OKEx Research: Looking at the development trend of digital currency from the evolution of currency

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Does digital currency have the three elements of currency, and can it gradually replace cash? Analyze from the nature of currency, currency carrier and historical changes in currency issuance.

Written by: OKEx Research

Digital currency (Digital Currency) can be considered a virtual currency based on a node network and digital encryption algorithms. Decentralized digital currency has no issuer, so no person or institution can control its issuance, such as Bitcoin, Ethereum, etc.; because the number of algorithm solutions is determined, the total amount of digital currency is fixed, thereby eliminating inflation It is possible that the transaction process requires the approval of each node in the network, so the transaction process of digital currency is sufficiently safe. Centralized digital currency refers to currencies that have issuers, such as the digital renminbi issued by the central bank, Facebook’s Libra, and so on.

This paper conducts research from three aspects: the nature of currency, the historical changes of currency carriers, and the gradual completion of unified historical changes by currency issuers. It aims to explore whether digital currency has the three elements of currency, whether it can gradually replace cash to realize the digital revolution, and the current There are still problems with digital currencies.

Historical changes in currency carriers

The nature of money

As we all know, in the history of traditional currency, everyone believes that the essence of currency is a measure of value, and its most basic function is as a medium of exchange and a means of storing value. The fundamental purpose is to organize production activities and become a link to maintain production relations. However, with the coordinated development of productivity and production relations, the interpretation of the nature of money has naturally improved. We can see that the nature of money has evolved into a social mechanism constructed by humans. Its core is trust. This trust is The trust of the intermediary (currency issuer) by untrusted parties. All of us have now reached a new consensus on currency, which provides a solution to the problem of lack of trust.

Secondly, the essence of currency is also the currency of accounting, or called the unit of measurement, and its value fluctuates with changes in the country’s fiscal policy, monetary policy, and other economic means, and changes in domestic and foreign situations. The value of a good unit of measurement must be relatively stable. Therefore, in the course of history, currency always needs a set of mechanisms to ensure the stability of its value. The development of this mechanism has been relatively comprehensive so far, including payment and settlement systems, Credit creation system, financial supervision and other core infrastructure construction.

Third, currency essentially reflects the credit relationship mentioned in the opening article. Currency is not only a debt or liability of the issuer, but also a credit or claim of the holder. Therefore, currency affects assets and liabilities in both directions, and can be recorded through changes at both ends.

Finally, this trust relationship can be circulated. If currency is to be used in circulation, it must be characterized by a token, and an accounting system is used to record the value and its transfer and to settle various credit relationships.

If digital currency wants to replace legal currency, it needs to meet the three major elements of the above-mentioned currency. From a long-term perspective, there needs to be a complete mechanism behind the digital currency to ensure the stability of its value, so as to realize its function as an accounting unit, and this set of mechanisms is most likely to be provided by the central bank, as we will mention later The reason behind this.

Changes in the currency carrier

Historically, money carriers have followed the process of transition from metal currency to bank notes, and then to fiat money. At the beginning, the emergence of metal currency greatly facilitated the exchange and promoted the accelerated economic and social development. However, with the increase in transaction frequency and the expansion of transaction scope, the cost of carrying, delivering, and clearing a large amount of metal currency is getting higher and higher, and it is difficult to meet the needs of economic development. Therefore, the merchants keep separate accounts, and at the end of a period of time, the two parties will check the accounts again, and after offsetting each other, the balance will be settled in currency. This currency receipt is called a’money order’, and the merchant that specializes in the money order business is called a’money house’ or a’ticket number’. With the gradual increase in the acceptance of the bill of exchange in the bill number, in order to facilitate the circulation, the bill number has begun to transform the bill of exchange into a pre-printed denomination (different grades), indicate the drawer and promise to pay on sight, add anti-counterfeiting verification marks, etc., But it does not limit the holder’s general bill of exchange, which makes it become a “paper currency.”

