Cai Weide: Will digital currency become a new battlefield in world geopolitics?

Excerpt

1. “Digital currency replaced the U.S. dollar as the world’s reserve currency.” This sentence overturned the U.S. government and opposition, the U.S. financial community, and the U.S. academic community. This meant that the financial Pearl Harbor incident had suddenly occurred. Prior to this, the United States had never believed that the US dollar would be challenged by digital currencies, so the Americans were very surprised by the speech of the Governor of the Bank of England in the “823 Incident”.

2. The theory of Princeton University believes that the platform determines the currency area (a platform is a currency area), but in fact, due to geopolitics, the currency area will be divided into countries or regions. Therefore, the digital currency zone will eventually become a geopolitical digital currency zone.

3. Assuming that the Bank of England has successfully launched the digital pound sterling on August 23, it will be discovered that the United States is not ready at all, and the United States has not thought that digital currency can be used as the world’s reserve currency. Suppose that country A is the United States, country B is the United Kingdom, and the British currency is on the world stage, but country A and the United States do not. This will cause major changes in the world.

4. Digital currency itself is a cross-border Internet. Assuming that the deposits in the Bank of America become stablecoins, then suddenly a large number of US dollar stablecoins can circulate in the world, which can protect the US dollar from becoming the world’s reserve currency, and all the backed US dollars remain in the US bank. This is the number Currency area theory.

1 Introduction

The Digital Currency Areas (DCA) theory is the most important theory in the new currency war. The importance of this theory has reached an indescribable level because it has changed the layout of the U.S. Treasury Department for banks. The Bank of America reform that began in 2020 originated from this theory, and Facebook’s strategy of “abandoning currency to protect the chain” in February 2020 also originated from this theory.

In terms of length, this theory is very simple. Its English length is only two pages, and the Chinese version is only 3,000 words. It takes a few minutes to complete the reading (see the appendix at the bottom of the text for details), but its impact is very huge.

The new currency war is a change brought about by technology. It is not just a change in financial and economic theory. Therefore, it is necessary to have a certain understanding of computer, communication, currency, finance, and law before studying the theory of digital currency. Different chains or different currencies will produce different theories and practices, so if you lack an understanding of Bitcoin’s design principles, the following things will be difficult to understand.

The theory of currency war strategy thinking: subversive reform

The digital currency zone is a strategic idea or strategic theory. It is also the highest strategic theoretical basis for the digital currency war in the United States. Only by understanding this theory can we understand the layout of some countries.

This theory has been discussed, cited, and expanded for a long time. The European Central Bank and the Federal Reserve believe that this theory has subverted the theory of money. They use the word “subversion” because the market structure described by this theory is different from the current market structure, and their thinking is different from traditional thinking.

Since 2015, some digital currency theories have continued to appear. The Bank of England, the Bank for International Settlements, the European Central Bank, the Federal Reserve, and the International Monetary Fund have introduced many digital currency theories, but in the end only the digital currency zone theory has changed the US national policy and financial strategy.

Theoretical and market structure reforms

Although other digital currency theories are also very exciting, such as the digital currency theory of the Federal Reserve, the International Monetary Fund, and the Bank of England, especially the digital currency theory of the Bank of England in 2016 and 2018, and the numbers of the International Monetary Fund in 2019 and 2020. Monetary theory, but most of these theories are based on the reform of the existing market.

The digital currency zone is different. The changes brought about by it are similar to the change from playing basketball to playing football. This means that the venue and rules have changed, and the entire thinking structure has also changed. Therefore, the Federal Reserve and the European Central Bank think this is A subversion.

There have been discussions and doubts since I came out

At the end of 2019, the International Monetary Fund and many scholars were skeptical of this theory, but in October 2020, the International Monetary Fund issued a report that describes the extension of the digital currency zone theory, which confirmed The correctness of the theory of digital currency zone. The theory of digital currency zone appeared in July 2019, and until October 2020, the International Monetary Fund fully accepted the theory and began to extend it. This theory will affect all economic theories.

