1. Overview of fiat digital currency
In recent years, with the rapid development of Internet technology and mobile networks, people are no longer unfamiliar with concepts such as digital currency and electronic money, and they are increasingly used in daily life. Unlike electronic currencies based on Internet technology, such as online payment and mobile payment, digital currencies are encrypted electronic currencies based on the principles of cryptography. At present, digital currencies can be divided into privately issued private digital currencies and legal digital currencies issued by ** banks (referred to as "central banks") in various countries, such as Bitcoin proposed by Satoshi Nakamoto in 2008 is a typical private digital currency.
This kind of private digital currency is different from the traditional currency issued by the first generation, with a high degree of decentralization, and its issuance and circulation are not controlled by any organization, which makes private digital currency easy to become a helper for a series of illegal and criminal acts such as money laundering, and there are huge hidden dangers and uncertainties. In order to deal with the huge hidden dangers and threats brought by private digital currency, countries have focused on the implementation of legal digital currency. Legal digital currency is an electronic currency issued by ** bank and backed by national credit.
Legal digital currency is as legally compensatory as the traditional paper currency issued by the state, and can be simply understood as an electronic and M0 alternative to the banknote issued by the state. Compared with private digital currency, legal digital currency has the characteristics of decentralization, issued by a country, whether it is issued or circulated will be strictly supervised and controlled by the bank, to a certain extent, it strengthens the regulation and supervision of monetary policies, and strengthens the supervision of the monetary system, effectively inhibiting a series of illegal and criminal acts such as money laundering and illegal transactions.
The People's Bank of China set up a special research team in 2014 to begin in-depth research on legal digital currency, and after a series of exploration and research, it held a pilot promotion meeting for legal digital yuan in 2020. As of 2021, China's legal digital currency has completed top-level design, functional research and development and other functions.
In terms of structure, compared with the single system of central banks around the world to provide peer-to-peer services to customers, the People's Bank of China adopts a dual system with commercial banks as intermediaries, that is, the central bank first exchanges the legal digital currency to the commercial bank, and then the commercial central bank transfers the digital currency to the customer. In terms of payment function, the dual offline payment mode is adopted, that is, the two parties can transfer and pay without a network, and only need to make real-time inductive payment through NFC (Near Field Wireless Communication).
At present, although China has not yet promoted legal digital currency on a large scale, under the new normal of China's economy, as a combination of finance and Internet technology, the research and issuance of legal digital currency is conducive to the further development of China's economy and the full realization of HP Finance, and the practical application of legal digital currency is imperative.
2. The utility of legal digital currency
1.Low cost
*In the printing and manufacturing, transportation, depreciation**, and anti-counterfeiting technology of traditional currencies, it requires a lot of cost and manpower. Compared with traditional currency, most of the cost of legal digital currency in digital form is the capital investment in building the platform in the early stage, and only the platform needs to be maintained in the later stage, which greatly reduces the cost of currency issuance.
At the same time, the circulation of legal digital currency can be completed only through peer-to-peer transactions, and there is no need for depreciation**, so there is almost no circulation cost. In addition, the use of legal digital currency only requires the use of mobile phones and other electronic devices, which is convenient and reduces the cost of carrying the user's currency.
2.Security
For users, legal digital currency is issued by ** and endorsed by national credit, and third-party payment institutions need to obtain certain user information within the scope of authorization, which may lead to identity information leakage or illegal theft and trafficking, and the use of legal digital currency can greatly reduce the risk of privacy leakage such as identity information.
In addition, compared with third-party mobile payment, legal digital currency is a public good and is not for-profit, so there is no risk of misappropriating customer reserves to obtain benefits.
For the first place, the controllable anonymity of the legal digital currency can enable the company to grasp the dynamics and flow of funds in an all-round way, and the information of each transaction can be recorded and tracked in detail, and stored in the database of the central bank, which ensures the legitimacy and legitimacy of each transaction, effectively inhibits the risks brought about by the use of private digital currency, and greatly cracks down on a series of illegal and criminal acts such as money laundering, tax evasion, illegal transactions, and tampering with transaction information, which is conducive to the establishment of a more transparent payment system.
3.Ease of payment
The dual offline payment adopted by legal digital currency only requires the user's ** digital wallet APP, even if there is no connection to the Internet, as long as the mobile phone is charged, the payment or transfer can be completed through NFC real-time induction. In other words, even in areas where there is no network, weak signal, or basic communication equipment is not yet in place, the transfer of funds can be completed with just the touch of two mobile phones.
To a large extent, this function solves the high dependence of third-party payment on the network, and also improves the transaction payment conditions in remote areas, providing great convenience for people's lives.
4.Monetary policy effectiveness
The issuance of legal digital currency will help improve the transmission efficiency of the central bank's monetary policy and shorten the policy lag. Different from traditional currency, the issuance of fiat digital currency does not need to go through transportation and a series of offline processes, from the central bank to the user's use, which only takes a small part of the time compared with the traditional model, which greatly saves the time cost of issuing currency.
In addition, the legal digital currency also greatly reduces the time required for the central bank to collect information and data, and shortens the time lag between the collected data and the relevant policies issued accordingly, which effectively improves the transmission efficiency of the implementation of monetary policy and greatly shortens the policy time lag.
In addition, the legal digital currency can enable the central bank to monitor the speed, circulation, and direction of currency circulation in real time, and can also make reasonable predictions on the future economic trend and development trend according to the collected data, so as to formulate a more accurate and effective monetary policy, which is conducive to the central bank's macro control of the overall economy and enhance the central bank's control over the monetary system as a whole. Fiat digital currencies also make it possible to implement precise monetary policy.
