Cai Weide: Interpretation of the Central Bank’s Digital Currency Research

01. Preface

Central Bank Digital Currency (CBDC) was launched by the Bank of England in 2015. After the launch, it has always received the attention of the world, there are those who support it, and some who do not believe it. Those who don’t believe me think this is just a small software engineering project. For example, in 2016, some scholars believed that CBDC was only a simple engineering project, and only an engineering team was required to complete it. But when I met officials and academics of the Bank of England twice in the UK in 2016, they said that this was the biggest currency reform in 320 years. When the Bank of England said in a speech that this was the largest currency reform in 320 years, the European Central Bank, the Bank of Canada and other central banks were very excited about it.

Later, some scholars believed that the central bank may have introduced CBDC because of the relationship between Bitcoin or Facebook stablecoins. This view is equivalent to a reactive response, rather than a response based on overall considerations. What impact does CBDC have on the country and society? Both positive and negative effects need to be considered.

1. CBDC development experience questions and challenges

At first, the Bank of England believed that the issuance of CBDC would change the structure of the central bank’s bank, change the national monetary policy, change the market structure, and even change the macro and micro economics. Some people have objections and believe that it will not change at all, so that CBDC has always been controversial. The voice of opposition reached its peak in 2018, but in 2019, even whether technology will change finance is a controversial subject, and scholars also loudly objected at the conference, vigorously criticizing digital currency and blockchain systems.

2. 2018 is the coldest winter for digital currencies

2018 was the coldest year for the blockchain and the currency circle. At that time, the currency price plummeted and most of the currency prices returned to zero; however, compliant digital currencies also encountered difficulties. The Bank of England abandoned its CBDC plan in early 2018, including abandoning the previously vigorously launched blockchain-based RTGS project. At the same time, the American academic community also criticized the Bank of England’s regulatory sandbox program, thinking that it was unscientific, illegal, and ineffective.

3. Digital currency plum blossoms in winter

But the coldest time is also the best time to start a new project. In 2018, the world began a major reform of real digital currency, and this reform has completely renewed everyone’s understanding of digital currency by 2021. In 2018, Facebook, JPMorgan Chase Bank, and IBM all started their plans. Facebook started its stablecoin project in January 2018 (the CEO of Facebook at that time proposed a blockchain-based payment network system internally, and vice president Marcus led the team to work overtime in May). IBM announced its stablecoin project in August. We recruited executives from Wells Fargo and the Bank of Singapore to work together. Although the Bank of England has publicly abandoned CBDC, it has organized the private company Fnality to continue this plan.

4. The digital currency exploded after June 2019

But after June 18, 2019, the world’s view of digital currency suddenly changed ; on August 23, 2019, the entire American public opinion changed its view of digital currency; and China also changed after October 24, 2019. And 2021 is a year of great progress in views, and the most obvious change in American attitudes.

5. Consider the CBDC plan in its entirety

The Bank of England speech only talks about the material they want us to hear, and it is difficult to understand their overall thinking. But after 6 years, their overall idea still slowly emerged. This article discusses their overall thinking. Since the overall thinking is still very large, we will discuss it in two sessions.

In addition, the Bank of England has experienced some detours in the past six years. This article will not discuss these detours (such as the regulatory sandbox). We will only discuss the ideas left over later. For example, the Bank of England abandoned the regulatory sandbox and changed it to the Scale-box, abandoned the RSCoin model and introduced CBDC conditions (discussed in Lecture 4). But the Bank of England did not give up providing corporate and personal central bank accounts (this is their original intention), did not give up the model of synthetic CBDC (although the Bank for International Settlements opposed), did not give up the reform of the back-end system (discussed in Lecture 9), did not give up smart contracts (Financial reforms in various industries are discussed in Lecture 6), and specific solutions are also proposed to solve the problems of commercial banks (discussed in Lecture 9).