Theoretical continuous speech

Starting from the second half of 2019, the theory of digital currency zone has been repeatedly discussed by Princeton University, the Bank of England, the European Central Bank, and the Federal Reserve. Until March 2021, Princeton University was still discussing this theory at the Federal Reserve. The whole process lasted 21 months and its speech The repeatability of PPT is as high as 80%. More interestingly, not only did the Fed invite Princeton University to give a speech, the Fed itself also quoted this theory.

A serious question is why some key institutions including the Federal Reserve and the European Central Bank have been discussing this theory in the past 21 months? Didn’t they understand this theory? And the content of the discussion is similar, which can be seen from the speech PPT. This is enough to show that the theory is very important. Even if you understand it, there are still many related issues that need to be discussed.

I thought I understood it, but I didn’t actually understand it

This theory is only a few pages of description. Many people, including myself, thought that they understood it at the time, but after thinking about it, they found that they didn’t fully understand it. Although I judged that this article changed history when I saw this article in 2019, and after I translated it into Chinese and read it repeatedly for a month, I suddenly found that I still didn’t fully understand the theory, and I still need to think more deeply.

Based on our previous knowledge and experience, we always believe that banking, currency issuance, and currency competition should be the case, but the theory of digital currency zone shows that this is not the case. People may think that they understand the theory, but after a while, they find that they don’t understand it. Therefore, relevant units repeatedly invite Princeton University professors to give lectures and discussions.

From this we can see that the impact of this theory is huge, which is equivalent to changing from playing basketball to playing football, and the overall thinking, planning, and training have all changed.

Digital currency zone theory affects Harvard University

The theory of the digital currency zone later influenced some theories of Harvard University, the strategy of Facebook, and the strategy of supervision. At the same time, the three major ideas of the U.S. Department of the Treasury in 2020, namely the split bank, stable currency and blockchain payment network, are all based on this theory Come, the impact is far-reaching.

2. Historical background

A new type of currency war requires theoretical foundations and strategic thinking. In 2019, the International Monetary Fund published a report called “The Rise of Digital Money” (The Rise of Digital Money), which was considered by many foreign central bank scholars to be the most important number in the world Monetary theory. But in my book “Interlink Network”, the theory of the rise of digital currency is placed in the appendix, and the theory of the digital currency zone is placed in the main text.

Five major innovations in the digital currency zone: from the bottom to the top, systemic changes

There are five innovations in digital currency regional theory.

For the first time, some theories of the Internet have been placed on currency, but in the past, the theory of the Internet has been placed on e-commerce and other aspects;

Reorganize the priority of currency functions;

Adjust the world reserve currency competition rules;

Predict the market segmentation, which means that the market will split before things happen;

Put forward the concept of platform as king, which overturned the current banking system.

The Fed and the European Central Bank believe that this theoretical report proposes a systematic theory. On February 5, 2020, the Fed’s speech (“The Digitalization of Payments and Currency: Some Issues for Consideration” by Lael Brianard) cited this theory to explain the Fed’s new direction.

Digital currency zone theory is a normative analysis theory

The research is not an empirical theory, but a normative research (Normative research), which is a theory of reasoning. If the reasoning is wrong, different conclusions will be drawn. The digital currency zone basically belongs to a theory of reasoning and a system of reasoning.

This is different from empirical research. Empirical research is based on the analysis of facts. The facts will not change, but the theory of explanation can be different and can be improved. But normative analysis is different, it is a predictive study.

Since it is a predictive study and has a large impact, this theory must be verified all the time. This may also be the reason why Princeton University has been invited to speak, and other scholars need to discuss the truth of this theory together.

After 21 months of discussion, this theory has not changed much.

3. The Governor of the Bank of England launches an attack

The speech of the Bank of England on August 23, 2019 is a very important speech in the history of digital currency. The speech changed history. I call it the “823 incident”.

On August 23, 2019, the Governor of the Bank of England made some points:

First, cross-border trade is very important.

