Zhang Ming, Chinese Academy of Social Sciences: Talking about CryptoCurrency

Since Bitcoin ( Bitcoin since) in 2009 turned out, the rapid development of digital currency sparked widespread concern around the world. According to the definition of Wikipedia, digital currency refers to the currency or related assets that are managed, stored and traded on digital computer systems and the Internet.

Investopedia gives five characteristics of digital currency: First, digital currency exists only in electronic form, so it can only be obtained through a computer or mobile phone; second, a typical digital currency does not require an intermediary, so it is usually the cheapest way of currency transactions. ; Third, all cryptocurrencies are digital currencies, but digital currencies are not limited to encrypted currencies; fourth, the main advantage of digital currencies is that they can maximize the transfer of value and reduce transaction costs; fifth, the main advantages of digital currencies The disadvantage is that the value fluctuates sharply and is vulnerable to hacker attacks.

The digital currencies so far are mainly divided into three categories. One is the cryptocurrency represented by Bitcoin ; the other is Stablecoin represented by Libra or Diem ; and the third is the digital currency of the People’s Bank of China (e-CNY). Represents the central bank digital currency (Central Bank Digital Currency, CBDC).

Encryption currency refers to the use of cryptography principles to ensure transaction security and the transaction medium created by the control unit. Bitcoin is the earliest and most representative cryptocurrency. Bitcoin is the world’s first digital currency created by using cryptographic algorithms and blockchain technology, which can be described as leading the trend of the times. Bitcoin has the following typical characteristics: First, the issuance of Bitcoin does not rely on any national institutions, and the decentralization of currency issuance is realized; the second is that the total amount of Bitcoin is determined to be 21 million, and the production speed is also determined in advance (more The slower it comes); the third is that Bitcoin uses a private key to prove its ownership, and the Bitcoin account is composed of digital addresses, so it has a high degree of anonymity; the fourth is that the entire process of bitcoin from generation to transaction is recorded in the main area In the block chain, there is a strong traceability.

Compared with traditional currencies, the biggest feature of Bitcoin is that it is created by a preset algorithm and the total amount is constant, and it is not issued by the central bank of a specific country. Therefore, no country can use the issuance of bitcoin to levy seigniorage, nor can it exchange for real resources by issuing bitcoin indefinitely. In other words, theoretically speaking, the use of Bitcoin can avoid inflation and asset price bubbles, thereby ensuring that the value of the currency is not diluted by the central bank’s excess issuance. Because of this, Bitcoin has been strongly sought after by investors in the financial market in recent years, especially in the context of global excess liquidity. Since the outbreak of the new crown epidemic, the price of Bitcoin has skyrocketed and has so far exceeded $60,000 per coin twice.

However, Bitcoin also faces the following three major challenges. One of the challenges is that traditional currencies have strong support for the government’s ability to levy taxes, that is , they have the endorsement of government credit. And there is no credit endorsement behind Bitcoin, and it only depends on the trust of users to maintain its value. Once user confidence is impaired, the value of Bitcoin may drop significantly. The second challenge is that the total amount of Bitcoin is constant, so Bitcoin will face the “Triffin Dilemma.” In other words, a fixed amount of currency cannot fully meet the demand for liquidity in an expanding economy, which will put the economy under deflationary pressure. If the unit value of Bitcoin is constantly increased according to the economic growth rate to solve the Triffin problem, this will regularly create room for market arbitrage. The third challenge is that over time, the generation of Bitcoin will become slower and slower, and it will be obtained by “mining” with specialized machines that consume huge power. In the context of increasing global emphasis on carbon reduction, the “mining” behavior for obtaining Bitcoin has also encountered increasing pressure.

It is precisely due to the existence of the above characteristics that the price of Bitcoin fluctuates greatly, making it difficult for Bitcoin to become a value scale and trading medium so far, but it is reduced to a risky asset with huge price fluctuations and extremely high investor risk appetites. . From this point of view, Bitcoin can hardly be regarded as a real currency by nature (real currency has the three major functions of value scale, transaction medium and storage means), but a highly speculative alternative finance assets.