In one sentence, the development of CBDC in the UK is to promote the development of the British economy, completely change the British economic system, and improve the status of the pound in the world. According to Dr. Josh Ryan-Collins, an economist at University College London, on June 14, 2021, the UK Economy Could be Transformed by Central Bank Digital Currency), which is considered to be the largest currency reform in the UK. This position is very different from the position of the past few years. This view is that CBDC is a project to change the country’s national transport and is the backbone of the country’s new digital economy in the future. This can be compared with the public purpose in 2015-to provide better payment services for the people-there is indeed a big gap.

The United States and the United Kingdom are the two most important countries for Western CBDC research, so this article discusses the development of these two countries. The two countries have different views on CBDC at different time periods, and sometimes there is still a big gap in views. Both these two countries have made great progress recently. The changes in the United States after August 2019 are very obvious. After 2021, the views are more advanced.

02. Theoretical basis of CBDC

1. MIT Digital Society Program

The theoretical basis actually comes from the 2012 MIT Digital Society Project. The representative work of this project is “From Bitcoin to Burning 1 Man and Beyond”. This book talks about a trusted digital society (blockchain is a trust machine). If a society can guarantee a trust mechanism, the economic benefits will grow exponentially. This is called David Reed’s Law. When this law emerges, there will be an economic explosion. Its development will be more prosperous than the traditional digital economy (Internet economy). The traditional digital economy belongs to the modern Internet era. In this era, famous companies include Google, Amazon, Tencent, etc. The traditional digital economy is completed in an environment without trust.

The Massachusetts Institute of Technology also mentioned that if the digital society emerges, there will be overall changes in justice and all aspects of society. After studying this book, I established the Digital Society and Blockchain Laboratory at Beihang University.

Cai Weide: Interpretation of the Central Bank's Digital Currency Research

Figure 1: Reed’s Law: The digital socioeconomic explosion

2. 2014 Bank of England Report

A report from the Bank of England in December 2014 stated that there is no value behind Bitcoin, and there is anarchism behind it, a system that the central bank is not pleased with. But the report stated that Bitcoin has no credit risk and no liquidity risk. The Bank of England said that the 320-year-old central bank currency still has credit risk and liquidity risk, which shows that the current monetary system has a lot of room for improvement. The Bank of England believes that the digital pound should be developed. This is the origin of CBDC.

Cai Weide: Interpretation of the Central Bank's Digital Currency Research

Figure 2: The cover of the Bank of England’s 2014 paper

If the digital pound is launched and there is no credit risk, according to the theory of digital society, credit currency must have huge dividends, which is an economic explosion. At that time, the Bank of England did not propose this concept, but because I happened to read MIT’s digital society theory in 2015, I immediately thought that CBDC would bring huge economic dividends. The Bank of England later admitted in July 2019 that this was an important reason for their promotion of CBDC.

Cai Weide: Interpretation of the Central Bank's Digital Currency Research

Figure 3: The paper shows that the Bitcoin system has no credit and liquidity risks

03. The first Bank of England

1. Reasons for the development of CBDC in the UK (1): regaining the power of supervision

The reason for the development of CBDC by the Bank of England is that most of the payment systems in the UK, like China, have been occupied by third-party payments. The Bank of England is preparing to develop CBDC to compete with these companies.

If the United Kingdom continues to allow such development, most of the economic activities in the United Kingdom are not under the control of the central bank. The Bank of England considers this to be dangerous, so it must use the power of the Bank of England to get back the power of supervision. Because the Bank of England is more trustworthy than third-party payment, people will transfer the payment function from third-party payment to the Bank of England. This is the first reason the Bank of England develops CBDC. Mark Carney, the former governor of the Bank of England, delivered a speech at the end of his term, acknowledging that the development of CBDC was to regain supervision.

At that time, he said that for this purpose, the central bank should allow every institution and individual to open an account with the central bank and use CBDC. Some scholars believe this is “big central bankism.” This doctrine has brought changes to the entire banking structure, because traditionally, commercial banks, not central banks, provide services to individuals and institutions.

The Bank of England is also preparing to establish a big data supervision platform in the backstage of the CBDC.

Different people have different opinions on the correctness of this idea. Some American scholars think that this idea is bad, and that the central bank is too big to be a good thing. But there are also scholars who support it. Note that the Bank of England has always maintained a CBDC view (the original intention of the Bank of England). Although there have been many changes in thinking later, this has never changed.