The change of currency carrier explains people’s demand for its convenient circulation and trustworthiness. This evolution process complies with Gresham’s law, that is, bad money drives out good money. The initial currency was linked to the value of metals such as gold, silver, and copper. As transactions proceeded, bills and banknotes, which have no real value, were endorsed by trust in the middle party, and were artificially endowed with value and succeeded. Replaced metal currency.

Ideally, digital currency should be issued by a third party trusted by everyone or a decentralized system with strong technical support. This kind of digital currency can be said to be the direct conversion of the account number itself into currency, and the currency carrier changes from tangible to intangible.

Changes in European currency carriers

Modern European paper money originated from bank notes, and British gold shop vouchers were the pioneers of modern European paper money. We know that before the ninth century, Babylonian camel caravans used native bamboo slips as an acceptance certificate for accrued interest in order to prevent gold and silver loans from being robbed during transportation. This is similar to the cost of the Tang Dynasty in China, but it is not in modern meaning. Banknotes. From the 16th century to the 17th century, for security reasons, the Tower of London, the seat of the British government, became the best place for merchants to store gold and silver. However, in 1646, Charles I confiscated 130,000 pounds of gold and silver as military expenses. Trust has turned to private gold shops with better credit. The deposit receipts issued by gold shops are called “gold shop coupons.” Gold shop coupons can replace gold and silver currency in the market and be used for payment. However, due to lack of regulation and greed for interest, the British government stopped paying after the Anglo-Dutch War broke out in 1670, and the gold shop era ended. In 1694, British merchants further improved the regulations, established the Bank of England as a company, and obtained a charter to issue 1.2 million pounds of bank notes. In this regard, modern banknotes, bank notes, appeared in Europe.

Paper money on the European continent is closely related to John Law. John Law was born in a bank family in Edinburgh, England, and has a wealth of knowledge about currency and banking systems since he was a child. However, after the death of his father, he relied on his proficiency in mathematics and became obsessed with gambling. In 1694, he was even thrown into jail for shooting his love rival to death, and then he was sent to Europe. During his escape, he further studied finance and trade, and accumulated a lot of experience in Amsterdam and the Netherlands. At this time, he keenly observed that the economies of countries that strongly resisted paper currencies, such as France, were mostly depressed. England and the Netherlands introduced paper currencies. On the contrary, the irreplaceability of paper currency made John Law gradually become a loyal fan of “bank bonds.”

In 1705, John Law summarized his ideas into “On Currency and Trade: A Proposal for Supplying Currency to the Country.” In his book, he strongly advocated the establishment of a national bank and called on the national bank to complement state-owned enterprises. National finance, the latter controls the country’s commerce, thus realizing the country’s monopoly on currency and trade, and the profits from the monopoly feed back the country’s fiscal debts.

This idea is not easy to realize, until the great success of the French King Louis XIV caused the government’s debt to be high. In this case, the shortage of precious metals undoubtedly caused a sharp decrease in the metal currency in circulation, and France’s weak finances gave John Law hope. In 1715, John Law persuaded the French King Louis XIV and the Duke of Orleans. The next year John Law established Banque Generale in Paris. The bank has the right to issue bank notes and participate in the management of royal revenue. And banknotes can be exchanged for coins. This is the first large-scale issuance of paper currency by a private bank in France. In 1717, John Law convinced the French royal family that all taxes must be paid in bank notes. Until 1718, under the vigorous advocacy of John Law, the bank was nationalized and transformed into the first central bank in France. This marked the beginning of France’s transition from coinage to the use of paper money. Later, the United Kingdom and other countries joined the paper money camp. Quality currency has been widely spread in Europe.