3. The risk of fiat digital currency
1.Operational risk
The issuance and use of fiat digital currencies relies on the infrastructure of payment systems. As a digital currency, the circulation of legal digital currency requires high technical support, which puts forward certain requirements for the payment system infrastructure established by the central bank. Once the infrastructure construction is destroyed or the relevant technology update cannot meet the needs of the society, it will not only face the problem of difficult operation, but also cause security problems, and cause huge impact and damage to the social financial, monetary and payment systems.
2.Market Risk
Although third-party payment is a payment method and legal digital currency is currency, there is a fundamental difference in the concept of the two, but the payment function of legal digital currency undoubtedly overlaps with third-party payment tools, so the issuance of legal digital currency is bound to be affected by the third-party payment industry. For legal digital currency, the third-party payment scenario is well-established and already has a high customer stickiness.
If fiat digital currency is used, users need to pay certain conversion costs and learning costs, which will affect the speed of implementation of fiat digital currency. For the third-party payment industry, the many advantages of legal digital currency will also have a certain impact on the third-party payment industry, leading to more fierce industry competition, squeezing its market share, and ultimately affecting the payment system and market order of the whole society.
3.Financial risk
If fiat digital currency is only a substitute for cash in circulation, then it will not have a great impact on the current financial system, but if fiat digital currency is not just a substitute for M0, for example, the provision of interest-bearing electronic payments to the public may lead to a large transfer of funds to the central bank, and the central bank has no credit risk compared to commercial banks, in this case people are more inclined to deposit funds in the central bank, and the fiat digital currency account is likely to become a real bank account.
At this time, the role of the central bank as the "lender of last resort" has changed, and it has begun to compete with commercial banks for deposits, and the traditional business of commercial banks has gradually been marginalized, and the profit model has been affected. This could lead to fewer reserves for commercial banks, leading to disintermediation of the banking system. This not only greatly increases the instability of the banking system, but also is not conducive to the development of China's financial system.
In addition, if financial institutions other than central banks have large amounts of fiat digital currencies, it could lead to further crowding out of banking operations or even causing disruptions to funds. On top of that, fiat digital currencies may also weaken banks' creditworthiness. The conversion of bank deposits into legal digital currency within a certain range may lead to the loss of funds by commercial banks**, forcing banks to raise interest rates and actively compete for deposits, further increasing the debt pressure of commercial banks, and then affecting the operation of the entire financial system.
4.Regulatory risk
China is the world's second largest economy, the number of population ranks first in the world, so the legal digital currency issued by China has high concurrency, and the issuance of legal digital currency will inevitably affect the operation of the financial system and the national economy, so in this environment, the supervision and management of the first is particularly important.
Compared with traditional currencies, the current regulatory system for fiat digital currencies is not perfect. If the supervision is not comprehensive and in place, it may cause serious damage to China's payment system and monetary policy system. In addition, with the implementation of fiat digital currency, financial service institutions and financial innovation products related to it may be derived accordingly. How to timely and effectively supervise such financial service institutions and financial products, and further improve the payment architecture, is also an issue that regulators should consider.
4. Policy recommendations
1.Promote infrastructure construction and improve the legal digital currency system
As mentioned above, the issuance and use of legal digital currency depends on the infrastructure of the payment system, in order to better promote the operation and application of legal digital currency, the relevant departments at all levels should be coordinated to formulate relevant plans and policies in a timely manner, and vigorously promote the construction of infrastructure to meet social needs. In addition to the planning and construction of the future, the central bank should also consider the current research process of fiat digital currency, continuously promote technological research and innovation related to infrastructure construction, promote research in related fields, and gradually improve infrastructure.
In addition, the central bank should consider the differentiated operation between legal digital currency and the third-party payment industry to ensure the healthy and orderly development of the third-party payment industry in the new era. Considering that the third-party payment technology is widely used in the current scenario and the technology is relatively perfect, the central bank can consider using the third-party mature wallet technology to provide relevant technical support for the issuance of digital currency.
2.Relevant policies have been introduced to mitigate the impact on commercial banks
The central bank can use the best intervention means to introduce relevant policies to ensure that every deposit deposited by users in the bank is guaranteed by corresponding bank reserves, so as to ensure that bank deposits are risk-free, thereby reducing the occurrence of runs. In addition, the central bank can also monitor the data in real time and adjust the amount and amount of fiat digital currency issued in a timely manner to reduce the risk of a run on the bank.
Commercial banks can pay close attention to the implementation process of legal digital currency in terms of operational strategy, actively participate in the pilot work of legal digital currency, and make relevant technical preparations in advance for the large-scale application of legal digital currency in the future.
3.Improve the regulatory system for legal digital currencies
With the continuous pilot promotion of legal digital currency in China, the central bank needs to gradually improve the relevant legal system and regulatory measures. On the one hand, the central bank should review the possible legal loopholes of legal digital currency in a timely manner in accordance with existing laws, and assess the hidden dangers of legal digital currency, reduce credit risk, and ensure the information security and property security of users;
On the other hand, the central bank can continuously build a new legal framework and improve the corresponding legal regulatory system according to the current operation status of legal digital currency. In addition, the central bank can also set up a legal digital currency access review mechanism and set up a supervision department to implement a strict access mechanism and supervision for relevant derivative financial service enterprises and financial innovation.
5. Conclusion
As a new digital currency, legal digital currency has strong innovation potential, and its research and implementation significance is undoubtedly huge. At present, the pilot work of legal digital currency has begun in China, and the arrival of the era of legal digital currency can be foreseen. However, at the same time, the implementation of legal digital currency is bound to have a huge impact on China's financial and monetary system, and with its continuous research and promotion, the potential risks brought by it cannot be ignored. How to develop fiat digital currency in the future still needs to be actively deployed and studied by departments at all levels.