2. Reasons for the development of CBDC in the UK (2): Increase the liquidity of the pound sterling

The Bank of England believes that the development of CBDC can also increase the liquidity of the legal currency pound sterling and enhance the country’s financial competitiveness. The Bank of England stated that the pound sterling should have the same flow as Bitcoin.

In 2019, the International Monetary Fund proposed a new concept called “Synthetic CBDC” (Synthetic CBDC). The Bank of England believes that this is feasible. In this case, the Bank of England does not need to manage all the accounts, but is done by a private company. In his speech in 2019, he said that this synthetic CBDC platform or stablecoin platform is a “systemically important” platform and the center of world finance. This is an important theory in the digital currency area. In August 2019, the Bank of England proposed a synthetic CBDC to replace the US dollar as the world’s reserve currency. This means that the UK still values ​​the concept of synthetic CBDC.

There are only 4 “systemically important” banks in China, and only a very small number of systemically important banks in the world. The Bank of England considers this platform to be a systemically important platform. This shows that he raised the height of CBDC very high.

He also stated that CBDC is an instrument of central bank monetary policy. At the same time, in addition to the platform and payment, the central bank also needs to make loans, and the entire financial center is on it. It can be seen that the CBDC plan of the Bank of England is an ambitious plan. These views are derived from Mark Carney’s speech “Enable, Empower, Ensure: A New Finance for the New Economy” in July 2019. At that time, he was preparing to step down, and Libra just came out. Many central banks around the world are very nervous about Libra. He said that Libra is a small case, and the Bank of England’s plan is much larger than this, because the CBDC plan will change the status of the world’s reserve currency.

He also said that a new type of digital economy needs a new central bank. If this central bank can see ambitious goals, this ambitious reform starts with payments. The payment reform starts with the new architecture (blockchain), from the new architecture to the new payment, from the new payment to the CBDC or stable currency. At this time, a large amount of funds are released along with economic activities. In the end, this reform will reach hundreds of industries, such as loan business.

3. The most important reason for the development of CBDC (3): to promote economic development

The July 2019 speech also mentioned that stablecoins can release a large amount of funds. He described this scenario with the stable currency of the USC Alliance. Since the reserve fund of this stable currency exists in the central bank, there is no credit risk, and the digital stable currency can be settled in real time. Therefore, the transaction does not need to be put on hold for a long time like traditional currencies, so a large amount of currency can be released and enter the real economy. The concept of digital currency can also be applied to “digital assets”, which means not only digital currency, but also extends to all kinds of digital assets. In this way, the entire national economic system has changed!

For example, securities can use blockchain smart contract technology, which can improve efficiency and reduce counterparty risks. He stated that “this will release billions of pounds of capital and liquidity” because it has a trust mechanism that reduces the previously increased processes to maintain trust.

Promoting economic development is the most important reason for the development of CBDC in the UK. This information was not revealed until the speech in July 2019. On June 7, 2021, the Bank of England issued a report to reaffirm this theory, and believes that the emergence of CBDC will completely change the British economic system! In this way, the development of CBDC has become an important project of national economic development.

CBDC increases the liquidity of banknotes but does not print banknotes, which is the important meaning of digital currency and digital assets. In January 2016, I told the CDB staff that if blockchain and related technologies are used, a large amount of capital can be released without printing money. Three years later, the Governor of the Bank of England in 2019 also expressed the same view. If a large amount of capital is released, it will boost the domestic economy at home and increase the competitiveness of the national currency on the world stage internationally.

