At the digital currency seminar held by the People's Bank of China in January 2016 , the central bank discussed the overall framework and related technical issues for issuing digital currency, and proposed to continue to advance on the basis of previous work and strive to launch the digital currency issued by the central bank as soon as possible. Looking horizontally, other countries are also paying attention to and developing digital currencies. In recent years, Canada and Ecuador have conducted many experiments on government-controlled digital payment technologies, and many other central banks have also put digital currencies on their development schedules. On January 2, 2016 , foreign media quoted Victoria Cleland, chief cashier of the Bank of England, as saying that the Bank of England is also considering whether to issue digital currencies by the central bank, and the research work is still in its early stages. Andy Haldane, chief economist of the Bank of England, said that switching to digital currencies would be a "great technological leap forward." In recent years, the Federal Reserve has also been continuously analyzing Bitcoin in depth , studying its characteristics, impact, technical support behind it, and analyzing data. The process of digital currency in Europe is also accelerating. DNB, Norway's largest bank , recently called on the country to completely stop using cash. In fact, several banks in Norway have closed cash businesses in some branches. Digital currency definition and existing models The definition of digital currency is still controversial and there is no unified expression. In June 2014 , the Financial Action Task Force released the "Report on Key Definitions of Virtual Currency and Potential Anti-Money Laundering / Counter-Terrorist Financing Risks". The definition of virtual currency in the report is: it is a data representation of value, which can be traded through data and play the role of transaction medium, accounting unit and value storage, but the existing digital currency is not the legal tender of any country or region, and no authority provides guarantee for it. In February 2015 , the European Central Bank released a report on digital currency, which defined digital currency as a data representation of value that is not issued by the monetary authority, and in some cases, it can be used as a substitute for currency. But at the same time, the report pointed out that only a small part of digital currency is currently used as a transaction medium, and because of its large price fluctuations, it is difficult to play the role of value storage and accounting unit. At present, the digital currencies on the market mainly include "decentralized" Bitcoin, Litecoin and "centralized" Ripple. The author concludes that the above-mentioned digital currency issuance has the following three characteristics. First, the issuance volume is small but the development is rapid. As of March 2016 , there are 656 digital currencies with a total market value of about 8.14 billion US dollars, which is still very small compared with the global broad money ( M2 ). But compared with the total market value of 6.35 billion US dollars in the same period of 2015 , the growth rate has reached 28.2% . Among them, 58 digital currencies have a market value of more than 1 million US dollars, 13 digital currencies have a market value of more than 10 million US dollars, and 4 digital currencies have a market value of more than 100 million US dollars. The four major digital currencies are Bitcoin, Ethereum, Ripple, and Litecoin, and their combined market value exceeds 95% of the total market value. See Figure 1 for specific data . Second, the price fluctuates violently. These digital currencies often fluctuate by more than 10% in a day , and in extreme cases, by more than 100% . Take Bitcoin as an example. In April 2010 , the price of Bitcoin was less than 14 cents. On July 1, 2013 , it reached $ 81.57 , and on November 25 of the same year , it reached a historical high of $ 968.84 . On January 12 , 2015 , the price of Bitcoin fell to $ 218.01 , and then remained at around $ 200 , but rebounded to more than $ 400 in December . Other digital currencies also fluctuate violently. Third, the average daily payment amount is small. The gray bar chart below Figure 2 is the 24- hour transaction volume of Bitcoin , that is, the average daily transaction amount. It can be seen that before October 2015 , the average daily transaction amount was not high, maintaining at US$ 10 million and US $ 20 million. It reached a peak of US$ 130 million on November 2, 2015 , and then remained at US$ 70 million and US$ 80 million. Analysis of the monetary attributes of existing digital currencies The existing digital currencies are mainly Bitcoin, Litecoin and Ripple. The technical principles they implement are basically the same. They are all digital cryptocurrencies that need to be obtained through mining and computing power contribution. The "decentralized" Bitcoin and Litecoin are not managed by any central agency and have no legal entity. The "centralized" is represented by Ripple, which is operated and issued by Ripple Labs and can circulate in the Ripple network. From the perspective of Marxist monetary theory, money is a special commodity separated from other commodities and fixed as a general equivalent, which has value and use value. Digital currency can be used to purchase goods and services, international donations, etc., which reflects its use value. To obtain digital currency, "mining" is required, and the CPU computing power, power consumption, and time consumption consumed by "mining" will be converted into the value of digital currency. However, from the perspective of currency development trends, the specific form of currency itself is also constantly changing. Currency is increasingly developing in the direction of a symbol. Currency itself does not necessarily have to have value. Currency is gradually transforming from physical currency to credit currency. In the past, gold and silver were special commodities, while current paper money, electronic currency, and future digital currency are all credit currencies. In the physical currency stage, the value of currency comes from its own value, while in the credit currency stage, the value of currency comes from the law or a common belief, such as " IN GOD WE TRUST" written on the back of the US dollar. At present, the so-called "decentralized" digital currency such as Bitcoin is not highly recognized by the society. Only a few technicians are interested in it. Once a country in the world explicitly prohibits it, its price will drop sharply. If the issuer of "centralized" digital currency is not an institution with national credit, it is not easy to be recognized by the whole society on the one hand; on the other hand, its supply is easily affected by the issuer and has no credibility. Its typical representative is Ripple, most of which have been held by Ripple Labs, and its issuance system needs to be further improved. As of April 2016 , Ripple has only issued 34.4 billion of the 100 billion, including nearly 20 billion held by the three co-founders . Therefore, judging from the development trend, the existing digital currencies cannot be used as currencies in essence. The most important functions of money are the measure of value, means of circulation, and means of storage. From ancient times to the present, the monetary theories of various thinkers and economists in the East and the West have mainly revolved around these three points. Aristotle believed that money mainly has the functions of measure of value, means of circulation, and means of storage. Kindleberger classified the functions of money into means of payment, unit of account, medium of exchange, and value storage. Mishkin summarized the functions of money as transaction medium, unit of calculation, and value storage. George Kaufman believed that the functions of money include medium of exchange, value standard, and value storage. Marx believed that money has the functions of measure of value, means of circulation, means of storage, means of payment, and world currency. The means of payment is the extension of the means of circulation in time, and the world currency is the extension of the three basic means in space. The value scale refers to the role of currency in measuring and expressing the value of all goods. This function is the embodiment of the essence of currency, which is manifested in the form of price tags. Existing digital currencies such as Bitcoin can be exchanged with the US dollar, and the value of goods can be measured through the US dollar as an intermediary. In June 2014 , the Bitcoin payment processing platform Coinbase announced that it would allow merchants to mark the prices of goods and services with smaller Bitcoin price units "bits". However, the existing digital currencies have the characteristics of fixed total amount and drastic price fluctuations, which make them unable to effectively perform the function of value scale. The amount of currency itself must not be scarce. Once it is scarce, its value will increase with the development of social production. If it is used as currency, it will lead to a terrible problem-deflation. In addition, an obvious disadvantage of existing digital currencies is drastic price fluctuations. Often the fluctuations exceed 10% within a day , and in extreme cases exceed 100% . It is impossible to stably price normal goods and services-the prices of the latter generally fluctuate slightly around a stable value. Means of circulation refers to the function of currency as a medium in the process of commodity exchange. Existing digital currencies can be used to purchase goods and services. American technology giants such as Dell and Microsoft , as well as some small foreign businesses, have begun to accept Bitcoin payments. In June 2014 , the Swiss Financial Market Supervisory Authority ( FIN MA ) granted the SBEX exchange the first Bitcoin trading license, recognizing Bitcoin as a means of circulation. In addition, digital currencies can also be used for donations, especially making international donations more convenient. After the Ya'an earthquake, One Foundation received a total of 65 Bitcoin donations, with a market value of about 50,000 yuan. This was the first time that Bitcoin became a donation. However, the anonymity of existing digital currencies is not conducive to supervision, and the risks they generate may endanger financial stability. Therefore, it is questionable whether they can effectively perform the function of a means of circulation. Since digital currencies such as Bitcoin use blockchain technology, anonymous transactions without credit, and the characteristics of borderless and geographical restrictions, they are easily used for criminal activities such as terrorist financing and money laundering by corrupt elements, and it is difficult to curb them from the regulatory perspective. In addition, derivative financial instruments such as Bitcoin options and futures have been developed. These financial instruments lack supervision or are difficult to supervise, which further amplifies the risks and poses a certain threat to financial stability. In early 2014 , after the closure and bankruptcy of Mt.Gox , the world's largest Bitcoin trading platform , the chief operating officer of Bitcoin derivatives market BTC.sx announced the suspension of trading. The closure of the Bitcoin trading platform caused serious losses to Bitcoin investors, and some Chinese players lost millions of yuan. In addition, the certain characteristics of the total amount of existing digital currencies will make their value continue to rise with the development of social production. People will be more willing to hoard the digital currencies they already have like hoarding investment products, rather than using them for consumption. At this time, digital currencies will lose their function as a means of circulation. Storage means is the function of currency withdrawing from circulation and being preserved as a general representative of social wealth. Existing digital currencies rely on cryptography and Internet technology , and use electronic signatures to ensure that all persons hold and circulate freely. The cost of carrying and keeping it is almost zero, and there is no physical currency, so there will be no loss problem. Digital currency has a real-time exchange rate with the US dollar, and it can be converted into real currency through a specific trading platform. It has high liquidity and high wealth realization ability. At present, many people who are optimistic about the prospects of digital currency regard buying Bitcoin as an investment. However, existing digital currencies have security issues and are still difficult to serve as a means of storage. At present, digital