Changes in the U.S. Currency Carrier

In the early 17th century, England established the first colonies in the Chesapeake Bay and New England on the Atlantic coast of North America, and finally formed 13 colonies in North America in the 18th century. As the colonists carried fewer coins and no gold and silver mines were discovered every week, the actual supply of coins was severely shorted, and the long-term trade deficit exacerbated this situation. For this purpose, the colonists mainly used five forms of currency. (See Table 1)

Table 1 Five currency forms in North America during the colonial period

OKEx Research: Looking at the development trend of digital currency from the evolution of currencyTable 2 Reasons for the gradual disappearance of non-paper currency

The earliest paper currency issuance in the North American colonies was a credit certificate issued by the Massachusetts colony in 1690 to pay for the expeditionary army. The credit certificate is a currency between short-term bills issued with tax guarantees and pure credit currency. Form, the authorities recognize that gold and silver can be redeemed in the future, can be used for taxation, and can be used as a legal currency. Out of military financing or taxation needs, other colonies followed suit, but because they only admitted to cashing in the future, this paper currency soon began to depreciate until the British Parliament completely banned the issuance of forensic currency in 1764.

The next turning point was conceived in the War of Independence on the American continent. At that time, the central government, the Continental Congress, was only a gathering of leaders of various states and had no right to levy taxes. In this case, military financing must rely on borrowing or printing banknotes. Thomas Paine and Alexander Hamilton both support borrowing. They believe that “no country should be debt-free, and national debt is a kind of national cohesion”, but Hamilton also agrees. The necessity of paper money. Benjamin Franklin is a strong supporter of paper money. In the end, considering that the prospect of war was unknown and the Continental Congress did not have any guarantees, lending to it was risky. At that time, the colonies did not have sufficient funds to lend. The Continental Congress adopted the method of issuing banknotes to raise funds. At the same time, the state authorities were forced to use credit vouchers for the operation of the war machine. With the issuance of a large number of banknotes, since 1776, the mainland bonds continued to depreciate. In 1781, the cost of printing 1 US dollar mainland bonds was even higher than its currency value. However, due to the war, the Continental Congress had to continue to rely on banknotes. After the victory of the War of Independence, the U.S. Constitution clearly gave the Federation the power to mint currency and adjust its value, and states had no right to mint currency or issue paper money.

After experiencing the Bank of the First United States of America and the Bank of North America, we came to the period of the Bank of the Second United States of America. Jackson, the then President of the United States, was dissatisfied with the bank’s 1/3 of the shares held by foreigners, squeezing out state banks and domestic and foreign The currency exchange monopoly, etc., strongly opposed paper money and believed in “hard currency”, which made the Bank of the Second United States of America finally closed down and liquidated in 1841, and the U.S. Central Bank process was forced to interrupt. Until 1846, Congress approved the establishment of an independent treasury system. The treasury or sub-treasury system composed of customs and mints across the country deposited government funds. This system was the main regulator of the U.S. currency and banking system until the establishment of the Federal Reserve System in 1913. By.

In 1861, it was a similar background, that is, the American Civil War broke out. The Northern Allied Forces desperately needed a nationwide currency to stop the chaos caused by thousands of bank notes. In February of the following year, Congress passed the proposal of then Secretary of the Treasury Chase and passed the “Indemnity Act”, which authorized the Ministry of Finance to issue US$150 million in United States fiscal bills, or “green back paper,” and announced its It is a legal currency that can be used for payment, but cannot be exchanged for gold and silver, and cannot be used to pay tariffs and interest on government bonds. This is the first paper currency issued by the United States, and it is a credit currency based entirely on national credit issuance and circulation, which performs monetary functions.

The historical changes of China Jiaozi and other banknotes

Chinese banknotes appeared in the Northern Song Dynasty, when the feudalism flourished, nearly 700 years earlier than Europe and the United States. During the Tang and Song Dynasties, Sichuan and Sichuan had complex terrain and developed commerce. Their trading medium was still cheap and heavy iron money, which was extremely inconvenient. This was the direct cause of the emergence of Jiaozi. From a more essential point of view, the outflow of coins in the Song Dynasty, the serious “money shortage”, high military and administrative expenses, and increased fiscal deficits are similar to the opportunities that European and American banknotes appeared in, but other than that, China was highly centralized at that time. In a feudal country with an autocratic regime, the government directly stepped forward to forcibly promote the new medium of exchange (Jiaozi), which made Chinese paper money (Jiaozi, etc.) not only have the economic function of currency, but also the political function of currency.