In the original text of the speech by the Governor of the Bank of England, he finally put forward his real idea: the development of CBDC is the development of the British economy. This can explain why the Bank of England used almost the entire bank to promote CBDC in the past. His original words were: ” These alliances, such as USC, propose to use digital stablecoins supported by the central bank that can be settled in real time. It can also be applied to’digital assets’-traditional securities but using blockchain and smart contract technology. This can improve operational efficiency and resilience in operations, and reduce counterparty risks, freeing up billions of pounds of capital and liquidity that can be used for other production purposes. ” (English original:” These consortia, such as USC, propose to issue digital tokens that are fully backed by central bank money, allowing instant settlement. This could also plug into’tokenised assets’ – conventional securities also represented on blockchain and smart contracts. This can drive efficiency and resilience in operational processes and reduce counterparty risks in the system, unlocking billions of pounds in capital and liquidity that can be put to more productive uses. “)

Cai Weide: Interpretation of the Central Bank's Digital Currency Research

Figure 5: Roadmap for financial reform

The emergence of the blockchain has changed the payment system, and the high liquidity of the stable currency paid by the central bank has caused economic activity to erupt. Mark Carney said that because the blockchain is a consensus economy, the entire back-end clearing platform must undergo major reforms, and this major reform will become a new type of digital assets and smart contracts.

I often mentioned that the digital currency war is a trilogy. The first step is payment, the second step is bank reform, that is, stable currency and back-end reform, and the third step is digital assets. Such a roadmap already existed in 2015, but it was not revealed until July 2019.

4. The dilemma of commercial banks

In 2015, the Bank of England proposed a possible weakness. During an economic crisis, customers will turn bank deposits into CBDC, so the bank may have no deposits. This potential problem is still being discussed today.

The conclusion of the Fed’s research in 2020 is that there will be no deposits in commercial banks in the future, so commercial banks may not need to exist. Some people think that commercial banks need to exist, while others think that CBDC should not be abandoned for commercial banks. This has formed a strong divergence of views. The Fed is still studying whether to continue, because this step has a significant impact and may affect the bank structure and market structure.

The Fed did not list this issue as an important issue in May 2021. Indicates that this issue is not that important. The Bank of England also issued a report in June 2021 that this problem is not so serious. These will be discussed in Lecture 9.

The International Monetary Fund, the Federal Reserve, the U.S. Department of the Treasury, and the European Central Bank have different views. The International Monetary Fund believes that banks can change their business scope. The US Treasury Department holds a positive attitude and believes that bank changes are beneficial to banks.

5. World finance, only fast and not broken

Similar to the “world of martial arts, only quickness is not broken” in the “Kung Fu” movie, the Bank of England’s CBDC embodies the idea of ​​”world finance, only quickness is not broken”. The Bank of England stated that digital currency has high liquidity and fast transaction speed. When the transaction speed is fast, the economy will explode. Its high speed comes from the trust system maintained by the blockchain. The reform of the blockchain starts with payment, and the reform of payment starts with the reform of the back-end system, so the entire back-end system needs to be changed.

In 2018, my biggest concern is how to use the blockchain to do the back-end system. Some people think that if it is fully changed to blockchain, this is only the second step of the reform. In the end, the financial market will be comprehensively reformed.

Cai Weide: Interpretation of the Central Bank's Digital Currency Research

Figure 6: World Finance, Only Fast and Unbreakable: The speed of finance is like the speed of Kung Fu in the movie

The Bank of England is willing to pay the price of changing the bank structure to launch CBDC because it may be a huge economic flashpoint. Although British commercial banks have been reformed, they will also benefit from the improvement of the country’s economy.

6. A picture to understand the Bank of England’s overall CBDC plan

The Bank of England report in March 2020 stated that CBDC has several important destinations.

Cai Weide: Interpretation of the Central Bank's Digital Currency Research

Figure 7: The Bank of England’s overall plan

First , provide more flexible payment scenarios.

Second , to avoid the risks of new private currencies, that is, to combat third-party payments. The central bank now believes that third-party payments or other stable currencies may be its enemies.

Third , support competition, efficiency and innovation in the payment field. The purpose of the Bank of England’s CBDC is to seek speed, so it supports efficiency and innovation, and then maintains trust.

Fourth , to meet the payment needs of the future digital economy. The connection between digital assets and digital currencies will be a huge breakthrough in the future. On the whole, this is the largest reform of the world currency in 300 years.

Fifth , improve the effectiveness and usability of central bank currencies. The central bank can regard the use of digital currency as its monetary policy, and digital currency can spread all over the world.