currencies are generally stored in computer hard drives, mobile devices or online wallets. If stored offline, once the computer fails or the mobile device is lost or damaged, the Bitcoin owner is likely to lose the digital currency he owns. Storing in an online wallet may be attacked by hackers, or the trading platform may run away with the money. Such cases are endless. In June 2011 , Allinvain had 25,000 bitcoins stolen , becoming the first player in the history of Bitcoin to suffer major losses due to hacker attacks. In September 2012 , the Bitcoin platform bitfloor lost 24,000 bitcoins after a hacker successfully obtained the unencrypted backup wallet . In addition, without the exclusivity granted by law and the lack of support from the government, central bank, and physical goods, digital cryptocurrencies are easily replaced by new varieties of the same type. Future Prospects of Digital Currency Based on the above analysis, the author boldly hypothesizes that the technology that can be used as digital currency in the future should have the following characteristics: winning common beliefs, low or zero cost, non-scarcity, stable value, and cannot be forged or tampered with. The technical route of digital currency can be divided into two types: account-based and non-account-based. It can also be improved and used in layers. Distributed bookkeeping and non-account-based blockchain technology are currently attracting widespread attention. In September 2015 , a total of 22 top banks including HSBC and Deutsche Bank joined an organization led by financial technology company R3 . The organization will use blockchain technology as a framework. In October of the same year , the first global blockchain summit "Blockchain-New Economic Blueprint" was held in Shanghai. About 200 industry professionals around the world who are interested in the application prospects of blockchain technology participated, including staff from the Central Bank Financial Research Institute, the Central Bank Credit Information Center, the Shanghai Stock Exchange, Lufax, Deloitte, etc. In addition, central banks such as the Bank of England have also invested a lot of research on blockchain technology and digital currency issues. Blockchain technology refers to a technical solution that combines traditional encryption technology with Internet distributed technology to collectively maintain a reliable database in a decentralized and trustless manner. In this technical solution, each data block that makes up the system has a backup of all the information exchange data of the system within a certain period of time, and generates a data fingerprint to verify the validity of its information and link to the next database block. Through full network encryption and distributed records, it can ensure the authenticity of transactions and the integrity of records, effectively prevent counterfeiting, and protect funds and information security. However, Zhou Xiaochuan, governor of the People's Bank of China , said in an interview that the storage and computing resources occupied by blockchain are still too much to cope with the current transaction scale. In addition, there are still disputes about whether digital currency will be "decentralized" and anonymous in the future, and whether blockchain technology is suitable also needs to be studied and observed. Whether to "decentralize" is still controversial. Hayek's free currency theory believes that the key to the market mechanism to play a role is the existence of competition. The government's monopoly on the right to issue currency has destroyed the economic equilibrium. He demonstrated the feasibility and superiority of the competitive currency system through research. He believes that the denationalization of currency is the fundamental direction of the reform of the currency issuance system. The ideal currency issuance system is to replace the state-issued monopoly currency with competitive currency (free currency) issued by private banks. The "decentralized" issuance mechanism of most existing digital currencies such as Bitcoin and the R3 organization composed of many well-known banks are the practitioners of this theory. However, "decentralization" will also have many problems. If it is completely "decentralized", there will be no legal entity. How to hold accountable when encountering legal problems? Does currency still need to be regulated? Who will supervise and regulate it? What will the currency issuance mechanism become? The relatively unfair issuance mechanism that is easier to obtain for a few "miners" with technology and hardware equipment like Bitcoin will definitely not work, and its limited total amount is prone to deflation. "Multiple centers" such as alliances and organizations established by multiple banks are similar to the joint issuance of currency by multiple banks in Hong Kong. However, the key to Hong Kong's currency issuance system is to be pegged to the US dollar. Does the "multiple centers" digital currency also need to be pegged to something? These issues are worth further research and discussion. Adhering to the "centralized" issuance mechanism - the central bank launches and issues digital currency with legal recognition - although there is no essential difference from the current electronic currency, it has many natural advantages in solving the shortcomings of the existing digital currency. As for the problem that the total amount of existing digital currency is certain, it is easy to reduce monetary liquidity and cause deflation. The central bank has a special survey and statistics department, which has experience and data advantages in regulating the total amount of currency issuance, which can match the total amount of currency with the total economic output, ensure that the currency has healthy liquidity, and effectively curb the trend of inflation and deflation. In response to the problem that the price of existing digital currency fluctuates violently and affects financial stability, on the one hand, the central bank can regulate through monetary policy to reduce the price fluctuation range; on the other hand, a large part of the violent price fluctuation of existing digital currency is due to the low social recognition. After the Chinese government stated that it did not recognize the legality of Bitcoin in December 2013 , the investment boom in Bitcoin cooled down instantly and the price of Bitcoin plummeted. Therefore, the