We can see that the birth and continuation of banknotes in Europe, the United States and the Chinese civilization are based on the means of circulation, led by the government, with a relatively stable and broad currency market, and always accompanied by a strong political and military color. It is hoped that the issuance of banknotes will support government expenditures and huge military expenditures. However, when China Jiaozi appeared, China was still a farming society that emphasized agriculture and restrained business. Its economic level was far lower than that of Europe and the United States, where cities and commerce had developed rapidly in the 17th and 18th centuries, and lacked a stable material foundation. The relationship between commodity production and commodity currency was lacking. Not healthy. Not to mention that under the feudal rule, “Jiaoziwu” may at any time turn banknotes into a purely financial plundering tool. Its credit business and credit institutions are quite unreliable. This deviates from the economic functions of banknotes, and is more inclined to ” Political functions. Therefore, stable and healthy credit institutions and credit systems are also necessary conditions for the development of credit currency.

Historical changes in currency issuers

The change of currency issuers from private money to central bank money

The right of coinage is considered to be the fundamental factor of the government’s power, and the government uses it to show its supreme power. In the early days, the government did not undertake the task of making currency, but to guarantee the weight and fineness of the materials used as currency, namely gold, silver, and copper, and to indicate their true value. At this stage, private companies do not have the ability to provide a sound coinage, and it has always been a major problem to provide a unified and easily recognizable coinage technology. At the same time, the government found that it is not only beneficial to the society to mint money by itself, but also can extract the expenses used to cover the cost of minting, thereby increasing income. After taking over the coinage rights, we can say that almost all local governments are abusing the trust of the people and defrauding the people. This is reflected in the fact that when people take metal blocks to the government’s furnace to mint currency, the government forcibly retains some of it; The coins in circulation are re-minted into two smaller coins of the same value.

In the Middle Ages, the contraction of trade led to a decrease in the amount of money in circulation. In order to restore trade, the European monarchs rushed to reduce the weight and fineness of coinage. In the end, the emergence of paper money gave the government a cheaper way to deceive the people. The government used brutal methods to impose these bad money on the people.

The government monopolized the issuance of paper money, which greatly contributed to the growth of government power. We hypothesize that if the government has the right to create any amount of currency at its will and make people accept it, it will help the government to defend its power. In recent years, the government’s continuous expansion has been largely due to its ability to issue currency to make up for deficits. Therefore, we believe that the government should issue currency within the scope approved by the people, otherwise, this power will be deprived.

Paper money is issued by a number of private banks, and gradually unified for the central bank. For digital currency, it is currently issued by many private individuals, but the digital currency that can truly become currency will eventually be issued by the central bank and become a centralized digital currency. A decentralized digital currency like Bitcoin may evolve into an investment product in the future (the current digital currency is not a real currency).

Bank of England unified currency rights

From the second half of the 17th century to the 1920s, various bank notes were in circulation on the market. In the London area, Bank of England notes were the dominant one. In 1826, the British Parliament passed the Banking Partners Act, stating that the Bank of England had the sole privilege of issuing joint-stock bank notes within 65 miles outside of London, but private banks in London could still issue bank notes; allowing the Bank of England to be in the UK Set up branches in various places. After the passage of the bill, some small private banks in the UK merged into joint-stock banks, and joint-stock commercial banks developed rapidly and issued their own bank notes. In the British money market at this time, there was a parallel situation of Bank of England bonds, bank bonds issued by private banks, and joint-stock bank bonds.