Second, the currency of cross-border payment is very important, and similar to Internet theory, the currency of cross-border payment has a network effect. The more people use it, the more people are willing to use it.

Third, the world will become more polarized, and the US GDP will become weaker and weaker.

Based on these three points, he believes that a new type of monetary theory will emerge. He proposed three methods for this. One is not to change the status quo and continue to use US dollars; the other is to switch to renminbi, because China’s GDP will be the world’s largest in the future. One. However, he believes that method one will be unreasonable in the future, and method two still has many difficulties. His third method is to replace the U.S. dollar based on a basket of fiat currency synthetic hegemonic digital currency, “digital currency replaces the U.S. dollar to become the world’s reserve currency.”

Digital currency replaces the U.S. dollar as the world’s reserve currency

This sentence overturned the U.S. government and opposition, the U.S. financial circles, and the U.S. academic circles, which meant that the financial Pearl Harbor incident had happened suddenly. Prior to this, the United States had never believed that the US dollar would be challenged by digital currencies, so the Americans were very surprised by the speech of the Governor of the Bank of England in the “823 Incident”.

After research, I found that the theory cited by the Governor of the Bank of England is the Princeton University Digital Currency Zone Theory, which means that the theory has affected the Bank of England. This is also the origin of my research on the digital currency zone theory. The governor of the Bank of England also said that the world’s financial markets will be divided by digital currencies.

4. Digital currency zone theory

4.1. Princeton University Theory: Digital Currency Zone (July 2019)

The thinking in the theory of digital currency zone is very profound.

First, digital currency is cross-border and cross-domain. Do not think that digital currency is national currency or regional currency. When digital currency is created, it is cross-border currency and cross-domain currency.

Second, the functions of currency include transaction media, value storage and measurement. When digital currency comes out, the transaction media is the most important.

Third, digital currency will replace legal currency, and English is digital dollarization, and the current market situation will change.

Fourth, digital currencies will eventually affect the world’s reserve currencies and form competition for the world’s reserve currencies.

This seriously challenges traditional economic theory. Traditional economic theory believes that a country’s GDP is the most important factor in determining the world’s reserve currency. However, Princeton University’s theory that a currency with a larger transaction volume is more likely to become the world’s reserve currency has become a new theory.

Digital currency makes financial markets more fragmented, not integrated

The reason why everyone uses Bitcoin for cross-border payments is because it provides convenience. It eliminates the bank’s queuing, filling out forms and other procedures. The convenience theory created Bitcoin. If the theory of the digital currency zone is correct, then the world reserve currency will also change in the future. It can also be said that convenience theory has caused the change of the world reserve currency.

Platform is king

The digital currency economy is not bank-centric, but platform-centric. This theory is another subversion. Financial institutions nowadays are bank-centered. The theories of many central banks such as the Bank of England, the Federal Reserve, the European Central Bank, and the Bank of Canada are discussing digital currencies based on the current banking structure, but Princeton University’s digital currency zone theory says The platform should be the center, which will cause changes in the world’s financial markets.

The U.S. Treasury Department adopts the theory of digital currency zone: Bank structure changes

On January 4, 2021, the U.S. Treasury Department stated that Bank of America can participate in blockchain operations. This means that the U.S. Treasury Department has accepted the digital currency zone theory and believes that the platform will be the center in the future. In the future, economic and financial competition in the world will be Platform competition. Based on this, Facebook has also adopted the strategy of “abandoning coins to protect the chain”. It can be seen that the entire competition ideology, competition rules, and bank structure have all changed.

The last point is that digital currency is produced due to network links, but it will be more divided due to competition, and the financial market will be split in the future, so this theory is called the digital currency zone.

4.2. Reforms brought about by the digital currency zone

Many results can be derived based on the theory of the digital currency zone.