central bank also has advantages in stabilizing the currency value. As for the problem that the current cross-border legal formulation is imperfect and cannot be coordinated, which affects the international circulation of digital currency, the central bank can work with central banks of various countries and other relevant departments to jointly formulate corresponding laws and regulations and coordinate the management of cross-border transactions of digital currency. Regarding the problem that existing digital currencies have no legal protection, once there is a central bank as the central support and the government provides compulsory guarantees, it will be easier to enhance common credibility and win common belief. There is also controversy over whether to use anonymity or real-name registration. If the real-name registration is adopted, the transfer of funds can be made transparent, and corruption, terrorist financing and other issues can be better prevented. At the same time, the flow of funds between departments and industries can be better grasped, which will help relevant government departments understand the national conditions and provide reference for decision-making. In addition, the real-name registration is more conducive to the function of digital currency as a storage means. If the device where the digital currency is placed is lost or damaged, the owner only needs to provide proof of identity to retrieve it, just like reporting the loss of a bank card to the bank, or even more convenient than the latter - just operate it online. However, the real-name registration will pose a great threat to privacy. If the government makes human or technical mistakes, private wealth and privacy may be leaked. For the central bank, it certainly hopes that the digital currency it launches can protect the private privacy of citizens as much as possible and facilitate their use; but it is also its responsibility to maintain national financial stability, implement necessary supervision, and reduce crimes such as money laundering. Therefore, it is necessary to comprehensively consider these points and find a balance point that can both protect private privacy and effectively curb criminal behavior. When digital currency is truly launched in the future, it will have a series of profound impacts on many aspects of the economy and finance, such as the formulation and implementation of monetary policy, payment and settlement systems, and anti-money laundering. In terms of monetary policy formulation and implementation, on the one hand, digital currency is conducive to improving the transparency and effectiveness of monetary policy. With the rapid transmission and response capabilities of the Internet, the monetary system constructed by digital currency is more flat, which can achieve faster and more accurate monetary policy transmission than the current "central bank-commercial bank-enterprise / resident". On the other hand, digital currency can improve the security and efficiency of currency issuance and withdrawal. Although the current issuance method of digital currency is still controversial, compared with the current paper currency, the transportation and custody of currency will change: the transportation method will change from physical transportation to network transmission; the storage method will change from the central bank's issuance library and the banking institution's business library to the cloud computing space for storing digital currency. In terms of payment and settlement, digital currency can improve transaction convenience and reduce transaction costs, bring competition to the traditional payment system, and encourage banks and other financial institutions to improve service levels and reduce transaction costs. Digital currency is convenient for payment, has stronger segmentation ability than paper currency and electronic currency, and is convenient for micro-payments, which is its incomparable advantage in exercising the function of a means of circulation. At present, the smallest subdivision unit of Bitcoin is the eighth decimal place, called "satoshi"; the smallest subdivision unit of Ripple is the sixth decimal place , called "di". It may be smaller if technology allows in the future. In addition, digital currency can enable people who do not have an account in a financial institution to make non-cash payments, and it is fast and low-cost, which is conducive to the development of inclusive finance. The powerful payment and settlement function of digital currency will gradually weaken the role of the central bank. If the currency issuance is de-monopolized and de-nationalized as predicted by Hayek, the central bank may not be necessary in the future. A report by the Bank for International Settlements in April 2016 also pointed out that digital currency reduces the functions of central institutions and may undermine the ability of central banks to control the economy or issue currency. In terms of anti-money laundering, digital currency also has its natural advantages. Previously, physical currencies such as gold and silver had no identity recognition function at all, and every currency was the same. In the paper currency stage, although each banknote has a unique code printed on it, the currency has no affiliation information, and the owner of the banknote cannot be known by the code. However, after a certain algorithm is used, digital currency not only has a unique code for each currency, but also stores information such as the account number and transaction process of the currency owner. Banks and other financial institutions can hold "private keys" and, under the guidance of KYC policies (know your customer), strengthen the review of digital currency account holders, investigate whether the source of funds is legal, effectively fight money laundering, and prevent corruption. In addition, digital currency will promote the birth of a new batch of industries, drive economic development, and solve employment difficulties. Such as online digital currency wallets and exchanges, offline ATMs , incubators for investing in digital currency-related startups, etc. The Internet will transform from an information Internet to a value Internet, and transfer value. The Internet era will enter version 2.0 . ( The author is Zhang Wei, associate researcher at Tsinghua University, and Qian Jiaqi, School of Finance, Central University of Finance and Economics) |
