The central bank’s attention to digital currency does not come from Bitcoin, and Bitcoin does not pose any threat to the central bank and fiat currencies. Strengthening the control of the money market may be the core reason for the central bank to research and issue legal digital currencies. Many people have a misunderstanding of digital currency, thinking that digital currency is currency digitization. In fact, it is quite wrong. Today's legal currency has basically realized currency digitization. More importantly, it is precisely because of currency digitization that the central bank's control over digital currencies has been taken away by commercial banks. Now, what the central bank is concerned about is whether digital currency can allow it to regain control of the currency.
Because there is a fundamental difference between currency digitization and digital currency in the nature of claims: currency digitization is M2, which belongs to the liabilities of commercial banks; digital currency is MO, which belongs to the liabilities of the central bank. This change in the nature of creditor's rights has a great impact on the structure of the currency market and currency control. Technology is the fundamental driving force for all these changes. The underlying technology of currency digitization is computers and the Internet, while digital currency is the blockchain.
In the computer age, commercial banks bring M2 to control the creativity of money. The digitalization of money is a change brought about by the information technology revolution after 1970. Prior to this, banks did not have computer systems and network systems, ATM machines did not appear in banks 24 hours a day, and banks relied on manual clearing and settlement. It was inconvenient for users to store, withdraw, transfer and remit money. Many people and companies had a large amount of cash in case from time to time. Need. In the currency market at that time, the ratio of M0 and M1 was larger than it is now, and M2 was much smaller.
However, after the advent of computers and the Internet, the bank's clearing and settlement system brought fundamental changes to the currency structure. Banks can realize fast storage, lending, withdrawal, transfer and remittance. Users deposit a large amount of cash in the bank, so that there is a large decrease in cash in the market and a large increase in deposits. This change led to three results: First, the nature of claims has fundamentally changed. The cash held by the user is the debt of the central bank and belongs to the MO category, and if it is deposited in a commercial bank, it is the debt of the bank, which belongs to the M2 category. The second is to greatly increase the currency creation ability of commercial banks, the proportion of M2 and the currency multiplier have increased, and the debt and assets of banks have increased significantly. On the one hand, commercial banks have absorbed more deposits (debts) and also released more loans (assets) from the perspective of profit; on the other hand, due to the advent of computers, banks can control risks more accurately, expand their balance sheets, and continue to Absorb more deposits and release more loans. Third, the control of commercial banks has increased, the control of the central bank has weakened, market leverage has increased substantially, and debt has expanded on a large scale.
There is also a significant change in the field of investment banking. In 1971, the U.S. dollar was decoupled from gold, and major countries in the world began to implement floating exchange rates. Under the floating exchange rate, the exchange rate and interest rate fluctuate greatly, and there is room for speculative arbitrage. The arbitrage space has induced a variety of financial innovations, including options, futures, trusts, various funds and derivatives, and investment banks have sprung up. Due to the emergence of the Internet and computers, the risk control capabilities of investment banks have been greatly enhanced, and they have also been encouraged to expand rapidly. High returns have prompted more funds to flow from commercial banks to investment banks, and commercial banks are forced to use "shadow banking" to transfer money to investment banking under pressure from profitability. It can be seen that after the advent of computers and the implementation of floating exchange rates, the central bank's control over currencies was weakened by commercial banks and investment banks. Although the United States implemented separate management of banks and supervised the expansion of commercial banks' balance sheets, commercial banks circumvented the Fed's supervision by expanding off-balance sheet businesses. This period of history seems familiar, and it is happening in China today.
In the era of blockchain, can the central bank regain control with the digital currency M0. Recently, the People's Bank of China has become a little tired of deleveraging and "pinched" with the Ministry of Finance. There are many problems reflected in this. The central bank is indeed relatively passive in deleveraging. Commercial banks have experienced asset mismatches in front of local governments, local financing platforms, and state-owned enterprises. Off-balance sheet businesses have surged, and leverage has increased. This greatly weakens the central bank's ability to control money and the effect of monetary instrument regulation.
