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Editor's note: April 26, Senior Researcher of Chongyang Institute of Financial Studies, Renmin University of China, Professor of Beihang University, Professor of Tsinghua Changjiang Chair, Beihang Digital Society and Blockchain Experiment Office Director Cai Weide, shared his thoughts on "Digital Currency Zone Theory and Its Influence" in the third lecture ( under ) of the "Technology, Market, and Supervision of New Currency Wars" series of live events hosted by RDCY Latest thinking. The content of this issue will be divided into two parts, the following is the live video and the first part. The
reading function is online! Click the play button to listen to the full text ↓
Core points
1, Now is the era of "a hundred flowers blooming" for digital currency. Because digital tokens are legalized and a large number of compliant funds are invested, the development of digital currency is in "extremely rapid progress".
2, In 2016, the Bank of England let us “work” for them for free by releasing the CBDC model RSCoin, and now the Fed does the same.
3, digital currency technology may change the status of the US dollar as the world's reserve currency, and thus affect the status of the US financial system in the world.
4, digital currency will have a huge impact on macroeconomics. The emergence of digital currency is a "historic and unprecedented change" and a major financial reform that occurs once in three hundred years. This reform may be difficult to digest for ten or twenty years. If
5, digital tokens replace fiat currency, stablecoins, or central bank CBDCs, this matter will be more serious, because digital tokens are very difficult to remove.
Ten lectures on digital currency series
Cai Weide: When the new currency war is going on, China must fight the backwater
[Popular Science] Experts decrypt Bitcoin! The common currency of the underground economy, or may it be replaced?
Will digital currency become the new battlefield of world geopolitics? Expert interpretation of
dollar hegemony is being disintegrated! Experts suggest to fully open digital currency research
Foreword
The field of digital currency has recently received attention from the world, especially the United States. Now is the era of "a hundred flowers blooming", because of the legalization of digital tokens, there are also a large number of compliant capital investment. Under this circumstance, new theories are constantly coming out, and the development is very fast. Both private and government units are researching and developing digital currency, so the development of digital currency is in "extremely rapid progress".
1. April 16, 2021 Digital Currency 2.0
On April 16, 2021, according to a report by CNBC, an important financial media in the United States, the chairman of the Federal Reserve stated that the digital dollar is a high-level and priority project, which is very different from before . In 2018, early 2019, the Fed said it was just researching. By February 2020, the Fed said it was looking at it very seriously. On April 16, 2021, the Fed said it was a "priority project." Also on April 16, Citibank issued a report called "Digital Currency 2.0", which stated that "some people think that this is a new space race or a digital currency cold war, but we believe that this is not a zero-sum game, and the digital world is huge. More than sixty years ago (beginning in 1957), the United States was in a space race with the then Soviet Union. The Soviet Union launched a rocket to the moon earlier than the United States. In order to surpass the Soviet Union's technology, the United States started a space race.In the absence of computing power, the United States still achieved great achievements, and later achieved achievements such as the moon landing. This space race is a great technological race between the United States and the Soviet Union.
Professor Rogoff of Harvard University said that for the United States, the digital currency competition is a currency war of life and death. But Citibank said , is not a zero-sum game, because the market is so big that many people can participate and profit.
2. March 31, 2021 The Federal Reserve and MIT
March 31, 2021 The Federal Reserve announced that it will launch two experimental platforms for central bank digital currency (CBDC) in July 2021. MIT has always valued digital currencies. In 2015, I discussed blockchain at Tsinghua University with the president of the MIT Digital Currency Club, as well as Vitalik Buterin of Ethereum and a Tsinghua teacher (also a Ph.D. from MIT). At that time, Brian Forde, the White House scientific advisor, quit the government and went to the Massachusetts Institute of Technology to establish a digital currency initiative (Digital Currency Initiative, website https://dci.mit.edu/about).
In 2020, Gary Gensler, a scientist of the MIT digital currency program, became an adviser to the Biden administration in the United States and later became the chairman of the SEC, which is an important signal.
3. The Bank of England asked us to “ work ” for them for free, and now the Federal Reserve does the same. When the Bank of England proposed the RSCoin model as their official model, scientists all over the world who were interested in CBDC went to study this model, which is equivalent to working for the Bank of England for free. This is the cleverness of the Bank of England . Our Beihang team spent more than half a year researching and discussing it many times.At that time, it was judged that the Bank of England had not studied it well, and it was announced that this was the model of the Bank of England's CBDC, and this model was only a prototype at most. These points appeared in several articles of the author in 2016. It is normal to fail in
scientific experiments, because failure is the mother of success. But now the Federal Reserve and MIT are about to launch two experimental models that many scientists in many worlds will be working on.
