Why do monetary authorities issue central bank digital currencies?

The article believes that the disorderly development of private digital currencies will have a serious impact on monetary authorities' policy regulation and the economic and financial system. This will force monetary authorities to study the issuance of central bank digital currencies. Since central bank digital currencies are issued and regulated by monetary authorities and are centralized, monetary authorities have a natural advantage in issuing central bank digital currencies. In the future, central bank digital currencies will force the construction of financial infrastructure from multiple aspects, further improve my country's payment system, and further improve payment and settlement efficiency. Central bank digital currencies can eventually form a big data system to further improve the convenience and transparency of economic transaction activities, which will be conducive to the effective operation and transmission of monetary policy.

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Since the advent of Bitcoin in 2009, various forms of private digital currencies have developed extremely rapidly. International financial institutions and technology companies have invested in the research and development of digital currencies and have made certain progress. Against this background, monetary authorities of major economies have begun to study central bank digital currencies, and my country is no exception.

Why do monetary authorities issue central bank digital currencies? Is it just to replace cash? Is it just to save the cost of printing cash? Obviously not. Because the proportion of cash usage has been declining year by year, and various electronic currencies that replace cash have been increasing year by year, and the economic and social costs of researching and issuing central bank digital currencies are huge, it is impossible for central banks of various countries to issue central bank digital currencies simply to replace cash.

Recently, a variety of private digital currencies, represented by Bitcoin, have emerged in large numbers, developed rapidly, and had a huge impact. Many economists and financiers in the world, including central bankers, have been greatly shocked, and some even mistakenly believe that private digital currencies may replace sovereign currencies. As early as the end of 2013, the author clearly pointed out that virtual currencies (including private digital currencies) are not currencies in essence and cannot replace sovereign currencies. As time goes by, the non-monetary nature of virtual currencies has gradually been recognized by people.

Private digital currencies use a series of new technologies that have a strong penetration into the financial system and even have an impact on the operation of modern economic and financial systems. Therefore, in order to maintain the stability of the monetary system and even the entire financial system, monetary authorities must also use the same or even more advanced technologies and designs to study and issue central bank digital currencies. If private digital currencies are allowed to develop disorderly, this will have a serious impact on monetary authorities' policy regulation and the economic and financial system.

First, private digital currencies have diverted and replaced the use of part of sovereign currencies, which will weaken the effectiveness of monetary policy and distort the transmission mechanism. Private currencies and sovereign currencies are in a relationship of mutual growth and decline. As the scope of use of private digital currencies continues to expand, the use of sovereign currencies will gradually decline, which will reduce the control of monetary authorities over sovereign currencies. At the same time, the influence of monetary policy regulation on the supply and circulation of sovereign currencies will also decline and become unstable, which will weaken the effectiveness of monetary policy and distort the transmission mechanism.

Second, the value of private digital currencies fluctuates greatly, posing a threat to financial stability. Private digital currencies are not backed by national credit and are not real currencies. Their prices are easily affected by market expectations, have extremely high volatility, and market liquidity is difficult to guarantee. As the scope and scale of private digital currency use expands, the probability of a single private digital currency risk evolving into a systemic risk will also increase.

Third, the supply of private digital currencies is relatively fixed and difficult to adapt to the needs of modern economic development. Taking Bitcoin as an example, there is a contradiction between the supply limit set by the system and the ever-expanding social production and commodity circulation. If it is widely used, it will cause deflation and inhibit economic development. This is also the fundamental reason for the collapse of the gold standard.

Fourth, private digital currencies lack a central regulatory mechanism and are unlikely to meet the demands for stability in the modern monetary system. The so-called “decentralization” is a common feature of private digital currencies, which is that there is no centralized issuing and regulating agency. This means that if private digital currencies are widely recognized by the whole society, but the monetary authorities cannot use the central regulatory mechanism to stabilize the currency value, this will cause economic fluctuations on the one hand, and shake the monetary system based on national credit on the other.

Fifth, private digital currencies pose challenges to anti-money laundering, anti-terrorist financing, and capital control. Private digital currencies generally have the characteristics of anonymous transactions and free cross-border flow of funds, making it easy for criminals to conceal the source and direction of their funds, and for individuals to circumvent the exchange quota and the management regulations on foreign exchange remittances abroad, which facilitates money laundering, terrorist financing, and evasion of capital control.

Sixth, private digital currencies increase the difficulty of protecting consumer rights. Private digital currency prices fluctuate greatly, market participants are almost unregulated, user funds are not secure, and transactions are opaque. Therefore, private digital currency transactions are prone to fraud, theft, and counterfeiting. This not only makes consumer rights unprotected, but also increases the difficulty of evidence collection and investigation by regulatory authorities. Therefore, in order to cope with the impact of the rapid development of private digital currencies on monetary sovereignty, monetary policy, financial risks, and consumer rights protection, the monetary authorities clearly realize that the country should start researching and issuing central bank digital currencies as soon as possible. In the future, central bank digital currencies should, with the support of national credit, continue to meet the society's requirements for currency use technology and become a widely recognized settlement and payment method. Only in this way can monetary authorities expand the use of sovereign currencies and reduce the impact of private digital currencies on the monetary system and the entire financial system.