The emergence of digital currency, perhaps similar to digital monetization, changes the structure of the money market and strengthens the central bank's monetary control. Although cash has basically been eliminated in the digital currency era, MO has returned. Digital currency and cash are both MO and are the liabilities of the central bank. According to the information disclosed by Dr. Yao Qian of the People's Bank of China, the central bank's digital currency plans to adopt a "two-tier structure", that is, a bank account plus a digital currency wallet account. The digital currency wallet account is actually a personal "wallet" mapped to the commercial banking system, which belongs to the category of M0. The funds in the bank account system belong to the M2 category.
We can speculate that if the central bank issues digital currencies in accordance with the two-tier price design, what impact will it have on the currency market? First of all, the digital currency in the "private wallet" returns to the MO category like cash. The user has his own key and stored the cash in his private wallet without worrying that the commercial bank will take the money. Secondly, if the digital currency adopts blockchain technology, it will promote the "disintermediation" of commercial banks, and the funds of commercial banks may flow out again, and more flow to investment banks and other newly derived financial institutions. In this way, the currency creation ability of commercial banks is compressed, and the proportion of M2 may decrease. Third, the central bank's ability to control currency has been enhanced.
Currently, the currency issued by the central bank circulates freely in society. How to withdraw it in the end? One is the withdrawal of currency derived from commercial banks, and the other is the withdrawal of the central bank's base currency. The former can be controlled by the central bank through deposit reserves, interest rates and other policies, while the latter is done by the tax system and open market operations.
However, after the issuance of digital currency, the proportion of the base currency controlled by the central bank has increased, and M2 may decline, which has increased the central bank's control bargaining chip. However, the Japanese professor Akira Kuroda's research in The World History of the Monetary System found that after a large amount of cash flowed into the market, the government was almost unable to recover it, and the cash seemed to "sink". Digital currency belongs to MO just like cash. Is it easy for the central bank to control and recycle it?
Ao Meng, chief architect of Tencent Cloud's blockchain, believes that programmable currencies can greatly strengthen the central bank's control over digital currencies. Dr. Ao Meng believes: "Through programming, the central bank can control the entire life cycle of currency-creation, circulation, and withdrawal." How do you understand? For a computer, it has a certain internal self-control function. Take the early object-oriented language as an example. At least two functions are required, one is the constructor and the other is the destructor. You have to solve the problem of its creation as well as the problem of its demise. If we rise to a programmable digital currency in the future, the central bank's control power will be much greater. Even in the circulation link, control can be increased. This is why the central banks of various countries are very interested in blockchain technology.
If the central bank's digital currency can improve the central bank's control over the currency, the problems of commercial bank balance sheets and off-balance sheet business excessive expansion, excessive leverage, and debt ratios caused by the rise of computers and digital monetization may be alleviated. The central bank has stronger monetary control. If it controls the currency market scientifically, it should be better able to prevent and alleviate financial crises.
Technology promotes changes, and the emergence of computer technology has led to a large amount of cash entering the commercial banking system, the transfer of currency claims, and changes in the structure of the money market. The central bank’s debt M0 has shrunk and its control over the money market has weakened. Commercial banks have created a large amount of M2 through the currency multiplier, and their balance sheets have expanded on a large scale. At the same time, it has caused problems such as inflation and high debt. The emergence of blockchain technology has also triggered changes in currency claims, currency market structure, and currency control rights. The central bank can issue digital currency, or promote currency from cash and banking systems into digital currency wallet accounts, the central bank can regain control of MO and currency, and commercial banks' ability to create in M2 is weakened.
Strengthening currency control should be the main driving force for the central bank to research and issue legal digital currencies. The real problem is how to resolve the contradiction between the central bank's demand for currency control and the decentralization of blockchain, how to combine the advance anti-money laundering, taxation and other laws, balance the interests of all parties, and formulate the central bank's digital currency management mechanism.
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