“Decentralized” currency concept and its currency practice limitations

Trading medium intermediary

Ordinary people’s understanding of currency is the most common and simple understanding, that is, currency is the medium of transaction. Whether it becomes a “general equivalent” or a “payment instrument”, it basically means this. Then, the simplest monetary activity is the monetary payment from the first party to the second party, or payment, as long as the two parties have no doubts, there will be no third party involved. This “consensus” between the two is the most basic currency consensus, and its meaning is to exclude any third party. In other words, the currency itself is a third party, the so-called “medium”, without any other intermediaries.

The discovery or invention of the medium of exchange undoubtedly expanded the transaction, and it is difficult for the expanded transaction to leave the monetary medium. Although third parties are still excluded, there is no doubt that broader and complex transactions require a broader monetary consensus. How to establish its broader currency consensus? Cross-border or long-term travel trade often chooses precious metals so-called payment and settlement tools, which gives rise to “precious metals for trade”. In the history of European trade and currency, gold and silver have become “trade metals”; in the East, the situation is more complicated. Intra-East Asian trade does not necessarily choose gold and silver, but Chinese copper coins. From the perspective of currency, trading metals are the so-called “weighing currency”, supplemented by the identification of metal fineness. Although weighing currency has been criticized by later generations, it is a free currency, that is, it is not restricted and restricted by the relevant authorities.

In the history of European currency, even the circulation of precious metals—gold and silver currencies was often restricted by the royal authority. Just as Britain rejected the circulation of foreign currencies before 1663, the so-called seigniorage was based on this exclusive currency control. of. However, this situation does not exist at all in East Asia. There was the Song Dynasty, and Song coins were widely circulated. Song, Liao, Jin, Xia, and Korea all had a large amount of Song coins in circulation. There have been no restrictions on the inflow of foreign coins in Europe. Specifically, restricting the inflow of foreign currency has been the norm in the history of European currency, while restricting the outflow of currency in the history of Chinese currency has become a temporary choice. In the two Songs, due to the shortage of copper, the imperial court decided to set up regional restrictions on currency circulation, which were divided into copper coin circulation areas, iron wall circulation areas, and copper coins and iron coins mixed circulation areas.

The early currency issuance was a fiscal issuance. The royal power’s intervention in currency circulation affected the scope of currency circulation and formed a consensus on currency in a certain sense. However, as a currency, it always tends to break free from the control of the crown. In the coinage era, this is not the so-called “decentralization” of the cries, but “de-intermediation.” The geographical scope of currency circulation is the result of a market choice, and power intervention is often unsuccessful unless such intervention reduces rather than increases the cost of circulation. The international circulation of Song coins was the result of lowering the cost of circulation, and even the two Song courts restricted the outflow of coins to varying degrees and increased the cost of outflow. Even so, Song coins allowed a large amount of wine to flow out of the country.

From this, it is not difficult to find that the currency circulation in the coinage era pursues the tendency of de-intermediation, trying to break free from the intervention of third parties and increase transaction costs or circulation costs. Therefore, de-intermediation is more practical than decentralization.

Bank currency centralized currency

The currency of the banking era is the account currency. This is an epoch-making fundamental change. Currency does not follow the circulation logic of the coinage era, but flows within the account system. Off-account circulation is no longer a major part of the currency system. For example, bank notes issued by banks, or “paper money”, as the circulation of cash, in fact get rid of the constraints of the bank account system. However, this escape is temporary, not permanent. Even the “subsidiary currency” of the paper currency era-coins, although they rarely flow back to the bank, they are not completely insulated from the banking institutions. Currency in the banking era, the main form of bank currency circulation, is the transfer between accounts. This brings about the creation of money and credit money, which has also become a so-called “centralized” currency. Credit risk and liquidity risk are the main risks of bank currency circulation. The banking system itself is the “medium” of money.

As a centralized currency, bank currency is account currency, that is, currency for bookkeeping. The main content of currency activities is closely related to bookkeeping activities. Here, the so-called currency center is the bookkeeping center, the operator and maintainer of the currency account system. In the coinage era, although there are also currency issuers and order maintainers, there is no so-called “center” or “bookkeeper” in the specific currency circulation. Centralized bank currency does not lose the function of a transaction medium.

The mandatory and voluntary nature of currency consensus

The currency consensus determines the scope, level and structure of currency circulation, and there is no doubt that bank currency has created a broader currency consensus. The establishment of currency consensus is both voluntary and mandatory. The universal applicability of the single currency system indicates the mandatory currency consensus to a certain extent. Realistically, the global monetary system is determined by the bank’s monetary system. However, outside the bank’s currency system, there are still complex and diverse related currency systems, the most common of which is the various “prepaid card” account systems. These linked currency systems are both voluntary and mandatory for payment or settlement. Simply put, it means voluntary consumption and card settlement.

