the continuous reshaping and iteration of the payment system, the Bank of England's payment regulatory framework needs to be updated in real time to include new payment models. The update of the regulatory framework is based on three principles: first, the new payment system does not pose a threat to financial stability; second, the end-to-end operation of the payment chain is stable and resilient; and third, there are sufficient data sets to monitor payment activities so that emerging financial risks can be identified and addressed (Bank of England, 2020). Specifically for anti-money laundering and counter-terrorist financing, the central bank's digital currency payment system needs to comply with anti-money laundering and counter-terrorist financing regulations and requirements, which means that user identities need to be backed up in the relevant regulatory agencies of the central bank's digital currency payment system. In the Bank of England's digital currency model, a possible compliance solution is that the core ledger only stores the account code and balance, but each account in the ledger is connected to the payment interface provider (financial institution). The payment interface provider needs to identify the user and is responsible for anti-money laundering checks on user transactions. With the continuous development of regulatory technology, the field of digital identity recognition and anti-money laundering compliance supervision is currently undergoing tremendous changes, and new financial technology solutions are constantly emerging, which can promote the provision of better regulatory compliance solutions.

4. The development and prospects of digital currency

In monetary policy, central bank digital currency will gradually replace private digital currency and become the main force in the digital currency market. The decentralized architecture of private digital currency will weaken the effectiveness of the central bank's monetary policy and may further affect the stability of the financial system. Central bank digital currency can achieve precise loan placement by limiting the use scenarios and channels of credit through built-in smart contracts (Xie Xing and Feng Sixian, 2019). Therefore, it is expected that central banks of various countries will actively promote central bank digital currency for a long time in the future, so as to take the initiative in the competition for the right to speak in the future digital currency world.
In financial supervision, the principle of "same behavior, same supervision" should be gradually established to reduce the space for regulatory arbitrage. Both private digital currencies and central bank digital currencies will have impacts and risks on the financial system. In the process of supervising digital currencies, it is necessary to adhere to the principle of "same behavior, same supervision", that is, for the same financial behaviors and business activities, the same capital and liquidity regulatory standards as traditional financial institutions should be followed. For example, Libra's cross-border capital flows should comply with anti-money laundering and prevention of financial crime behavior norms based on KYC (know-your-customer) rules.
In the application scenarios, we should continue to explore and improve the digital currency ecosystem. Financial institutions should continue to expand financial services and application scenarios derived from digital currencies, attract customer resources with a full range of digital currency ecosystems, and seize market share. A perfect digital ecological environment is the fertile ground for the circulation and prosperity of digital currencies, rather than mandatory policy orders (Feng Sixian and Yang Jing, 2020). For example, the Ecuadorian currency in Ecuador, a pioneer in digital currency, was withdrawn from circulation due to its small circulation and inability to attract enough users. With the continuous increase in market heat and the continuous influx of resources, the coverage of the application scenarios of the digital currency ecosystem will continue to expand and benefit digital currency holders.
In the underlying technology, multilateral cross-border and cross-regional cooperation should be strengthened to promote the development of the underlying technology of digital currency. Both private digital currency and legal digital currency rely on technical paths to expand their performance and application scope. Technology has no physical boundaries, and the principle of technological neutrality reserves space for the development of digital currency. Mutual cooperation between digital currency research institutions is conducive to the research and development of different technical architectures, and is conducive to the central bank and private digital currency issuers to absorb different technologies, and carefully evaluate the pros and cons of each optional technology, determine the optimal technical path for digital currency, and expand the technical boundaries to have a long-term impact on digital currency (Yao Qian and Tang Yingwei, 2017).

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