What kind of digital currency will the central bank issue? What impact will it have on Bitcoin?

For basic knowledge about what digital currency and Bitcoin are and how they work, please refer to my other answer:
Basic Science of Bitcoin
This answer assumes that the reader already understands the basics and concepts of these digital currencies.

1. What kind of digital currency does the central bank want to issue?

The central bank has taken a fancy to the superiority of the underlying technology (blockchain) used by Bitcoin and wants to use blockchain to issue and manage digital RMB. Please note that digital RMB is not the electronic RMB that only transfers paper money to the Internet for transmission, such as online banking/Alipay that we use now , but a brand new form of currency.

The central bank's goal is to issue a digital RMB that is anchored 1:1 to the RMB, with the initial currency issued by the central bank, real-name accounts, and only the central bank has the right to generate blocks and package accounts. The central bank hopes to use digital RMB to complete online RMB transactions.

The issuance and operation mode of digital RMB is very different from Bitcoin:

① Generation of initial coins <br/> The initial coins of Bitcoin are generated by miners through POW mining; the initial coins of digital RMB can only be generated by the central bank. Whenever a bank requests to exchange digital RMB with traditional RMB (paper money or electronic RMB), the central bank will cancel the traditional RMB and hand over the newly generated digital RMB of the same amount to the bank, and vice versa.

After the digital RMB is widely used and occupies a dominant position in online transactions, the central bank may change the primary and secondary relationship between traditional RMB and digital RMB and use digital RMB as the main base currency. For example, additional currency issuance will be directly carried out on digital RMB, rather than issuing additional currency on traditional RMB and then exchanging it for digital RMB.

② Total amount of coins <br/> When 21 million Bitcoins are mined, no new initial coins will be generated, and the total amount of coins will never increase or decrease; the total amount of digital RMB may increase or decrease based on the bank's exchange and the central bank's issuance needs.

③ Block generation and transaction packaging <br/> Bitcoin block generation and transaction packaging are generated by miners through POW mining, and everyone can participate in mining; for digital RMB, only the central bank can generate blocks and package transactions.

④ Account generation <br/> Bitcoin accounts can be generated by everyone by themselves, and are completely anonymous; digital RMB accounts are the same as existing bank accounts, requiring application for registration and real-name registration.

In short, the central bank will transform the existing digital currency according to demand and produce a customized and centralized currency - digital RMB . In digital RMB, the central bank has the right to issue currency, just like traditional RMB. For security reasons, only the central bank has the right to generate blocks and package transactions. Other nodes (such as banks, enterprises, and individuals) only have the right to issue transactions.

2. The intention of the central bank to issue digital currency

What are the differences and advantages of the digital RMB issued by the central bank compared with the existing electronic RMB?
We compare the "positive practical significance and far-reaching historical significance" cited by the central bank and give examples one by one:

Issuing digital currency can reduce the high cost of issuing and circulating traditional paper currency

This is easy to understand. Although most of the RMB now exists in electronic form, the central bank's increase in RMB issuance is also a change of numbers, but the increase will still lead to an increase in M0 (cash in circulation), so the central bank still has to pay the cost and print a certain proportion of paper money. The issuance of digital currency is just a change of numbers, which is zero cost compared to printing money.

In addition, the costs associated with the storage, transportation, damage, and authenticity identification of paper money are also quite high, while the costs of digital currency in this regard are very low, and costs such as server bandwidth are further reduced with technological advances.

Improve the convenience and transparency of economic transactions and reduce illegal and criminal activities such as money laundering and tax evasion

Any transaction on the blockchain is unforgeable and transparent, which makes economic activities and capital flows completely open and transparent to the government , for example:
① The central bank can easily track the final destination of liquidity injected by short-term tools;
② The Statistics Bureau is fully aware of all economic data, but the downside is that it can no longer inflate data at will;
③ The tax bureau can easily view all the inflow and outflow accounts of a company;
④ The police may start from the last drug retail transaction, track and locate all related transactions on the blockchain layer by layer, and catch all the upstream and downstream criminals in one fell swoop. Why don't drug dealers use cash? In the United States, carrying a large amount of cash is basically equivalent to writing on your face that you are a drug dealer/criminal, and we are not far from this state.