These linked currency systems exist in a “community form”, which is the so-called “commercial currency”. The existing “commercial area currency” is the outward expansion of bank currency and is also covered by banking supervision, or even some of it is the established scope of banking business. In other words, the business district currency is a variant or subspecies of the bank account system. The most representative ones are the third-party payment account system, stored-value card consumption, and mobile prepayment payment.

"Decentralized" currency concept and its currency practice limitations

” Decentralized ” Currency View and Its Practice

These sub-bank account systems continued to expand with the help of electronic, internet, and digital technologies, and eventually, they broke free from the bank account system directly or indirectly, and also got rid of bank supervision. As a result, a completely decentralized “currency” system has become technically and commercially possible, and a decentralized currency concept has also emerged.

First of all, electronic money is not in this category. They still belong to the established banking currency category, directly and indirectly subject to the constraints of banking supervision and even the influence of banking institutions. Secondly, decentralized digital currency is established between purely two entities, that is to say, de-intermediation is established. However, it is difficult and unnecessary to completely break away from debanking. Because any new currency type always needs the support and continuation of the old currency type. In other words, the new currency needs to use the old currency as the source of value, and it is dangerous and reckless to completely separate the relationship between the new currency and the old currency. Before the large-scale exchange of old currencies with new currencies, the expansion of new currencies actually received many restrictions. In other words, there is no decentralization in the true sense, because it needs the support of the bank’s currency position and requires an exchange arrangement between the old and the new currency. This arrangement itself cannot be “decentralized”.

The essence of the decentralized currency concept is to de-intermediate, that is, to minimize intermediate costs. Compared with the digital currency with the technical conditions of the digital network, the banking institution and its currency cost are very huge, and the efficiency loss is also very huge. Getting rid of this cost load and efficiency loss is a gradual process, that is, the initial realization of the degree, rather than one overnight. Therefore, the so-called “decentralized” currency concept does not mean that it is “isolated” with centralized bank currencies. Digital currencies and bank currencies are not insulated, neither can it be done, nor is it necessary.

The actual position of the decentralized currency concept is not to reject bank currencies, or even to enjoy the premium of crypto assets denominated in bank currencies. So, what is the reality of its decentralization? In short, it is to get rid of supervision, especially the supervision of banks. Can you get rid of it? How to get rid of? It depends on two factors: one is market demand, and the other is technological capability. However, the currency supervisory authority does not always take a tolerant attitude or a compatible position towards decentralized monetary practices. On the issue of endangering the monetary system of banks, the strictness and determination of supervision is beyond doubt. In other words, the practice of laissez-faire decentralized currency concept will inevitably conflict with currency supervision.

Looking back, the practice of the decentralized currency concept has generally gone through three stages: the first stage is to break free from the category of electronic money, and establish an account system with currency-like functions outside the bank account system At this stage, because the threat to the existing bank currency is still small and brings a series of monetary and financial innovations, it is at the level of tolerant supervision; the second stage is the funds between the digital account system and the bank account system The exchanges are established, and the total amount of circulating funds is not large, and the frequency is limited, and it is at the level of inclusive supervision; the third phase of the digital account system is abnormally active, and the price of encrypted assets affects the bank account system and breaks some regulatory restrictions. Strengthen the level of supervision.

At this point, the practical activities of the decentralized currency concept have actually evolved into a trend of resistance and contending with centralized currency supervision. This is no longer a pure “value research and judgment”, but a realistic confrontation.

Going back to the origin of the monetary medium, decentralization is not where the genes of money lies, it is de-intermediation. There are too many nodes in bank currency circulation, and there are a series of breakpoints and blind spots, which results in lengthy processes. These are what digital currency can and should avoid. However, this does not mean that digital currency is decentralized. . The so-called decentralization has two levels of meaning: one is in the technical sense, there is no need to set up a bookkeeping center, but whether the bookkeeping rules are still centralized, and whether the bookkeeping process is still some kind of centralized The form of this is to be observed and analyzed. The second is in the legal sense, that is to say, the decentralized currency practice in technology still cannot lose its legal recognition or judgment, or it cannot get rid of the intervention in the regulatory sense. In other words, a technologically decentralized digital currency may still be a centralized digital currency in law.

Centralized and decentralized currency concepts, entangled with practice, often present very complex and turbulent situations. In the future, people may increasingly feel that whether decentralization or not is not a very effective or concise expression of ideas. Whether to de-intermediate or de-bank is the fundamental point of digital currency practice.


Author: Zhou Ziheng


Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/decentralized-currency-concept-and-its-currency-practice-limitations/
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