Sixth , address the impact of reduced cash usage. Cash can be gradually replaced by a large amount, and cash will always exist.

Seventh , as a basis for better cross-border payments, we will compete in digital fiat currency in international financial trade.

7. The liquidity of digital currency is much higher

The data collected by the International Monetary Fund in 2020 indicate that the liquidity of digital currencies is much higher than that of traditional bank currencies, and they are not of the same order of magnitude.

Cai Weide: Interpretation of the Central Bank's Digital Currency Research

Figure 8: The speed of bank money from 1.8 to 3

A 10% higher liquidity can already burst out huge economic power, but the data at the end of 2020 is that the liquidity of digital currency will be 20 times higher, which means that the power of digital currency is great, and the development of digital currency means instead. behind. There is no need to print money, but to increase liquidity. This is a new and holistic view.

Cai Weide: Interpretation of the Central Bank's Digital Currency Research

Figure 9: The speed of digital currency here far exceeds the speed of bank money

From the perspective of the stock market, taking the American software companies Salesforce and Microsoft as examples at the time, Microsoft’s market value for 1 yuan may be X yuan, but Salesforce’s market value for 1 yuan is many times that of Microsoft. All the money earned is 1 yuan, but the market value of Salesforce is multiple times that of Microsoft. This is because Salesforce was a growth type at the time, while Microsoft was a stable type, and the market value multiplier was different.

Due to the extremely high liquidity, the market price of many digital tokens is many times the market price of equivalent stocks. The above two charts show that the speed can be 77, 159, 64, and the bank currency is 3, 2.5, 2.2, the difference between the highest and the lowest is at least 20 times (64/3), and the difference is as high as 80 times. This means that the value of new digital finance is much higher than traditional finance, and it also confirms the theoretical basis of the Bank of England’s CBDC in 2015.

8. Deployment of the Bank of England CBDC project

Regarding the operation model of CBDC, the United Kingdom has made RSCoin, but this model is too similar to Bitcoin and is too far apart from CBDC.

In 2018, they made a universal digital currency model, which later became the prototype of the synthetic hegemonic digital currency model in the “823” speech in 2019.

The Bank of England has asked some economists to do macroeconomic analysis, and the analysis believes that CBDC can have different monetary policies, which can improve operating efficiency.

The RTGS full real-time settlement system can be said to be the most failed project of the Bank of England. After the failure, they started the USC project.

The United Kingdom proposed a sandbox plan, which has been criticized by the United States, which believes that adults abide by the law and children play sandboxes. The Bank of England’s sandbox program is basically not a regulatory report but a learning report. In 2021, the United Kingdom proposed a comprehensive change to the entire sandbox plan, renamed the “scale-box” (scale-box), which is always open, and the United Kingdom has opened a green channel so that these companies can quickly go public.

9. Fnality stable coin USC

I have talked with Fnality’s CCO for hours, and some of his views are designed to be similar to those of the Bank of England. They did not change the monetary policy, but only put the funds in the central bank and used high-speed cross-border payments. They hoped that the transaction could be completed in a few seconds or a second. At that time, there were 5 fiat currencies willing to try.

Cai Weide: Interpretation of the Central Bank's Digital Currency Research

Figure 10: Fnality system architecture: funds remain in the central bank

For the sake of prudence, they only allowed systemic important banks to participate. At that time, there were 16 systemic important banks participating.

Cai Weide: Interpretation of the Central Bank's Digital Currency Research

Figure 11: In 2019, we visited Fnality in the UK to discuss digital currency

04.CBDC classification

There are retail CBDCs that can be used by individuals and institutions; there are wholesale ones that can only be used by banks or franchised institutions; there are synthetic ones, which are concepts proposed by the IMF and are issued and managed by institutions (or banks), but funds exist. Inside the central bank.

There are compliant stablecoins, such as issued by Facebook, institutions, or banks, and are subject to bank-like supervision; there are also non-compliant stablecoins that are used in the underground economy.

CBDC can be based on Token or ledger. If privacy is important, it must be based on Token, and if supervision is important, it must be based on ledger. This is a traditional classification of CBDC.