4. The monetary policy has not yet been decided, the experiment is first
It can be seen that this CBDC plan in the United States has entered the experimental stage. There is also an important piece of information in the report. Why send out the model of digital currency operation first? The report said that the United States cannot wait for the policy to be clarified, because it may take a little time for the policy to be clear, maybe one or two years, or two or three years?
From the papers and speeches we have read on the US digital monetary policy theory, the Fed should only be in the early stage of exploration, and there is still some time before deployment. The Bank of England's digital currency policy has been discussed for 6 years, but the problems found in the early days have not yet been decided on which solution is better.
5. April 20, 2021 The Bank of England
The UK announced on April 20 the establishment of a new CBDC Task Force (Task Force), mainly to accelerate the digital pound plan.
The UK will open the CBDC task force on April 13, 2021.
In terms of the development of CBDC, the Bank of England was originally the leader of the world's central banks. It has been developing CBDC since 2015. initiated. Therefore, it is now launching a new task force, which means that the digital pound will come out soon. From the platform of policy and experimentation, it is estimated that the digital pound may appear earlier than the Fed's digital dollar. The Bank of England is developing the digital pound through a comprehensive layout and reform.Based on game theory analysis, the smaller the country, the more frontier it should be able to seize opportunities.
6. The UK's February 2021 report attaches importance to blockchain infrastructure
A research report (Kalifa Review) released by the UK in February 2021 said that the UK has been talking about digital finance and digital currency for a long time, but now Americans are running ahead. The United States is indeed more systematic, bolder and more cutting-edge than the United Kingdom from 2020, especially the layout of the US Treasury Department from mid-2020 to early 2021 is surprising. The U.S. Treasury Department said in 2020 that in three to five years, the entire Fed payment system will become a blockchain network.
The UK said that there is still a lack of digital asset infrastructure and should be taken seriously. The current blockchain has no standards and is not interactive. (Remarks: The United States also stated that it should attach importance to digital asset infrastructure. Without infrastructure, digital currency cannot be developed.)
7. UK changes rules to support fintech
In order to support UK fintech, Kalifa Review recommends changing the listing rules for stocks , to accelerate the listing of digital currency-related companies. Then there is the cultivation of new technology companies. The regulatory sandbox and accelerator that the UK has done before are obviously not enough. Now the UK wants to nurture new technology companies and develop a Digital Scale-box instead of a regulatory sandbox. This new expansion box is similar to the service of the Boston Fintech Sandbox company. The expansion box brings together all the data tools to support new digital currency and digital asset companies, provide real data, and let them do experiments. This is very valuable and cannot progress without data science and systems.
8. The biggest currency reform in 320 years.
In 2016, the author participated in an international conference. The participants were all central bank scholars, including the European Central Bank, the Federal Reserve, the Bank of England, the Bank of Italy, and the German Central Bank. The Bank of England said in its speech that the issuance of digital sterling is the world's largest monetary reform in 320 years, which made the scholars of central banks sitting below very excited.
9. Technology changes monetary and financial markets
The views and predictions discussed by the Bank of England in 2016 are now being realized. For example, at that time, the United Kingdom predicted that the digital currency and CBDC plan will definitely change the financial market. Some scholars have long held reservations about this view. But the first sentence of Professor Rogoff's short essay at Harvard University in November 2019 said that any doubts about must stop, because it has now affected the national interests. There is no point in continuing to discuss whether digital currencies will have an impact on financial markets.
The first sentence of the Harvard Rogoff essay (table below) says that technology is changing the monetary system (and the financial system that uses it), just as technology has changed media, politics, and commerce, technology is destroying the U.S. national currency in pursuit of its broader confidence in the national interest. Technology has changed currency, and that's a big message. Monetary policy, currency circulation, and monetary theory have changed because of technology, and the market will change.
"Just as technology has disrupted media, politics, and business, it is on the verge of disrupting, just as technology has disrupted media, politics, and business. America's ability to leverage faith in its currency to pursue its broader national interests.)
