Why has the issuance of digital currency by central banks become a global trend?

On January 20, 2016, the People's Bank of China announced on its website that it was holding a seminar on digital currency. At the meeting, the central bank asked its digital currency research team to "strive to launch the digital currency issued by the central bank as soon as possible." Similarly, central banks such as the Bank of England and the Bank of Canada are also planning or considering issuing their own digital currencies. After the advent of Bitcoin triggered a wave of privately issued and denationalized digital currencies, digital currencies issued by central banks seem to have become a global trend.

Since central banks already have full control over the issuance of currency, why would they bother developing their own digital currencies?

Well, that’s an interesting and important question. To answer it, we first need to know some basics, some cryptocurrency 101.

Unlike traditional electronic payment tools used by online banks and third-party payment companies (tools that facilitate the dissemination of legal tender), digital currency is a new technology. It is developed on the basis of a series of new technologies - they are not tools for transmitting money; they are money themselves. Among them, digital currencies based on cryptography are also called cryptocurrencies. Bitcoin is a typical example of this kind of digital currency. After its emergence, it inspired many similar systems. Some commercial banks and central banks have also begun to develop their own digital currencies. Depending on the issuer, we can divide digital currencies into three types:

1. Digital currency issued by non-financial institutions

In November 2008, a person named Satoshi Nakamoto invented a new technology called blockchain and designed a peer-to-peer electronic cash system, namely Bitcoin. On January 3, 2009, Satoshi Nakamoto completed the code development of Bitcoin. Due to its peer-to-peer and electronic nature, Bitcoin can be transferred directly between two people without the need for a centralized settlement agency. Therefore, it is a fast, low-cost, borderless payment system.

2. Digital currency issued by commercial banks

Some large international financial institutions have taken a fancy to the low-cost, fast and secure features of digital currencies, and have begun to try to use its underlying technology, namely blockchain technology, to develop their own digital currencies. For example, UBS, Deutsche Bank, Santander Bank and Bank of New York Mellon, the four largest banks in the world, have already participated in it. Their digital currencies are similar to the above-mentioned digital currencies, but their issuers are different. It is particularly noteworthy that financial institutions develop digital currencies to meet their own needs for fast settlement of transactions, rather than to challenge the financial status quo by replacing the legal currency issued by the central bank.

3. Digital Currency Issued by Central Banks

Some central banks, such as the People's Bank of China and the Bank of England, are also planning to launch their own central bank digital currencies after conducting some research on digital currencies. Technically, CBDC is no different from the above two, but due to its special status, CBDC will have a greater impact on the economy, which is why the central bank wants to introduce CBDC.

CBDC will have at least three major impacts, that is, there are three major reasons for the government to embrace CBDC.

Creating a cashless society

Governments hate cash, which is largely why they want central banks to issue digital currencies.

Although cash is the original form of legal tender for the government, it has some obvious flaws. Compared with funds in financial institutions, cash is less controlled by the government. Once cash leaves the bank, it immediately becomes difficult to track. The government cannot know where each banknote is, who owns it, or even whether it still exists. This makes cash easy to be used for drug trafficking, smuggling, tax evasion, money laundering, and even to finance terrorist activities. On the other hand, cash held by individuals can easily become a target for thieves or robbers.

More importantly, cash will affect the government's efforts to promote negative interest rate policies. When negative interest rates are reduced to unbearable levels, depositors will give up the convenience and security of keeping their money in the bank - they will withdraw their money and keep the cash at home. This makes negative interest rate policies difficult to implement.

This is why the European Central Bank has decided to stop issuing 500 euro notes, and former US Treasury Secretary Lawrence Summers has called for the abolition of the $100 note - before that, the United States had already stopped issuing $500 and larger banknotes in 1945.