1. Different institutions need different CBDCs

Many central banks in the world have different views. For example, the Bank of England is not only a central bank, but also a regulatory agency. Their CBDC is big central bankism, which means that the central bank is prepared to provide services to all institutions and individuals.

The European Central Bank is the central bank of the Union of many countries, and there are also national central banks. The European Central Bank stated that it would not accept wholesale CBDCs. Wholesale CBDCs are beneficial to institutions but not to the common people, so they rejected the original wholesale stablecoins or wholesale CBDCs.

The Bank for International Settlements is the bank of many central banks in the world. It is very conservative and attaches great importance to supervision. It does not accept synthetic CBDC.

The IMF has both gold and an SDR package of currencies. In the past few years, it has often put forward new ideas. For example, it proposed a synthetic CBDC in 2019 and that commercial banks will disappear in the future. Some banks in the United States have great opinions on the IMF, thinking that the IMF’s views are a bit crazy. The IMF, like the Bank of England, often puts forward new ideas. Regardless of whether they were later proved correct or incorrect, these two institutions are at the forefront. At the end of 2020, the IMF proposed that the Bretton Woods meeting should be reopened and the entire international monetary system should be reconstructed (note: this view is very challenging because it proposes to change the existing monetary system). They believe that there is a problem with the world monetary system and it may be necessary to re-establish an international monetary system. At that time, the Federal Reserve printed a large number of US dollars due to the epidemic, and Bitcoin successfully challenged 98% of the legal currency at the same time. The IMF also issued a report that the digital currency has an unprecedented impact on the world’s macroeconomics, completely overturning the view that technology cannot change finance (and the main economic theory of the IMF is the digital currency zone).

The Digital Dollar project is a private project in the United States. They believe that any digital currency must use a token, and that it is not a digital currency without a token. They have a strong point of view.

In this way, people’s views on CBDC are very different, and their views on the entire bank structure and other aspects are very different.

2. Discussion

The Federal Reserve rarely publishes articles on CBDC, but the Federal Reserve issued an important article in December 2020, which stated that a token-based or ledger-based CBDC is actually meaningless. The Federal Reserve stated that if you look at the overall design of the digital currency software, you will know that the so-called token is also an account, and a token is only a type of account. Some central bank scholars say that “token is not an account” seems to be illogical.

Cai Weide: Interpretation of the Central Bank's Digital Currency Research

Figure 12: A paper published by the Federal Reserve that some discussions are not based on enough

An important point of the Federal Reserve is that the overall design of the system really determines the monetary policy and decides whether to use tokens or accounts.

Regarding “digital currency”, they think there are two opinions, one is the opinion of central bank scholars, and the other is the opinion of computer scholars. Both parties use the same nouns, but they have different meanings. The Federal Reserve stated that digital currency is affected by technology. Technology really determines the characteristics of CBDC or digital currency. It is not the theory of traditional central bank economics, because most of these theories are theories that existed before digital currency appeared, and have nothing to do with digital currency. .

U.S. regulatory technology has made tremendous progress in 2020, to the point that even the dark web does not accept Bitcoin. Every transaction of a digital currency that uses a token will be known by the U.S. Central Bank, and there is no privacy at all, so it is considered meaningless to think that a CBDC that must use a token is considered. Technology has changed economic theory and bank structure. At the same time, technology has also determined the privacy of digital currencies.

05. The late Fed

1. The Fed’s road to awakening

From 2015 to 2016, the Fed turned a blind eye to the CBDC plan, and there was very little discussion about it. The situation at that time was that the people paid attention to it but the Fed did not. From 2017 to August 2019, the Fed only reluctantly learned. When the European Central Bank and the Bank of Canada conducted experiments, the Fed stated that it only participated in discussions, but the Fed did not develop or conduct experiments.

In August 2019, the Bank of England stated to the Federal Reserve that digital currency will replace the U.S. dollar and become the world’s currency, which has aroused the attention of the United States. Since then, the Federal Reserve has been studying digital currencies very seriously, for example, it has conducted 22 consecutive months of research on the theory of digital currency zones. The Fed has been giving speeches on digital currencies for months in a row, which means that the Fed has indeed studied it seriously.