- Harvard Professor Rogoff in November 2019
This sentence says that digital currency affects the US dollar, which is the world's reserve currency. Therefore, digital currency technology may change the status of the US dollar as the world's reserve currency, and thus affect the status of the US financial system in the world.
The extension of digital currency zone theory
The theory of digital currency zone is progressing rapidly. It can be seen from the practices of the United States and the United Kingdom that they are not only developing blockchain systems, but also actively discussing and deploying them. For example, the U.S. Treasury Department and its deployment are very rigorous, with many specific plans, large and grand. and the 2021 UK report also recommends changing the rules for listing, giving the green light specifically to digital currency and digital finance companies.
Transactions determine the world's reserve currency, which means that transactions are king. If trading is king, it means that the entire technology, finance, currency, and regulation must all change, which is a very important thing. The world of finance is no longer centered on banks, but on the blockchain. This idea influenced the entire thought of economic theory at Harvard and Princeton. The U.S. Department of the Treasury said that if the platform is at the center, the entire financial structure will be reformed.
When Princeton University established the digital currency area, it only considered the competition between Facebook's stable currency and legal currency, which is a binary competition. But now it seems that it has become a ternary competition since November 2020. The previous text mentioned that bitcoin accidentally challenged the dollar.
1. References in the digital currency area
Some netizens asked, are there any reference books in the digital currency area? What's next for the theory?
The most important article in the digital currency area is "Digital Money across Borders: Macro-Financial Implications" published by the International Monetary Fund on October 19, 2020.
But if you don’t understand the theory of digital currency area, it will be difficult to understand this article. Some theories in it are different from traditional theories, the drawings are different, and the points of view are different. This report shows that digital currencies have an unprecedented impact. If you want to understand the theory and impact of the digital currency area, you should start from this article.
2. IMF2020 Cross-border Payment Report Viewpoint
IMF2020 Cross-border Payment Report expresses support for digital currency to replace local currency and change the competition rules of world reserve currency. Later, it not only mentioned a lot of data, but also made a lot of derivatives. The IMF report was put together with great effort by many economists.
It shows by drawing that the future will be centered on the blockchain platform instead of the bank. It believes that the division of financial markets is no longer a division between countries, but the emergence of a "digital currency camp", which is a complex area. It greatly extends the theory of Princeton University's entire digital currency area. Now if we talk about the theory of the digital currency area, the most important one is this report of the International Monetary Fund in October 2020. The
report also said one thing, it said that digital currency will affect the entire macroeconomic theory, including foreign exchange management, financial stability, regulatory policy, monetary policy, capital flow, macroeconomic policy, legal framework, structural policy .
One of its very important points is that digital currency will have a huge impact on macroeconomics. For a long time, some people believe that digital currency has no impact on the macro economy, monetary policy, and banks. Some people have always believed that digital currency is an engineering project.However, in October 2020, the International Monetary Fund stated that this is a "historic and unprecedented change", and all of these will affect it. This is a major financial reform that occurs once in three hundred years. This reform may be difficult to digest for ten or twenty years. .
The International Monetary Fund proposed that if a country's currency fails, the development and deployment of CBDC cannot cancel the imagination of digital foreign currency substitution. And the risk may be greater, because the country's CBDC may be shorted overseas, causing the corresponding fiat currency to fall sharply, so the International Monetary Fund believes that this is not a simple matter.
USA has released some data in 2020 that shows that a large amount of foreign exchange is now scurrying around through Bitcoin. Although foreign exchange management systems have been established now, when these systems encounter digital tokens, they are sometimes powerless. has a system, but it cannot actually be implemented - this is an important message in the 2020 report of the International Monetary Fund. In addition to having systems, also needs technology. The IRS heard this, and they signed a contract with an important technology company in the United States to start implementing the American system.
3. Previous analysis and forecast
Before we responded to the Governor of the Bank of England in the United States, we re-analyzed the development of the Bank of England CBDC in October 2019. We re-read the previous report of the Bank of England, and the new conclusion is that the Bank of England has been deploying this thing for a long time, which is to use digital currency to adjust the status of the world's multi-national currencies.
In 2019, we listed new macroeconomics and trading technology as two of the top ten directions of digital currency. At that time, we referred to the macroeconomic literature for this matter and found that they did not discuss the digital currency that we have encountered so far. Problems, they are all discussing traditional problems and rarely touch new problems, so we predict that a new type of economic theory will come out.
