Is digital currency really at a dead end based on monetary policy?

About the author : Hedy Bi, undergraduate degree from Minzu University of China, major in financial management. Paper: The relationship between internal control and profitability performance in the banking industry from the perspective of corporate management; Master degree from the University of Birmingham, UK, major in money, banking and finance, paper: The relationship between entry barriers and profitability in the banking industry.

Author: HedyBi

At the 2016 Financial Innovation Conference held by China Europe International, relevant leaders expressed their views that "digital currency" cannot replace legal currency. If such a situation occurs, it means that monetary policy will not be implemented in the future.

Regarding monetary policy, there are several points:

1. The ultimate goal of monetary policy is to stabilize prices, achieve full employment, achieve economic growth and achieve balance of international payments, all of which are closely related to the national economy and people's livelihood.

In developed countries, monetary policy is the main means of regulating the economy. Therefore, countries without monetary policy are completely market-oriented. This may lead to the rich getting richer, the poor getting poorer, and polarization becoming more serious. Think about it, with regard to the previous globalized trade, why have developed countries been talking about deglobalization since the subprime mortgage crisis in 2008? And this is only the globalization of trade. Just imagine, what will the "globalization" of the financial system cause? It is inevitable that the central bank is worried about digital currency.

2. Monetary policy is divided into price-based intermediate targets and quantity-based intermediate targets. The former is based on the liquidity preference theory of Keynesianism in the context of World War II. The latter is based on the monetarism theory of Friedman during the period of stagflation.

——In other words, not all stabilizing the economy depends on issuing currency to increase the amount of base currency. For example, innovative interest rate tools that cooperate with digital currency. Of course, it will eventually affect the amount of currency. Moreover, there are several types of digital currency. Nowadays, the People's Bank of China is studying the system architecture of issuing digital currency by the central bank.

3. Based on the above two points, countries will use different monetary tools when implementing different monetary policies to achieve different monetary goals.

From the perspective of monetary policy, to put it simply, if digital currency really becomes legal tender, and the most extreme case, decentralized digital currency becomes legal tender, it is not issued by the central bank, but there are actually monetary policies that can be implemented.

For example, from the perspective of investment and interest rates (new development of price-based monetary policy), it is equivalent to building a brand new financial system with the issuance of digital currency, which has the excellent properties of digital currency. And this possibility will establish a set of matching mature capital markets. Through this, regulation will be carried out. Therefore, the path of decentralized digital currency will change with the development of the digital financial system. As for whether it will reach the end, it is another matter.

Therefore, from the perspective of monetary policy, the future of decentralized digital currency may be far away, but for digital currency issued by the central bank, in theory, monetary policy will not fail. From the perspective of the architecture of digital currency, big data cloud computing may better and more effectively count the amount of currency in circulation, and better serve monetary policy.

Based on the current macroeconomic environment, the emergence of digital currency is actually necessary:

The systemic risk of banks is increasing with the exposure of economic problems. The most fundamental problem of financial systemic risk is the debt problem. The relationship between debt, bank, currency, asset price, etc. is complex and intertwined. It seems that the first financial institutions exposed are banks. The emergence of banks originated from the bond trading of Venetian merchants, which required endorsement and the storage of bonds and property. It seems that if digital currency and digital wallets appear, banks will lose their most basic functions. However, if blockchain technology is used from within the bank, digital currency or settlement currency can help banks improve their current competitiveness.

Even issuing digital currency from the central bank to form a new system will better solve the problems currently faced by the banking system. There are two models to choose from: one is for the central bank to issue digital currency directly to the public; the other is to follow the traditional "central bank-commercial bank" binary model. The first is also a common model for some digital currencies at present. In this case, the central bank directly provides legal digital currency issuance, circulation, and maintenance services to the whole society. The second still adopts the current paper currency issuance and circulation model, that is, the central bank issues digital currency to the business library of commercial banks, and commercial banks are entrusted by the central bank to provide legal digital currency deposit and withdrawal services to the public, and work with the central bank to maintain the normal operation of the legal digital currency issuance and circulation system. (Excerpt from Fan Yifei, China Finance)

4. Why doesn’t China consider illegal digital currencies such as Bitcoin as financial assets like the United States?

1. The financial system is not perfect. The capital market is still on the road to maturity. Due to its advantages, such as high efficiency, once risks appear, they spread very quickly and affect a wide range. Risks cannot be controlled. In the end, ordinary people suffer.

2. Monetary policy: Digital currency may disrupt the savings and payment functions of the banking system, and if the monetary policy continues to use the original transmission mechanism, it will be affected. Therefore, the effectiveness of the existing monetary policy will be weakened.

3. National security: Since decentralized, non-legal digital currencies have the characteristic of irreversible transactions, this may be exploited.

5. Conclusion:

Whether it is digital currency or virtual currency, from the perspective of monetary policy, digital currency is not at a dead end. And through the above arguments, it can also be seen that among digital currencies, legal digital currency may be the first regular force to enter the financial system.