Stable currency is a digital currency that is supported by reserve assets and helps maintain price stability. The most representative stable currency is the stable currency plan proposed by the American Facebook company. The first generation is called Libra and the second generation is called Diem. The biggest difference between the two generations of stablecoins is that the issuance of Libra is based on assets composed of a series of currencies (the main currency is the U.S. dollar), while Diem is a currency issued based on U.S. dollar assets.

The biggest feature of Diem is that, on the one hand, this currency is issued by a multinational Internet platform such as Facebook, which has rich application scenarios and is easy to break through national boundaries and circulate widely; on the other hand, this currency issuance has a one-to-one dollar asset as a The support of reserve assets, so that its credit is linked to the credit of the U.S. dollar, helps to maintain the stability of the currency value and is more easily accepted by all parties to the transaction.

As the name suggests, central bank digital currency refers to the digital currency issued by the central bank of a specific country. This currency uses electronic currency instead of paper currency, so the currency value of digital currency and existing currency is one to one. One of the biggest features of the central bank’s digital currency is that it can be directly created and issued to enterprises or households by the central bank without using the commercial banking system as a medium. In this sense, the central bank digital currency is similar to the national debt to a certain extent, except that the national debt is the debt issued by the Ministry of Finance of a country, and the central bank digital currency is the debt issued by the central bank. The central bank can achieve structural policy goals (such as helping small and medium-sized enterprises or low-income households) through targeted issuance of digital currencies. From this perspective, there is a strong similarity between targeted issuance of digital currencies and fiscal policy transfer payments. It is not difficult to see that to a certain extent, digital currencies may confuse the boundary between the central bank and the fiscal.

At present, the development of China’s central bank digital currency is relatively advanced on a global scale. However, the central bank of China still adopts the traditional method of two-tier issuance of digital currency, that is, the central bank issues digital currency to commercial banks, and commercial banks transfer the digital currency to households or businesses through various methods. In addition, the current digital currency of the People’s Bank of China is only a substitute for cash (M0), so it does not have the function of currency creation. It is a retail digital currency, not a wholesale digital currency. In other words, among the various possible forms of central bank digital currency, China’s digital currency has chosen the least radical path.

How to compare the three most typical digital currencies: cryptocurrency, stable currency and central bank digital currency? The author believes that, from the perspective of creativity, cryptocurrency is a subversive monetary innovation, central bank digital currency is the most moderate monetary innovation, and the degree of innovation of stable currency lies in the middle of the two. But from the perspective of path dependence and network externalities, central bank digital currency is also the easiest form of digital currency accepted by all walks of life, and Bitcoin does not actually have the function of currency so far. Once the stablecoin is put into use, due to its strong value stability and the support of the scene of a private Internet platform, its use prospects are actually quite impressive.

At present, major countries in the world are also in a wave of digital currency competition. China’s central bank digital currency is one step ahead. However, it is worth noting that the degree of internationalization of a country’s currency is still determined by the country’s economic scale and development, the depth, breadth and liquidity of the products provided by the financial market, and a country’s ability to adjust after a crisis has erupted. The change in the form of currency from paper money to digital currency does not necessarily lead to a significant acceleration in the internationalization of the renminbi. In addition, it should be noted that once the US government passes the Diem issuance plan, the existing strength of the US dollar and the rich cross-border application scenarios of Facebook superimpose, it may significantly strengthen the US dollar’s reserve currency status. In other words, the global digital currency competition has just begun, and the internationalization of the Chinese central bank’s digital currency can be described as a long way to go.

The author of this article introduces: Chief Economist of Ping An Securities, Director of the International Investment Research Office of the Institute of World Economics and Politics, Chinese Academy of Social Sciences.

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