Chief Economist of Orient Securities: The central bank’s digital currency is a response to the central bank’s four major challenges
What is the definition of digital currency?
Currency refers to M0, M1, M2, where M0 is currency, banknotes, and coins in circulation, M1 is M0 plus current deposits, and M2 has a wider range.
Whether digital currency wants to replace M0 and M1, or replace all M2, is a key question. The current market view is relatively conservative. It is believed that replacing M0 first means replacing all the currencies in circulation. In the future, consumers will not use paper money and coins, but will directly use the central bank’s digital currency.
But some people may ask, how is this different from WeChat Pay? There are still differences between the two. Digital currency is issued by the central bank. It can penetrate the commercial banking system, that is, offline transactions can be carried out without going through commercial banks and third-party payment systems. This kind of transaction is very convenient, but it has the nature of controllable anonymity, that is, everything There are traces of transaction information in the central bank, but they are different because of their importance. Important information will be retained for a longer time, and unimportant information will not be taken seriously. This is the current definition.
Why is there a central bank digital currency? I think it was stimulated by Bitcoin, especially the decentralized currency Libra. Because this is a purely commercial, fully distributed, decentralized, and privately-issued currency, sovereign countries believe that they are threatened. Establish your own monetary sovereignty through your own methods. For example, the current M0, M1, and M2 are all jointly managed by the central bank and commercial banks. Now that the Internet giants create the blockchain, the creator of Bitcoin cannot even find it. This is a stress for central banks. reaction. This kind of change is great, and the impact of the change depends on what purpose the digital currency is used for and at which level it stops. I think it is at the M0 level, but it does not rule out that M1 and M2 will be involved in the future, because the currency The function is pricing, value storage, transaction, etc. The ultimate highest level is international currency. Who will make the international currency is also controversial. At the same time, because it is a digital currency, it is in line with the characteristics and convenience of the current economy, but the privacy protection issue behind it will also bring a series of in-depth discussions, not only ethical issues, but also security and other aspects.
How does digital currency affect existing monetary policy, financial stability, and macroeconomics?
If digital currency only replaces M0, even if it replaces all of it, its impact is relatively limited. Taking into account issues such as anti-money laundering and non-anonymization, the implementation of digital currency will bring some help to the regulatory level.
The future impact of digital currency needs more discussion. What impact will the future digital currency upgrade to M1, M2 or M3 have? This path is unlikely to appear in the short term, and here is more to make some predictions. If it replaces the existing monetary system, the M1 level is acceptable. At the M2 level, the derivation level of commercial banks is all determined by the central bank. This will result in a question most discussed in economics or monetary banking: whether money is internal Born or exogenous? If the currency is all central bank digital currency, it is theoretically exogenous, so we need to pay attention to the extent to which the central bank’s money supply expands and the overall policy expansion. But in fact, we know that M2 is closely related to the credit and collateral of commercial banks, so it may be endogenous. Of course, there will be a constant game between the two, considering that China controls the total amount of M2 This is reflected in the expansion and contraction of the central bank’s balance sheet scale and deposit reserve ratio. Since China controls the total amount of M2, if the current two-tiered investment framework remains unchanged and only uses it as part of a high-energy currency, the currency expansion capability will be relatively limited.
But there is another possibility. In fact, the most important thing in monetary theory is MMT (Modern Monetary Theory). The reason why people are more sensitive to central bank digital currencies is mainly to pay attention to whether fiscal and monetary policies will be connected to a higher level in the future. For example, if everyone can use the digital currency of the central bank, theoretically everyone has an account with the central bank, and the corresponding currency can be issued, then when poverty alleviation, can the account be directly credited with 1,000 yuan? Digital currency? This is UBI (Universal basic income). It is also to distribute money to the public. If it is distributed through commercial banks, it may require a lot of procedures, including wear and tear. This method will be more convenient. Of course, a certain amount is needed here. rule.
I think in the short term, if digital currency replaces M0, the impact will be relatively limited; but if it replaces M2, the impact will be great, but the path of impact depends on the two-tier structure of commercial banks and the reaction process between the central bank , And what is the main starting point for currency management. In addition, digital currencies may have some unimaginable functions, such as the aforementioned fiscal transfer payments, etc. These may be realized in the future and will also rewrite the relationship between currency and fiscal policy in traditional textbooks.
What are the future development prospects of digital currency?
The central bank digital currency (CBDC) is a response to the central bank after facing the following four challenges:
One is Big Bank. In the original digitalization of commercial banks, there were problems with monetary policy, which did not meet the expected requirements.
The second is Big Tech. Digital currency has instability or new systemic risks, whether it is Libra or China’s third-party payment.
The third is Big Country, that is, currency competition among big countries, which is similar to the logic of RMB internationalization.
The fourth is big finance, namely Big Fiscal or MMT. The central bank must fulfill the existing goals of maintaining economic growth, maintaining the stability of the financial system, and preventing systemic risks, and must also have a structured function, and must meet the requirements of global investment currency or currency competition.
We generally believe that the next industrial revolution will be driven by digital technology or smart technology. Among the so-called ABCD, namely AI, Blockchain, Cloud, and Big Data, digital currency will definitely play the role of infrastructure, including clearing, payment, Do pricing, do transactions, do stored value, and may even assume the function of an international currency. Of course this is a bright prospect. Therefore, individual users must have an understanding of its original creation mechanism. In the future, everyone will have CBDC in their wallets, and there may also be some Libra, and may even invest a part of Bitcoin as the case may be. Everyone attaches great importance to digital currency, which is the infrastructure of the future world and a necessary part.