Transaction is king, transaction determines the choice of world reserve currency

First, transactions determine the world’s reserve currency, not GDP determines the world’s reserve currency. If this theory is correct, then the current blockchain system needs to be redesigned, which requires a large number of stable coins. If you look at this theory carefully, you will find that there are many problems to be solved behind it, and the whole set of theories, basic technology, and economic theories have all changed. Therefore, if transactions determine the world’s reserve currency, whether there is enough currency for transactions becomes a very important issue, which requires a large number of stable currencies. This also requires a large blockchain network system and a large exchange to support such a theory. While countries need to cooperate in supervision, they must also have firewalls. If this theory is correct, the technology and management that will be triggered later will be completely different.

Due to insufficient stablecoins, the US Treasury Department said it would open banks to issue stablecoins. Since the Bank of America is fully open, all regulatory agencies in the United States will sign contracts with regulatory technology companies throughout 2020, and will fully implement regulatory technology. It can be seen that such a short sentence has led to a large number of problems and a large number of actions by the subsequent agencies, and hundreds of millions, billions, and tens of billions of projects may have been invested to support this theory.

Platform is king, platform is more important than bank

Second, the platform is the center. Blockchain systems are larger than banks. This is a foundation of platform-centric theory. One of the reasons is that Facebook customers account for 1/3 of the world’s population. But a problem will soon be discovered. The current blockchain system, Bitcoin, and Hyperledger are not yet able to provide sufficient support. Then I discovered another thing. When Facebook released Libra 2.0 in 2020, it said that the blockchain needs multiple currencies because it is platform-centric. So the whole ideological structure has changed.

In this environment, other questions arise, such as how the central bank and banks should operate, how should supervision operate, how should trusteeship operate, how should embedded supervision operate, how should supervisory networks operate, scientific and technological issues, economic issues, and policy theories. These whole sets of theories need more research.

Platform-centric is the theory supported by the U.S. Treasury Department. On January 4, 2021, the U.S. Treasury Department stated that banks can join the blockchain network. Although it is difficult to obtain a bank license, the U.S. Treasury Department said in 2020 that stablecoin issuing companies will obtain a bank license, which can illustrate the influence of this theory.

How digital currencies divide the financial world

Third, when discussing digital currency, many people said that after Bitcoin, the whole world accepts Bitcoin, or the whole world accepts Libra coins, and the whole world unites on the same network and unified currency. But the theory of the digital currency zone is just the opposite. The theory of the digital currency zone believes that it is not a union but a complete division, and it will be divided into an underground zone, a compliance zone, and a digital currency camp. Among them, the digital currency camp was formally proposed by the International Monetary Fund in October 2020, and the compliance and underground market division was proposed by Harvard University in November 2019.

The digital currency zone raises different questions, such as how should currencies compete in this environment? What is its competitive model? These issues have not been discussed in macroeconomics, banking, or microeconomics, so we must have a new theory. These three points have broken the previous traditional thinking.

World regulators also agree to the theory of digital currency zone

Regulators will support the theory of digital currency zones, and regulatory agencies such as the European Union and the United States would rather supervise it in a regional or world financial division.

4.3. The sharing platform is a digital currency zone

If the digital currency issued by country A is used by country B, country B will find that its currency has been foreignized by country A’s currency, which will cause country B’s legal currency to be replaced, so country B will close the country. At this time, Congress A hopes to keep its chain and at the same time help Country B to make currency. This is the theory of abandoning currency to protect the chain.

The digital currency zone is determined by geopolitics

The theory of Princeton University believes that the platform determines the currency area (a platform is a currency area), but in fact, due to geopolitics, the currency area will be divided into countries or regions. Therefore, the digital currency zone will eventually become a geopolitical digital currency zone. For example, both the U.S. dollar and the Euro can use the digital currency zone. The Euro zone does not want the U.S. dollar to enter, so the EU has established its own blockchain system and issued its own digital euro. German banks are even more aggressive, because the European Central Bank can’t do it, and German banks do their own digital euro. These are some theories of the digital currency zone.

4.4. The theoretical influence and extension of the digital currency zone

The picture below is from the International Monetary Fund. On the left is the structure of modern banks and SWIFT, and on the right is the structure of the chain. Such an architecture is derived from the platform theory of the digital currency zone, and the entire world finance has become a blockchain network.