However, as long as people can withdraw cash from banks, no matter how the government restricts the use of cash, there will still be a large amount of cash outside the government-controlled financial system. This is something the government does not want to see. However, in a society that fully uses central bank electronic currency, CBDC can replace traditional forms of currency and achieve the goal of cashlessness. At that time, the government will be able to monitor every citizen's personal account to every transaction, and can ban all transactions that they consider illegal. They can also prevent people from taking cash home when negative interest rates appear. People will completely become fish on the chopping board. As Professor Joseph T. Salerno pointed out in his article "Why Governments Hate Cash":

The reason our rulers give for restricting cash is to protect society from terrorists, tax evaders, money launderers, drug cartels, and other real or imagined villains. The real purpose of flooding cash restrictions or even bans is to force citizens to make payments through the financial system. This allows governments to expand their ability to spy on and track their citizens’ most private financial behavior in order to squeeze every last dollar of tax debt out of their citizens.
Stealing the limelight from private digital currencies such as Bitcoin

The current monetary system is unjust, has serious consequences, and is shaky, and economists from the Austrian School and other schools have spent a lot of energy to explain this. The birth of private digital currencies provides an opportunity to reform the monetary and financial systems. However, governments inevitably feel threatened. They are jealous of the popularity of various digital currencies. But due to face, most governments cannot directly declare Bitcoin illegal. After all, this goes against their ostensible position of supporting technological innovation.

Therefore, although the attitudes of governments around the world towards digital currencies vary, the difference lies only in the degree to which they reject Bitcoin - no government is completely embracing Bitcoin. These megalomaniacs hope to quietly divert public attention from Bitcoin by issuing a digital currency that they can control.

As a result, governments’ stance on digital currencies is often contradictory: on the one hand, they are restricting the development of digital currencies such as Bitcoin, on the other hand, they are actively researching and imitating Bitcoin to develop their own digital currencies. Take China as an example. On December 5, 2013, “in order to protect the property rights and interests of the public, safeguard the legal tender status of the RMB, prevent money laundering risks, and maintain financial stability”, the People’s Bank of China, together with the Ministry of Industry and Information Technology, the China Banking Regulatory Commission, the China Securities Regulatory Commission, and the China Insurance Regulatory Commission, jointly issued a notice:

Although Bitcoin is called "currency", it is not a real currency because it is not issued by the monetary authorities and does not have monetary attributes such as legal tender and compulsion. In terms of nature, Bitcoin should be a specific virtual commodity that does not have the same legal status as currency and cannot and should not be circulated and used as currency in the market.

At this stage, financial institutions and payment institutions are not allowed to price products or services in Bitcoin, buy or sell Bitcoin or act as a central counterparty to buy or sell Bitcoin, underwrite Bitcoin-related insurance business or include Bitcoin in the scope of insurance liability, or directly or indirectly provide customers with other Bitcoin-related services.

But this does not mean that the PBoC believes that digital currency is a bad thing. On the contrary, at the 2016 Digital Currency Seminar, they admitted that in fact "... a special research team has been established since 2014,..." and believed that "... exploring the issuance of digital currency by the central bank has positive practical significance and far-reaching historical significance." This is certainly not the first time that the government has replaced the real thing by issuing imitations.

Achieve more precise control over monetary policy

Central bankers—social engineers—believe in manipulating monetary policy to control the economy. However, whenever their efforts fail, they try to blame the market. For example, they use increasing the money supply as a stimulus; however, the money that is supposed to stimulate the real economy is often diverted to the financial market by "greedy" businessmen and used for the opposite purpose. In contrast, digital currencies can help them achieve more precise control over monetary policy, which not only means that they can accurately make "money dropped from helicopters" float into people's wallets; since these digital currencies are programmable, the government can even use various scripts to control how these new currencies are used.

For example, if the government plans to support the agricultural sector by subsidizing specific farms, such as a few corn farms, they can directly add a sum of money, such as $100 million, to the account addresses of these farms and stipulate that this money can only be sent to a specific fertilizer supplier at a specific time, and stipulate that each farm can only use a maximum of $10 million per year. In this way, they can ensure that farmers do not waste this windfall and that the money does not flow to other sectors, such as the stock market or the real estate market.

Although such monetary policy will still fail in the end, in the eyes of government officials, CBDC undoubtedly provides them with a better tool. For them, with the help of CBDC, they can better plan and manage the economy.

in conclusion

Despite some similarities with free digital currencies such as Bitcoin, central bank digital currencies are essentially the opposite of what Bitcoin represents. They have the following three impacts. (1) By issuing central bank digital currencies, governments may be able to achieve their goal of building a cashless society, while the financial exploitation that the general public will face will be even more severe; (2) CBDCs will steal Bitcoin's limelight and help governments suppress the digital currency revolution; (3) CBDCs may be used as a tool to achieve more precise control over monetary policy (although this effort will ultimately fail in the long run). Faced with such an impending threat, freedom lovers should be alert and think about countermeasures as soon as possible. (Translated by Xiong Yue)