The United States launched a new type of currency war in 2019, with regulation first, large technology companies began to collect a large amount of data, and the digital token market suddenly became very large. The U.S. Internal Revenue Service stated in 2021 that all money made with Bitcoin should be taxed by the U.S. Internal Revenue Service, and in cooperation with major U.S. Internet technology companies, Bitcoin no longer has any privacy rights!

At the end of 2020, digital tokens have skyrocketed. Although the total market value of digital tokens is much lower than the market value of fiat currencies (such as Japanese yen) in many countries, the main reason for the Bank of England to open CBDC is currency liquidity rather than total market value. The United States discovered in November 2020 that the liquidity of digital tokens has surpassed the sum of the liquidity of the British pound and the Russian ruble, making it the sixth largest liquid currency in the world. At that time, some US financial institutions issued warnings that this would seriously affect all legal currencies in the world (including U.S. dollar, euro, renminbi, yen, pound sterling, etc.).

Later, as Bitcoin continued to rise, surpassing the Indian rupee and the Japanese yen, the Fed finally admitted in February 2021 that the U.S. dollar was challenged by Bitcoin. If you compare the market value, there is no challenge at all, but if you compare the liquidity, it has already formed a serious challenge! In fact, if Bitcoin continues to rise, Bitcoin liquidity will soon exceed the liquidity of the U.S. dollar. Once exceeded, it is equal to Bitcoin’s success in challenging the world’s legal currency, and the world needs a new currency system. Most central banks in the world would not agree that this happened. Professor Rogoff of Harvard University issued a serious warning in February 2021 (he was also the professor who initiated the new digital currency war in November 2019) that the National Central Bank will never allow Bitcoin to challenge them. We have been raising this as a serious issue since November 2020.

Cai Weide: Interpretation of the Central Bank's Digital Currency Research

Figure 13: Harvard University professor severe warning in February 2021

The entire financial system and monetary system not only pay attention to the total market value, but also pay attention to liquidity. Bitcoin was once the world’s third-largest liquid currency, which is enough to alert the central banks of all countries in the world.

The Fed’s view has changed from what it considered to be unimportant in the past, to reluctantly studying later, to thinking it was important and to studying seriously, and to its strong emphasis now.

2. Digital currency affects the United States the most

A report from JPMorgan Chase Bank in February 2021 stated that the United States is the country that has suffered the most losses due to the disruptive nature of digital currencies, because the U.S. dollar is the world’s reserve currency. Therefore, the United States must lead the world in CBDC.

3. MIT Hamilton Project (Project Hamilton)

At the end of May 2021, the Federal Reserve announced the Hamilton plan, which is called Project Hamilton in English. And there are two famous Hamiltons in the United States:

• The first Alexander Hamilton was the first Secretary of the Treasury of the United States, the first President of the National Bank of the United States, and one of the founders of the United States;

• The second place is Margaret Hamilton, a software engineer involved in the development of American space software. She started the High Order Software (HOS) software engineering technology and is very familiar with us. We visited Margaret Hamilton for 3 days a few years ago, and She talks about software engineering technology.

Project Hamilton is a merger of finance and technology, a merger of Alexander Hamilton and Margaret Hamilton. However, due to the scarcity of relevant information on Project Hamilton, the scale and importance of this plan are still unknown.

4. Four issues for the Fed on May 24, 2021

First, the UK CBDC crowds out private money, which the Federal Reserve agrees. The Fed said it would squeeze out private money. Second, the Fed stated that how to transform the old financial system into a new type of digital finance and digital currency is a very important issue. The third is the competition of cross-border payments. The fourth is to expand the market.

It can be seen that the views of the Federal Reserve and the Bank of England have become more consistent.

5. MIT Digital Currency Model

The partner of the Hamilton plan is the Massachusetts Institute of Technology (MIT). The picture below shows the honeycomb-like CBDC model proposed by the Massachusetts Institute of Technology. Its CBDC model is different from the traditional CBDC model.