2019 article
4. Other English reference
Rogoff's short article talks about the importance of the platform, allowing the United States to have more insight, and also mentions that the world finance is divided, there are compliance areas, dollar areas and other areas, the world financial market is therefore Split. Rogoff said that digital currency will change monetary policy and change the financial system, and the digital currency platform is crucial. Although the short article in is short, all three points of view of the digital currency zone theory are there. He also proposed how to underground economy, and the United States did adopt this strategy later.
• Markus Brunnermeier, H. James, J. P. Landau, Digital Currency Areas, July 2019 Original article
• Mark Carney, The Growing Challenges for Monetary Policy in the Current International Monetary and Financial System, August 23, 2019. This article cites numbers Currency zone article, 1) Cross-border payments determine reserve currency; 2) Future financial market fragmentation
• Kenneth Rogoff, High Stakes of Coming Digital Currency Wars, Nov. 11, 2019. This short article argues that 1) digital currency determines international financial status; 2) platforms are important; 3) financial market partitions
• Brooks, How Unbundling and Decentralizing are Reshaping Banking and Financial Services, International Banker, Dec. 3, 2020. This article It is believed that the liquidity of digital currency drives financial market reforms, and institutions are more profitable
Some important theoretical articles on the digital currency area
The former U.S. Treasury Department's Director of Currency Audit (Brooks) wrote an article, on December 3, 2020, I put This article was translated into Chinese and published on Xinhua Finance. His article was the most optimistic, sunny, and joyous of all the theoretical articles on the digital currency zone.
Ordinary people feel serious when they hear digital currency, but he said that digital currency is beneficial to us, and we can still make profits.He said that we don't need to be afraid, this reform is good for us, and no reform is harmful.
5. The phenomenon of digital foreign currency substitution
The phenomenon of digital foreign currency substitution, because the phenomenon of digital foreign currency substitution has not yet appeared, so it is analyzed with the traditional currency phenomenon. This is the view put forward by the International Monetary Fund. reports that once there is a foreign currency substitution phenomenon, 30% of the currency will be replaced within a year, and the foreign currency cannot be removed after 10 years, which is a serious problem. The report suggests that in the case of digital currencies, the replacement phenomenon may be faster. The
report also stated that if the national currency is strong in , the development of stablecoins and digital currencies will be harmful. Being short-sold overseas will be more serious (and at home, it is easier to control). So, this becomes a serious question.
Digital tokens are not comfortable in the underground market. Around November 2020, many research reports came out that digital tokens will affect the world economy. The report of the International Monetary Organization in October did not analyze and find that Bitcoin can attack the dollar. In fact, the main body of such analysis includes Morgan Stanley, Blackstone, and us. This suddenly becomes a ternary currency competition. If digital tokens replace fiat currency, stablecoins, or central bank CBDCs, the matter will be more serious, because digital tokens are very difficult to remove. FATF and IMF did not recognize this , and this phenomenon is much more serious than the stable currency phenomenon.
Replacement of traditional foreign currencies
About 30% of the domestic currency is replaced in one year, and it is still difficult to remove it after 10 years.
6. At the same time, Bitcoin has the characteristics of compliance and underground markets.
Bitcoin has not changed, but the financial market has not changed its Opinions have changed, because the current regulatory technology is much better than before , especially after 2020, the regulatory technology in the United States is indeed much stronger, it has collected a lot of data, the current views on Bitcoin and Bitcoin half a year ago The point of view is completely different. And now the United States and many countries have legalized bitcoin, at least semi-legalized, so bitcoin has also begun to comply, but it still has the characteristics of an underground market, and this underground market characteristic will not be removed soon, so became a strange phenomenon.
// Renmin University of China Chongyang
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RDCY
Renmin University of China Chongyang Institute for Financial Studies (RDCY) was established on January 19, 2013. It is a major project funded by Chongyang Investment donated to Renmin University of China and set up an education fund for operation. As a new type of think tank with Chinese characteristics,
has hired dozens of former politicians, bankers, and well-known scholars from around the world as senior researchers, with the aim of focusing on reality, advising the country, and serving the people. At present, Chongyang has 7 departments and 4 centers of operation and management (Ecological Finance Research Center, Global Governance Research Center, Sino-US People-to-People Exchange Research Center, and China-Russia People-to-People Exchange Research Center). In recent years, RDCY has a high degree of recognition both at home and abroad in the fields of financial development, global governance, major power relations, and macro-policy research.
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