There are many types of private digital currencies created or issued by different private entities, which are decentralized and have different system settings and transaction methods. The competition is very fierce. In comparison, the central bank digital currency is issued and regulated by the monetary authority and is centralized, which gives the monetary authority a natural advantage in issuing the central bank digital currency.

First, the central bank's digital currency is backed by national credit and is more likely to be widely accepted by society. The central bank's digital currency is a new form of sovereign currency, which has the same legal tender and compulsory nature as sovereign currency. Therefore, society can use the central bank's digital currency like existing sovereign currencies, without the need to reprice the central bank's digital currency, and is more likely to be widely accepted by society. However, various private digital currencies are not backed by national credit, and their prices are prone to fluctuations. They need to be repriced in real time during use, which is why private digital currencies will not be widely accepted by society.

Second, the central bank's digital currency is more conducive to improving the liquidity of the economic system and reducing transaction costs. Each private digital currency has its own system settings, and the systems face exchange and compatibility issues, which actually increases the complexity of economic transactions. In contrast, the central bank's digital currency, which is backed by national credit, adopts a unified system standard. The improvement in transaction convenience will increase the total transaction volume, thereby improving the liquidity of the entire economic system.

Third, the central bank’s digital currency has the monetary authority as the lender of last resort, making it less likely to experience a currency run crisis. Like other forms of sovereign currency, the monetary authority is the lender of last resort for the central bank’s digital currency, providing a guarantee for currency stability. However, private digital currencies do not have a lender of last resort, and once a risk event occurs, currency suppliers and trading platforms are prone to a currency run crisis.

Fourth, the supply of central bank digital currency is regulated by the monetary authorities to meet the needs of modern economic development. Unlike private digital currency, once the central bank digital currency begins to be issued and used, the monetary authorities will adjust the supply of central bank digital currency according to the needs of economic development, thereby maintaining the applicability of central bank digital currency and facilitating the development of the modern economy.

Fifth, the monetary authorities can use the central regulatory mechanism to maintain the stability of the central bank's digital currency and keep the modern economy running normally. The prerequisite for a currency to serve as a measure of value and a means of circulation is that its value is relatively stable. Moreover, economic fluctuations are often accompanied by fluctuations in currency value, so maintaining currency stability is also a necessary condition for maintaining the normal operation of the modern economy.

Sixth, the monetary authorities will certainly enhance the security of the central bank's digital currency through technical means to protect the legitimate rights and interests of consumers. Different from private digital currency, the central bank's digital currency will ensure the security of digital currency users through cryptographic algorithms, and will also establish a controllable anonymity mechanism through technical means to achieve traceability under certain conditions, so as to further enhance the security of the central bank's digital currency and thus protect the security of user transactions.

Different from the existing electronic standard currency, technologies such as security chips, mobile payments, trusted and controllable cloud computing, blockchain, and cryptographic algorithms are areas that digital currencies may involve in the future. Therefore, the central bank's digital currency in the future will force the construction of financial infrastructure from multiple aspects, further improve my country's payment system, and further improve payment and settlement efficiency. What is more worth mentioning is that the central bank's digital currency can eventually form a big data system, which will further improve the convenience and transparency of economic transaction activities, which will be conducive to the effective operation and transmission of monetary policy.

First, central bank digital currency can help regulators track the flow of funds when necessary, thereby reducing money laundering, tax evasion, evasion of capital controls and other behaviors. Existing digital currency technology can not only record each transaction, but also track the flow of funds. In stark contrast to private digital currency, regulators can adopt a controllable anonymity mechanism to grasp the use of central bank digital currency, supplement the existing monitoring and control system, and thus enhance the effectiveness of the existing system.

Second, the information advantage of the central bank's digital currency can improve the accuracy of monetary indicators. The big data system formed by the central bank's digital currency is not only conducive to improving the measurability of money circulation velocity, but also conducive to better calculating the total amount of money and analyzing the monetary structure, which will further enrich the monetary indicator system and improve its accuracy.

Third, with the information advantage, regulatory authorities can use policy tools more accurately and flexibly, track the flow of funds, and conduct comprehensive monitoring and financial risk assessment. After the central bank's digital currency is widely accepted and used by the whole society, the transparency of overall economic activities will be greatly improved. Regulatory authorities can collect complete, real-time, and real transaction books of different institutions and frequencies according to different needs, which can provide a huge data foundation for monetary policy and macro-prudential policy.

Fourth, the central bank's digital currency technology can also improve the interest rate transmission of monetary policy. Only the central bank's digital currency that is widely recognized by the whole society can radiate this advantage to different financial market participants, thereby improving the liquidity of funds between different financial markets and the market liquidity of a single financial market. This will lower the interest rate level of the entire financial system, make the interest rate term structure smoother, and make the monetary policy interest rate transmission mechanism smoother.

In summary, the innovation of the central bank's digital currency is to adapt to the development of the situation, keep pace with the times, retain control over monetary sovereignty, and better serve currency issuance and monetary policy, rather than simply replacing paper cash circulation.