Although the current electronic RMB can theoretically do this, the cost is extremely high, and transaction data is scattered among hundreds of different banks, settlement organizations, third-party payment, etc. For example, funds from telecommunications fraud are often dispersed into hundreds of accounts and tossed back and forth in different settlement systems and third-party payment systems, making it too difficult (too costly) to track down, and ultimately impossible to track down.

On the blockchain, all transactions are clearly displayed. The government does not need to deal with hundreds of banks and third-party payment companies to directly analyze the flow of funds. Based on the standardization of blockchain transaction data, some automated tools can also be used to complete the analysis of fund flows.

Enhance the central bank's control over money supply and money circulation, better support economic and social development, and help achieve full inclusive finance.

The central bank needs to adjust the money supply according to the market and economic conditions. For example, when liquidity is tight in the market, the central bank injects liquidity into the market through short-term tools. However, most of the central bank's monetary policy tools can only indirectly affect the market by influencing banks, which means that the final result of the tools may not be what the central bank intended. For example, the central bank wants to inject liquidity into the market, but due to the pursuit of profit by capital, the funds eventually flow into the real estate or stock market, and the liquidity shortage in the market has not improved.

To solve this problem, Nobel Prize winner in Economics Milton Friedman proposed the "helicopter money" theory, which means that the central bank sends money directly to the spending sector (investors and consumers) without going through banks, in order to stimulate consumption and the economy.

This theory is difficult to implement under the existing monetary structure. The central bank lacks the channels and means to bypass banks and deal directly with spending departments, nor does it have the ability to deal with a huge number of spending departments. However, blockchain makes the central bank's control over currency unprecedentedly strong, making it possible to use tools such as "helicopter money" that directly affect spending departments.

Related derivative reading: "HSBC: Blockchain can improve the central bank's "helicopter money" policy"

http://www.8btc.com/hsbc-says-the-blockchain

In the future, the establishment of a digital currency issuance and circulation system will also help my country build a new financial infrastructure, further improve my country's payment system, improve payment and clearing efficiency, and promote economic quality improvement, efficiency enhancement and upgrading.
The existing payment system is extremely costly and inefficient, with a large number of manual processes leading to a large number of errors, and forced to use complex and inefficient clearing to correct the errors. Banks' year-end settlement days often require a lot of manpower and material resources to do clearing, but has anyone heard of Bitcoin's year-end settlement?

Bitcoin's leading edge in the technology tree (based on unbreakable cryptographic principles) has ensured that there have never been any errors in hundreds of millions of Bitcoin transactions. While banks are mobilizing a large number of manpower to correct manual errors, the unattended servers in the Bitcoin network are completing all payments efficiently and 100% correctly 24 hours a day, 365 days a year.

To sum up, the issuance of the digital RMB is indeed an important milestone in human monetary history, a major revolution and progress.

3. The impact of the central bank’s issuance of digital currency on Bitcoin

With such a powerful central bank issuing such a powerful digital RMB, will early unofficial digital currencies like Bitcoin be eliminated and swept into the garbage heap of history? What impact will the digital RMB have on Bitcoin?

3.1. Will gold be replaced by paper money?

An interesting rule is that if you have an idea to be bearish on Bitcoin, it is best to replace it with gold to see if this idea is valid for gold. Such a powerful central bank has issued such powerful paper money, so will early unofficial metal currencies like gold be eliminated and swept into the garbage dump of history?

Of course not. Although gold has withdrawn from daily circulation due to various reasons such as the inability to be digitized like paper money, gold has always been a better currency that is far more trusted than paper money. If you were asked to leave a sum of money for your descendants 50 years later, would you leave it in RMB or in gold?

From the perspective of currency functions, although paper money has huge advantages over gold in circulation - legally mandatory use, easy to carry, split, count, identify authenticity, and digitize, gold's advantage in value storage makes it invincible. Gold is decentralized - the total amount of gold on the earth is constant, and no one can issue more gold, while paper money is centralized - the government or central bank can issue unlimited paper money and plunder people's wealth through inflation.

Therefore, gold will not be replaced by paper money, but it is not without the risk of being replaced by social progress. Gold cannot be digitized, which makes it gradually marginalized due to its absence from daily transactions; after the development of aerospace technology in the future, if an asteroid rich in gold is mined, gold may even become worthless.

