- Central bank digital currency and cryptocurrency have almost nothing to do
-Libra and the central bank digital currency are not at the same level, so the comparison is of little significance
-China CBDC has yet to be launched
This article is an excerpt from the course "Stable Currency-The Third Landing Application of Blockchain".
Definition of Central Bank Digital Currency (CBDC)
1. The existence of CBDC is digital or physical. Digital currency is a relatively broad concept, and any non-tangible currency is called digital currency. At present, many currencies in the economy have been digitized, such as bank deposits, Yu'e Bao and WeChat change, etc., which are all manifestations of digital currencies. Corresponding to digital currency is the physical currency that people can carry, such as banknotes, coins, and gold.
Therefore, from the perspective of currency existence, the central bank's digital currency, as the name suggests, will be a digital currency.
2. Is the currency issuer, the National Central Bank, a commercial bank, or a private institution? Paper money and coins are usually issued directly by the National Central Bank or authorized commercial institutions, so they are also called legal tender. The special feature of legal currency is that the law grants it unlimited repayment. At the same time, taxes must be paid in legal currency, which gives legal currency a strong value endorsement and willful monopoly.
Therefore, the issuer of central bank digital currency is the central bank, which means that any institution must accept it and is more willing to accept it in theory.
3. Who can open an account with the central bank? All people still need to meet certain conditions. Anyone can hold cash, and most people can also open a bank account or Alipay account, but only authorized commercial banks can obtain the central bank's reserve account. Alipay has hundreds of millions of users, but the central bank of a country often manages only a few hundred commercial bank accounts.
When considering the central bank's digital currency, we need to be clear about the objects that this currency can face, in other words, whether ordinary people can open an account with the central bank and the impact it will bring.
The fourth perspective is how to record this currency, which is also the potential significance of blockchain for central bank digital currencies. Is the issuance of this central bank currency based on a distributed ledger or a centralized database, who has the authority to write and modify data, and whether these data should be public or anonymous.
In summary, we define central bank digital currency as an electronic cash substitute or supplement issued by the national central bank for a certain group of people or institutions. The central bank's digital currency can be issued through the blockchain or based on other data structures.
What problems does the central bank have to solve when issuing digital currencies? What are the pros and cons?
From an economic point of view, there are three main problems to be solved.
The first is to eliminate illegal transactions and money laundering through cash, the second is the possibility of negative interest rates, and the third is the direct assistance of the central bank to special groups.
Let's look at the first point first.
Cash is completely anonymous, which not only gives freedom of transaction, but also makes cash a vehicle for many illegal transactions, including drug transactions, gambling, corruption, bribery, and money laundering. If cash is made electronically, then every transaction can be recorded and illegal behavior can be restricted. At present, non-cash transactions in countries such as Switzerland, Canada, and the United Kingdom have accounted for more than half. In major cities in China, cash has basically disappeared. Of course, this is not without cost. In an era when citizens begin to pay more and more attention to privacy, a cashless society will pose great challenges to the choice between privacy and public information.
The second point brought about by the central bank's digital currency, and the point that has the greatest impact on the economy, is to make negative interest rates a viable tool for the central bank's monetary policy. After the 2008 financial crisis, central banks tried to cut interest rates to stimulate the people to convert savings to consumption and encourage corporate financing. But if the interest rate drops to zero, it cannot continue to fall. Assuming that the deposit interest is negative, we will see that our bank deposit balance continues to decrease, so everyone will naturally withdraw the deposit into cash and keep it at home. Because for cash, the book value never drops.
Once the cash used for export is completely replaced by electronic central bank currency, negative interest rates will become possible. Negative interest rates can bring greater operational space and imagination to the central bank's monetary policy. However, this will bring other problems. For example, when the economy starts to panic, people will tend to move deposits from commercial banks to central bank digital currencies, because the central bank has national credit endorsements and theoretically will not default or go bankrupt, which is likely to cause commercial banks to run on. In addition, for the public, the nominal reduction in currency in hand will also cause panic and foreign exchange confusion.
The third point is also at the level of monetary policy. The central bank's digital currency will make it possible to spread money by helicopter. The concept of helicopter money was put forward by Nobel laureate Friedman. During the economic depression, the governor of the central bank took the plane to give money to the masses to stimulate consumption. However, because the central bank does not have a public account, the general operation can only be for the central bank to pass a sum of money to the Ministry of Finance, and then the Ministry of Finance returns it in the form of tax or other names. If the central bank directly owns everyone’s account, it can directly increase the paper wealth of individual accounts. It can also provide precise special assistance based on the geographic location, gender, and age of the subject through data.
In summary, the central bank's digital currency considers more issues at the level of currency and policy.
The central bank's digital currency can increase the central bank's control and flexibility in economic adjustment, but it will also face systemic risks and bring about a decline in the central bank's independence.
Which countries have currently tried CBDC?
The first country to issue a central bank digital currency was Ecuador in South America. In February 2015, Ecuador launched a new encrypted payment system and Ecuadorian coins based on this system. Only eligible Ecuadorian residents have the right to use it, and citizens can use Ecuadorian coins to complete payments in supermarkets, shopping malls, banks and other places.
The Ecuadorian currency is directly supervised by the central bank and maintains the stability of the exchange rate, which is considered to be one of the measures taken in the process of "de-dollarization" in the country of Ecuador. At the time of launch, the project leader estimated that up to 500,000 people may join the system in 2015. However, the Ecuadorian currency has not been implemented. In the first year of operation, the circulation of Ecuadorian coins only accounted for less than 0.3% of the currency of the entire economy. The Ecuadorian currency, which was not used by the public, ceased operation in April 2018.
It is also a South American country. In February 2018, Venezuela announced the sale of "Petrocoins". The value of petroleum coins is linked to oil prices. The issuance reference price is US$60 and the issuance volume is 100 million. The Venezuelan government hopes that the petro currency can help Venezuela complete its economic transformation and ease the severe domestic inflation. The Venezuelan government claimed to have raised $6 billion through petrocoins, but there is very little public information about petrocoins, and they are not traded on the open market. Petroleum currency has even been characterized by many people as a national fund scam.
In addition, countries that have issued national digital currencies include Tunisia, Senegal and the Marshall Islands, but none of them have been adopted nationwide. For the major economies, they are all in a wait-and-see and research state. The Federal Reserve has repeatedly stated that it has no plans to launch cryptocurrencies. Canada, Singapore, Brazil and other countries are developing a national bank clearing system based on distributed ledgers. The People's Bank of China was one of the first central banks to conduct central bank digital currency research. It began to organize digital currency related seminars in 2015, and then established the Central Bank Digital Currency Research Institute in 2017. Currently CBDC is still in the research and design stage.
It can be seen that considering the huge impact and risks of central bank digital currencies on the international financial system, major powers are more cautious in this regard. Even the solution under development is only a backup and supplement to the existing system.
There is a big difference between central bank digital currency and general cryptocurrency. For technical solutions to realize the central bank's digital currency, distributed ledgers and blockchain are only one of the technical options that can be used, and existing electronic technologies can also be used. It is a trend that digital currency gradually replaces cash, but it is necessary to pay attention to the financial risks behind it