Cai Weide: Interpretation of the Central Bank's Digital Currency Research

Figure 14: MIT researcher Ali, formerly at the Bank of England

Its inventor is Ali. He was the promoter of the original British CBDC. He wrote an important article to change the history of digital currency in 2014. This article is also the article we quoted in the first lecture and this lecture.

Cai Weide: Interpretation of the Central Bank's Digital Currency Research

Figure 15: The CBDC model proposed by MIT

This model is similar to the satellite chain digital currency model of Japan’s NEC that I saw in 2016. It is a hexagonal cellular model, which is an architecture of nature. We have studied these models and discussed with Mayor Li in Guiyang. It is still unknown whether this model will be an experimental plan of the Fed.

Cai Weide: Interpretation of the Central Bank's Digital Currency Research

Figure 16: Japanese satellite chain architecture

6. Dante Disparte’s criticism that the United States is leading

When the Federal Reserve delivered a speech on May 17, 2021, Dante Disparte, the former manager of Facebook, expressed different views. He criticized CBDC, especially the Federal Reserve. He also severely criticized Ethereum before (thought that Ethereum is not a digital payment system at all. , But a closed exchange system).

Cai Weide: Interpretation of the Central Bank's Digital Currency Research

Figure 17: Dante Disparte’s views are often sharp

One point of Dante Disparte is that the United States is a leader in digital currency and is the world’s innovation center. In the past, he was a Facebook representative, with different expressions, in order to show China’s leadership and get the US Congress to approve the project. Now that he has left Facebook, he said that in fact, the United States leads the world in digital currencies. One of his important supporting points is that the US digital currency industry has produced a market value of 2 trillion US dollars without government support, which can reflect the liveliness of the US digital currency.

His other point is that now there is a need to improve the banking and payment system, improve interoperability and open banking standards, which is consistent with the reform of the Bank of England’s back-end system. He believes that the most important thing now is to connect the front-end and back-end systems, and there should be major innovations in value transfer and opening up financial service providers. On this point, his views are consistent with the Bank of England.

He also believes that the current banking system in the United States is too old and should have been updated long ago; and the regulatory system is also too old and should be fully networked instead of traditional centralized thinking. His views are the same as those of the Bank of England, US regulatory technology companies, and ours.

06. Views of the German Banking Council

This is a big reform of the whole EU

An open letter from the German Banking Association to the European Central Bank in 2021 stated:

First , the CBDC plan is a big plan, and all enterprises as large as the entire EU will participate, including all institutional units such as rice sellers, cleaners, medicines, and banks.

Second , Europe’s implementation of the digital euro requires major reforms in the monetary system, the structure of central banks and commercial banks, and the payment system. It also stated that commercial banks must be able to participate in digital euro operations, and that the European Central Bank cannot kick commercial banks out.

Third , we must insist that commercial banks continue to lend.

Fourth , any digital euro must be integrated into the modern payment system, as well as the current various banking systems.

Fifth , the document processing system is very important. There are many European countries and documents are very important.

Sixth , programmable transactions are different from programmable currencies. Generally speaking, smart contracts are programmable transactions. The currency itself must have its own smart contract, which is separate from the smart contract of the trading system, and these two smart contracts cooperate in the operation.

1. Currency wars are software wars

When Facebook released Libra 2.0 in 2020, the German bank stated that the stablecoins released by Facebook were not the most powerful, and the new digital currency war was a smart contract war and a software war.

The United States pays attention to the Internet, the United Kingdom pays attention to the big central bank, and Germany pays attention to smart contracts. We can see that everyone’s views are not consistent, but a more comprehensive understanding can be obtained by combining all the views.

2. Digital currency zone war: the entire region is affected

A very important point of the German Bank is that CBDC is a major currency reform in which every institution in the entire EU system will participate. This is not just a major event in the banking industry, but a major event in society as a whole. The German Bank asks the European Central Bank to be careful, to deal with it actively, and to stand on the cutting edge of world technology.

Posted by:CoinYuppie,Reprinted with attribution to:
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