3.2. Who will replace gold, continue to compete with legal tender, and curb the excessive issuance of legal tender?

As we all know, only competition can produce the best economic results. The extremely low cost of paper money makes the government naturally have the urge to issue more legal tender, and the existence of gold, a competitive currency with a limited total amount, inhibits the excessive issuance of legal tender. If legal tender is excessively issued, the market will turn to gold (including competitive currencies with a limited total amount such as silver), the market share of legal tender will decrease, and the government will lose its coinage rights.

Competition and elimination of currencies are not uncommon. From the Jiaozi in the Song and Yuan Dynasties to the French Revolution destroyed by inflation, there is nothing new under the sun. Even in modern times when the legal currency system is quite mature, competition and elimination of currencies will not stop. For example, during the famous Zimbabwean hyperinflation, the Zimbabwe dollar was completely abandoned by the market, and the US dollar and South African rand occupied the Zimbabwean currency market.

So, in the absence of gold in the digital age, and even in the possibility of its permanent disappearance in the space age, who will fill the gap left by gold? Who will compete with legal tender? Who will limit the excessive issuance of legal tender?

Technological progress has given rise to a new currency called digital gold - Bitcoin. The development of new things is always tortuous, and most people find it difficult to accept this currency that "can only exist on the Internet" and devalue it as a bubble or even a scam. However, the central bank's issuance of digital currency will directly justify the name of digital currency as a form of currency and objectively promote the popularization of Bitcoin. From a long-term perspective, the central bank's move is a milestone in the history of digital currency.

Since the central bank believes that the digital currency is advanced, does Bitcoin, which was invented and first appeared in the form of digital currency, also have its own advanced features? If the public uses the digital currency issued by the central bank and learns to accept a series of concepts such as wallets, addresses, private keys, transactions, blocks, and confirmations, does it lower the threshold for the public to learn to use Bitcoin? If the digital currency issued by the central bank is successful and proves to have great benefits, and the currencies of countries around the world also compete to digitize, then is it possible for Bitcoin and digital currencies of various countries to form a relationship similar to that between gold and paper money of various countries? In the future, is it possible for central banks of various countries to no longer reserve gold, but to reserve Bitcoin?

3.3. The relationship between digital currency and Bitcoin

Even if digital legal tender has advantages such as government enforcement and stable currency value, unless it is never issued in larger quantities, it will be a currency completely different in nature and demand from Bitcoin, and it will not be able to replace Bitcoin - just as the RMB cannot replace gold.

It is impossible for the central bank to stop issuing digital legal tender, because economic development and the increase in the total amount of goods in the market will inevitably require the release of more currency. Otherwise, the increase in goods will be greater than the increase in currency, and there will be insufficient currency, which will lead to deflation and damage production and the economy.

Of course, deflation caused by insufficient currency is almost impossible to happen now. With the right to mint coins in hand, the government and the central bank can only print more RMB, not less, for reasons such as stimulating the economy (4 trillion), raising funds (fiscal deficit), foreign exchange control (compulsory exchange settlement), and solving problems (securities fund guarantee).

Such printing is truly endless. With the US dollar as the global settlement, circulation and foreign exchange reserve currency, and China's GDP being less than 60% of that of the United States, the RMB M2 (broad money) has reached 1.8 times that of the US dollar M2 (136 trillion RMB = 21.4 trillion US dollars vs. 12.11 trillion US dollars).

This is also the fundamental reason why China has become the largest Bitcoin trading market - the 13% annual money printing growth rate has scared everyone. From speculation to investment, more and more people are starting to use Bitcoin, or even turn to Bitcoin completely. In addition to the high volatility in the early stage, Bitcoin does not have the disadvantages of gold over legal currency, and even has many advantages (global transfers, cross-border payments, anonymous payment storage), which makes it possible for Bitcoin to compete directly with the RMB.

The central bank has seen and valued the competitive advantages of Bitcoin. Therefore, China, which is known for its moderation and conservatism, even announced the first in the world to research and launch digital legal tender. This is a very radical behavior and also a driving force under competition. In the future when digital currency is widely used, Bitcoin will also achieve its highest mission - to limit the government's abuse of legal tender by technical means and promote social fairness and efficiency.

Bitcoin - one more choice, one more freedom.