What is a digital currency? Why is it so important?

According to the general definition in Western economics, any generally accepted payment instrument can be regarded as currency. Virtual currency is only an electronic payment tool used to purchase goods and services in specific social scenarios (such as online games), so it is not a digital currency.

For example, QQ coin is a payment tool that can be used in related games of Tencent. Without the social scene of Tencent games, it is not a widely accepted payment tool. The familiar Bitcoin also has similar properties, but Bitcoin is technically more complete than QQ coins. Therefore, from this perspective, Bitcoin is not a digital currency in the full sense.

If some digital assets can be generally accepted by the whole society as a payment tool, then these digital assets can be called digital currency. Digital currencies can be issued by governments (or central banks) or by the private sector. Digital currencies issued by governments (or central banks) are called fiat digital currencies.

British "Smart Money" intelligent financial transaction application Plum completed over 1.65 million pounds of crowdfunding: Jinse Finance reported that the British "Smart Money" intelligent financial transaction application Plum announced that it has completed over 1.65 million pounds of crowdfunding on the Crowdcube platform, exceeding Its initial funding target of £1 million will close on October 19. The Plum APP, which is currently live on the iOS and Android app stores, provides users with commission-free stock and cryptocurrency trading services, as well as a Plum-branded debit card. It is reported that Plum Fintech Ltd has registered with the Financial Conduct Authority of the United Kingdom as an account information service provider and an e-money agent. (crowdfundinsider) [2022/10/19 17:31:39]

For example, the Central Bank Digital Currency (DCEP), which is undergoing closed testing by the People's Bank of China, is a digital currency issued by the central bank.

Weekly CME Bitcoin futures position report: The total open interest rose to 13,302 contracts, and large investors are clearly biased towards bullishness: Golden Financial News, according to data monitoring from KingData, CFTC’s weekly report on CME Bitcoin futures positions from August 17 to August 23 shows:

Total open interest rose to 13,302 contracts from 12,423.

Institutional long positions are 9,231, short positions are 10,614, and the ratio of long and short positions is 1:1.1. The long and short forces of institutions are balanced, and they are slightly biased towards bearish;

Large investors have 1597 long positions and 449 short positions. The ratio of long and short positions is 3.6:1. Large investors are obviously bullish;

Retail investors have 1,141 long positions and 906 short positions. The ratio of long to short positions is 1.3:1. Retail investors are generally bullish. [2022/8/29 12:55:13]

Digital currencies can also be issued by private institutions, such as Libra, which is being developed by Facebook Inc. After the official launch, more than two billion users worldwide will use the platform in various transaction scenarios. Such massive use and widespread acceptance makes Libra a veritable digital currency. Of course, when consumers in various countries use Libra, they must also comply with the regulatory requirements of their own laws and regulations.

Total cryptocurrency market capitalization drops to $1 trillion: Bitcoin, Ethereum and other major cryptocurrencies fell on Monday as the Fed expects to raise its benchmark interest rate by 0.75%, the biggest hike in nearly 30 years, Jinse Finance reports . At the time of writing, bitcoin fell to a weekly low of around $21,935, down 2.8% over the past 24 hours, while ethereum was down nearly 5% on the day to its current value of $1,528.

The total market capitalization of all cryptocurrencies has dropped to $1 trillion from $1.08 trillion last Wednesday, according to data provided by CoinMarketCap. The latest price action comes ahead of a two-day Federal Reserve meeting that begins on Tuesday, when the central bank is expected to hike rates by another 75 basis points.

Fed officials have already raised the benchmark short-term borrowing rate by 1.5 percent this year, including a 75 basis point hike in June, the biggest increase in nearly 30 years. [2022/7/26 2:36:56]

At present, my country's central bank digital currency is still in the internal testing stage, adopting the dual delivery system of "central bank-commercial bank" and the operating framework of "one currency, two warehouses, and three centers".

After McDonald’s tweeted and ridiculed, the token Grimacecoin created by speculators soared 285,641%: According to news on January 26, after McDonald’s tweeted and teased, speculators took the opportunity to create the token of the same name, Grimace Coin, which soared 285,641% within a few hours %.