It was not until the beginning of the 20th century that the Bank of England finally unified the right to issue currency. In 1833, the British Parliament passed a new bill, stipulating that Bank of England bonds are eligible for unlimited “remuneration”, that is, legal tender. They must be circulated and must be accepted and not rejected. The Bank of England bonds have therefore become the first and only bank bonds to obtain legal tender status, and their legal status is equivalent to gold. In July 1844, the British Parliament passed the Banking Franchise Act. The bill stipulates that all newly established banks are prohibited from issuing bank bonds; banks that did not issue bank bonds before 1844 have limited issuance limits and bank bonds that have already been issued can still be circulated; all banks that issue bank bonds are in London Anyone who establishes a branch or merges with other banks loses the right to issue banknotes and transfers this right to the Bank of England. With the implementation of the bill year by year, most banks in the UK (only in England and Wales) have gradually lost the right to issue banknotes. By 1921, only the Bank of England had the right to issue banknotes.

In the end, the Bank of England notes became the legal credit notes of the United Kingdom and continue to be used to this day. After the outbreak of the First World War in 1914, in order to raise funds for the war, the Ministry of Finance issued 10 shillings and 1 pound notes as banknotes to circulate in the market. Therefore, after 1921, in addition to the Bank of England bonds, there were Treasury notes. In 1928, the British Parliament passed the “Currency and Banknotes Act”, legally confirming the Bank of England as the only institution that issues national currency. Since then, the Bank of England notes have become the sole master of British banknotes, completing the unification of banknote circulation. After Britain completely broke away from the gold standard in 1931, the Bank of England bonds became the “successor of the gold standard” and became the legal credit paper currency of the United Kingdom (relying only on government credit endorsement, which cannot be cashed), and it has continued to be used today. The British currency system has also been transformed into an uncashable credit paper currency system.

Unity of dollar

In 1787, the United States Constitution with inter-epochal significance was born. The constitution was designed to establish a common market and political alliance composed of the first 13 colonies, and legally ensured the self-flow of goods and production factors between states, and stipulated that And restricted the power of the coalition government. It has not been stated that the federal government has the exclusive right to issue bank licenses and banknotes. Therefore, in the early days, state banks “occupied the mountain as king” and issued their own currency (ie bank notes). The value of which depends on the reputation and convenience of the issuing bank. factor.

Throughout history, the United States has tried to create the Federal Bank twice. It should be noted that the bank at this time was not a true central bank, but an institution that handled nationwide banking business.

OKEx Research: Looking at the development trend of digital currency from the evolution of currencyTable 3 Overview of the First Bank of the United States and the Second Bank of the United States

Conflicts with state banks kept the development of the U.S. central bank system blocked. At this time, the Civil War became a new breakthrough point. In order to finance military and administrative expenses, the northern states passed the Banking Act from 1863 to 1865 and established the federal banking system as a new debt trading platform (secondary market) for the federal government. This system can solve the shortcomings of some state banks. In addition, in order to control bank risks and ensure the liquidity and solvency of banks, the bill also requires strict supervision and information disclosure on the capital and asset quality of commercial banks, and Implemented a reserve fund system. At the same time, the United States established the first banking system regulatory agency OOC in history, responsible for issuing national bank licenses, and OOC has clear regulatory responsibilities. But at this time, the money supply is still inelastic when the economy fluctuates.

After 1865, economic crises occurred frequently, and until 1907, some banks were run on speculation due to speculation, and the banking industry suffered severe damage. In the end, Congress asked the National Monetary Committee to review, and as a result, after its proposal, the Federal Reserve was born.

Prospects for the future of digital currency

Above we have summarized the historical changes of the currency carrier and currency issuer. It is not difficult to see that the limitations of the currency carrier, such as transaction convenience, portability, transaction fees and other issues, determine that the currency will inevitably move away from the carrier. development of. It is an inevitable development process for bad coins such as digital currency and paper money to replace good coins such as gold and silver as money carriers. History is always surprisingly similar. Once a consensus is reached on currency digitization or virtualization, maintaining this consensus and pursuing currency interests will inevitably reflect political games. The monopoly of digital currency issuance and regulation of digital currency supply by the political class may become an inevitable process for digital currency. In recent years, the central bank’s exploration of digital currency has brought some new thinking and practices to the reform of the monetary system. These explorations are still a long way, but they are also full of hope. For decentralized digital currencies, such as Bitcoin, Ethereum, etc., we think it is closer to investment products rather than currency in circulation.

