Editor's Note: This article comes fromMoneyness InstituteMoneyness Institute

(ID: moneyness), Author: Pan Chao, Head of MakerDAO China, released with authorization.

There have been a lot of discussions about CBDC recently, and I will share an old article.

Note:

- Central bank digital currencies have little to do with cryptocurrencies

- Libra and central bank digital currency are not at the same level, and the comparison is not meaningful

- China's CBDC still some time away from launchThis article is excerpted from"Stable currency - the third landing application of blockchain"

Definition of Central Bank Digital Currency (CBDC)

1. The existence form of CBDC, whether it is digital or a physical form. 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, WeChat change, etc., are all manifestations of digital currencies. Corresponding to digital currency is physical currency that people can carry, such as banknotes, coins and gold. Therefore, from the perspective of the form of currency, the central bank's digital currency, as the name implies, will be a digital currency.

2. The issuer of the currency is the national central bank, a commercial bank or a private institution. Banknotes and coins are usually issued directly by the national central bank or authorized by commercial institutions, so they are also called legal tender. The special feature of legal currency is that the law grants it unlimited solvency. At the same time, taxes must be paid in legal currency, which gives legal currency a strong value endorsement and a willful monopoly position. Therefore, the issuer of the central bank's digital currency is the central bank, which means that any institution must accept it, and is theoretically more willing to accept it.

3. Who can open an account in the central bank, all the people still need to meet certain conditions. Anyone can hold cash, and most people can 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 a country's central bank often only manages 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 target, in other words, whether ordinary people can open accounts in the central bank and the impact it will bring.

The fourth angle is how to record this currency, which is also the potential significance of the blockchain for the central bank's digital currency. 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 the data, and whether the data should be public or anonymous.

What problems does the central bank issue digital currency to solve? What are the pros and cons?

From an economic point of view, there are three main problems to be solved. The first is the elimination of illegal transactions and money laundering through cash, the second is the possibility of introducing negative interest rates, and the third is the central bank’s direct assistance 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 the carrier of many illegal transactions, including drug dealing, gambling, corruption and money laundering. If cash is digitized, every transaction can be recorded, limiting illegal activities. At present, non-cash transactions in Switzerland, Canada, the United Kingdom and other countries have accounted for more than half, and 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 a great challenge to the trade-off between privacy and public information.

The second point brought about by the central bank's digital currency, which is also 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 financial crisis in 2008, central banks of various countries tried to cut interest rates to stimulate people to shift savings to consumption and encourage enterprises to raise funds. But interest rates can't go any lower if they hit zero. Because assuming that deposit interest is negative, we will see that our bank deposit balance will continue to decrease, and everyone will naturally withdraw their deposits into cash and put them at home. Because for cash, the book value will never fall.

Once the cash used as exports is completely replaced by the electronic central bank currency, negative interest rates will become possible. Negative interest rates can bring greater room for maneuver and imagination to the central bank's monetary policy. However, this creates other problems. For example, when the economy starts to panic, people will tend to move their deposits from commercial banks to the central bank’s digital currency, because the central bank has the endorsement of national credit, and theoretically it will not default or go bankrupt, which is likely to cause a run on commercial banks. In addition, for the public, the nominal reduction of currency in hand will also cause panic and confusion in foreign exchange.

The third point is also at the level of monetary policy. The central bank’s digital currency will make it possible to drop money by helicopter. The concept of helicopter money was proposed by Friedman, a Nobel laureate in economics. When the economy is in recession, the central bank governors fly money to the masses to stimulate consumption. However, since the central bank does not have a public account, the general operation can only be that the central bank gives a sum of money to the Ministry of Finance, and then the Ministry of Finance returns it in the name of taxes or other names. If the central bank directly owns everyone's account, it can directly increase the paper wealth of individual accounts, and can also use data to provide precise special assistance based on the target's geographical location, gender, and age.

Which countries are currently experimenting with CBDC?

The first country to issue a central bank digital currency is Ecuador in South America. In February 2015, Ecuador launched a new encrypted payment system and Ecuadorian currency based on this system. Only qualified Ecuadorian residents are entitled to use it, and citizens can use Ecuadorian currency 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 in the process of "de-dollarization" in Ecuador. At launch, project leaders estimated that up to 500,000 people could join the system by 2015. However, the Ecuadorian currency has not been implemented. One year after its operation, the circulation of Ecuadorian currency accounted for less than 0.3/10,000 of the currency volume of the entire economy. In April 2018, the Ecuadorian currency, which was not used by the public, was declared discontinued.

Also a South American country, Venezuela announced in February 2018 the sale of "Petro Coins". The value of Petro Coins is linked to oil prices. The Venezuelan government hopes that the petro can help Venezuela complete its economic transformation and ease the severe domestic inflation. The Venezuelan government claims to have raised $6 billion through the petro, yet there is little public information about the petro, nor is it traded on the open market. The petroleum currency has even been characterized by many people as a national-level financial scam.

Other countries that have issued national digital currencies include Tunisia, Senegal and the Marshall Islands, but none have achieved nationwide adoption. For the major economies, they are all in a state of waiting and investigating. The Fed has repeatedly stated that it has no plans to launch a cryptocurrency. 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 research on the central bank's digital currency. It began organizing digital currency-related seminars in 2015, and then established the Central Bank's 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 the central bank's digital currency on the international financial system, major powers are more cautious in this regard. Even the solutions that are being developed are only a backup and supplement to the existing system.