A Grimacecoin on Binance Smart Chain (BSC) opened trading at $0.0007, peaking at $2 before dropping to the $0.60 level. The token, which once had a market capitalization close to $2 million, is worth $800,000 at press time, with more than $65,000 in user-created and provided liquidity pools. Yet blockchain data shows that 93% of tokens are held by a single entity. The market value of another Grimacecoin once reached 1 million US dollars, and the price once rose to 0.00000193 US dollars; the liquidity of 104,000 US dollars is locked, and 75% of the tokens are held by one address.

Grimacecoin, based on the ethereum blockchain, surged 56,000% within hours of its launch, reaching 1,000 holders and a market capitalization of $6 million.

According to previous reports, after Musk recommended to McDonald’s on Twitter last night to accept Dogecoin payment, McDonald’s responded to Musk on Twitter, saying that unless Tesla accepts Grimacecoin. Grimace is a furry purple cartoon character that appears alongside Ronald McDonald in a McDonald's commercial. McDonald's has not officially released the so-called Grimacecoin. (CoinDesk) [2022/1/26 9:14:44]

First, the issuance of digital currency broadens the range of options for the original monetary policy. If all physical currencies can be converted into digital currencies, this will make it possible for the central bank to break through the zero lower bound of interest rates and reduce nominal interest rates to negative.

In addition, digital currency also provides a new quantitative easing tool. The central bank issues an equal amount of digital currency to every citizen in the form of free payment, which can directly bypass the inefficient financial market during the crisis and increase citizens' consumption and repayment. Debt capacity, making it easier to achieve the central bank's monetary policy goal of smoothing fluctuations.

Second, digital currency can make monetary policy more transparent. Economic theory generally believes that the implementation of monetary policy should be systematic and transparent, which can enhance the effectiveness of the monetary transmission mechanism, reduce internal noise, and enhance system stability.

Although, central banks of various countries have made remarkable progress in this regard through the control of inflation target value. The implementation of central bank digital currencies presents an opportunity to increase the transparency of central bank monetary policy frameworks. By adopting a central bank digital currency, like inflation targeting, the central bank can establish a fixed price level target specified by a specific price index, thereby providing a durable, credible and transparent nominal anchor for the economic system.

Third, the issuance of digital currency can solve the problem of reducing physical cash and bring part of the seigniorage to the central bank. With the rise of mobile payment methods and mobile payment applications, the importance of cash in society is gradually decreasing.

With the demise of paper money, the only form of money circulating in the economy will be the bank deposits of residents, and the central bank may lose the power to issue money to the public. In addition, under the current system, seigniorage can only be obtained by issuing physical cash. Therefore, when ordinary people are less willing to hold cash, providing a convenient central bank digital currency that can be connected to the electronic payment system can allow the central bank to regain part of the seigniorage.

Fourth, digital currency can increase the stability of the financial system. From a technical point of view, digital currency allows residents, businesses and non-bank financial institutions to settle directly in central bank digital currency. This can share part of the settlement function of commercial banks and reduce the concentration of liquidity and credit risks in the payment system.

Of course, in specific policy practice, the central bank's digital currency can also be issued and operated on the basis of the commercial banking system due to the need for policy robustness. In addition, digital currencies issued by central banks can provide a truly risk-free alternative to bank deposits. The shift of residents from holding bank deposits to holding digital cash reduces part of the demand for government guarantees on deposits and weakens a source of moral hazard in the financial system.

Finally, digital currencies can encourage competition and innovation in payment systems and increase the benefits of financial inclusion. The issuance of digital currency will greatly simplify the process of applying for payment accounts for new entrants in the payment field, and therefore poses a challenge to the existing banking system. At the same time, it also reduces the need for most small banks and non-banks to send payments through large banks. And, by establishing a mobile payment system, issuing a digital currency for all citizens, allowing any citizen to hold an account with the central bank, those who are financially excluded from the traditional banking industry can also be included in the modern financial system Come.

Source: Beijing Daily Client

Author: Fan Zhiyong, Researcher at National Academy of Development and Strategy, Renmin University of China, Professor of School of Economics

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