The current state of central bank digital currencies

my country’s digital RMB CBDC is issued by the People’s Bank of China, operated by designated operating agencies and exchanged to the public. Based on the broad account system, it supports the loose coupling function of bank accounts, which is equivalent to banknotes and coins, and has value characteristics and features. A legally compensated, controllable and anonymous payment tool. Compared with Alipay and WeChat Pay, the advantage of digital renminbi is that the first is dual offline payment, that is, it can meet the normal electronic payment needs when the network signal is poor; the second is higher security, because behind WeChat and Alipay Tencent and Alibaba’s creditors are the two companies, and the digital renminbi is endorsed by the central bank’s security system; the third is multi-terminal selection. WeChat and Alipay must require a mobile phone with internet to complete the payment, while for those without a smart phone People can choose IC cards, feature phones and other hardware to use digital renminbi.

A few days ago, the Central Bank announced that the Monetary Research Institute of the People’s Bank of China, the Hong Kong Monetary Authority, the Central Bank of Thailand, and the Central Bank of the United Arab Emirates announced the joint launch of the multilateral central bank digital currency bridge research project (m-CBDC Bridge), which aims to explore the central bank’s digital currency Application in cross-border payment. The project has been supported by the Hong Kong Innovation Center of the Bank for International Settlements.

The People’s Bank of China is piloting digital renminbi in Shenzhen, Suzhou, Xiong’an and Chengdu. In addition, the digital renminbi will also conduct internal closed pilot tests in future Winter Olympics scenarios. On February 6, Beijing issued digital renminbi red envelopes with a value of 200 yuan each; on February 23, the WeChat official account “Chengdu Release” stated that Chengdu will make an appointment to issue digital renminbi consumption red envelopes totaling 40 million yuan.

Problems with digital currency

After the digital currency completely replaces cash, the central bank can implement a completely negative interest rate monetary policy through the digital system, making the monetary policy break through the ZLB (zero interest rate offline). For ordinary people, there may be a trend of negative growth in deposits. If people hold paper money, they can still withdraw the money home when the bank interest rate breaks through the zero interest rate, thus avoiding the situation of negative asset growth. However, when digital currency completely replaces paper currency, people will have no choice but to face the shrinking of assets.

From a historical perspective, it is not difficult to find that the nature of currency has transcended economic attributes and embodies stronger political attributes. The obstacle to the future currency revolution lies not in economy and technology, but in politics. The government usually responds to the deficit problem by issuing excessive amounts of money, which will lead to inflation, and the money in people’s hands becomes less and less valuable. Whether the political disputes over digital currencies in various countries will bring huge volatility to digital currencies is not known.

The real price of an idealized digital currency is absolutely unchanged, which can effectively avoid the threat of inflation, and only forms a structural relative change with the prices of goods and services. Such a currency is the real stable currency. However, the realization of this idealized digital currency will have to break through political obstacles, form a consensus, mutually restrict each other, and establish a reserve mechanism, payment and settlement mechanism, credit mechanism and other goals. The current digital renminbi only digitizes cash and makes a technical attempt for cross-border payment. It is still difficult and difficult for digital currency to replace cash.

Literature reference:

[1] Liu Zijian, “A Comparative Study of the Production Conditions of Eastern and Western Banknotes”, “Chinese Coins”, April 1994

[2] Wang Zhijun and others, “The History of European and American Financial Development”, Nankai University Press, January 2013

[3] Qian Xuening, “The Essence of Currency and Digital Currency Analysis”, “China Finance Magazine”, December 2019

[4] [English] Friedrich von Hayek, translated by Yao Zhongqiu, “Denationalization of Currency”, New Star Publishing, August 2007

[5] Gewu Capital, “The History of British Currency: The Birth and Unification of Paper Currency”, June 1, 2019

[6] Zhou Yonglin, “Viewing the Future of Digital Currency from the Essence of Currency”, “The Central Bank and Currency”, December 2018

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