Where will the bank or central bank be?

On the right side of the figure, some people will have questions, such as what theory is this? Where is the bank? Where is the central bank? How do we settle? How to do trade? These questions are all right, and they are also some topics that need to be studied now.

The digital currency zone theory believes that banks can participate in the blockchain network, while the U.S. Treasury Department believes in 2020 that the Federal Reserve’s payment network will be replaced by a blockchain network in 3 to 5 years.

The overall financial system and operations have changed

It can be seen from its ideological structure that the overall financial operations are all different from trading, clearing and settlement, custody, and supervision. This is where this theory is powerful. This article of several thousand words leads to such a theory that is difficult to fully understand. We should not regard blockchain digital currency as our tool, but as our main battlefield.

Therefore, the European Central Bank, the Federal Reserve, and the International Monetary Fund all believe that this is a subversive theory, which has completely changed the entire world financial market, and the IMF’s 2020 report is all based on the digital currency zone theory, which is tantamount to rewriting many economies. The principle of learning.

4.5. Digital currency cross-border

This shows that digital currency itself is a cross-border Internet. Therefore, the U.S. Treasury Department stated that banks can issue stablecoins, which means that the scope of services in the United States will be expanded to the world overnight in 2021, and its thinking has completely changed.

Assuming that the deposits in the Bank of America become stablecoins, then suddenly a large number of US dollar stablecoins can circulate in the world, which can protect the US dollar from becoming the world’s reserve currency, and all the backed US dollars remain in the US bank. This is the number Currency area theory.

5. Theoretical application of digital currency zone

5.1. The two countries are friendly and share a digital currency

If two countries are friendly and share a digital currency, transactions are happy.

5.2. The currency split of the two countries: country B finds the advantage of country A

Soon Congress B discovered that after using country A’s digital currency, country B’s own legal currency would be suppressed and squeezed out by country A’s currency, so Congress B stopped such intercommunication, and a wall appeared between A and B. This is the number. Currency area theory. Congress A stated that it will not do digital currency in country B, but deploy the chain in country B to help country B make digital currency. This is Facebook’s theory of abandoning currency and protecting the chain.

5.3. Taking into consideration the underground market

Harvard University said the world is divided into compliance and underground areas. The underground market of country A uses the digital currency of country B, and the underground market of country B uses the digital currency of country A. If people in country A use the digital currency of country A, they will be regulated by technology, and the digital currency of country B will become a different digital currency, and there will be a cross between each other, which becomes the quadrangle model. Therefore, the digital currency zone has become four zones, with the consideration of the underground market.

Digital tokens have already been opened up in the underground market

When Bitcoin uses the P2P network protocol, it has no borders, which will lead to its arbitrary circulation in the world. Therefore, in 2020, the regulatory agencies of various countries in the world require Facebook to abandon the idea of ​​public chain, which will directly attack currencies such as Bitcoin, which cannot be passed through the use of P2P networks. This is a simple digital currency model. The development of public chains will harm the world. Therefore, some countries prohibit the development of public chains.

Digital tokens are difficult to remove, and the digital currency zone model is complicated

But such considerations are not enough. In November 2020, the U.S. discovered that the underground currency Bitcoin has been circulating in the U.S., U.K., Russia, Japan, China, Brazil and other countries around the world. There are many people buying and selling Bitcoin. This is the so-called The underground market, because it uses P2P networks, cannot be restricted. Such a market has become a complicated model. Country A uses currency A, and country B uses currency B. However, in the underground market, people in Country A use currency B, as well as currencies such as Bitcoin. This adds a few more currencies. The currency of country A is used in the underground market of country B, and Bitcoin is also used. Such a crossing becomes a complicated courtyard model. It can be seen that this currency market has changed.

5.3. Neutral countries make the model complicated

Based on this, a neutral country has emerged. A neutral country can use the currency of country A, or the currency of country B, or neither. A neutral country can be in the middle, and some things appear in a neutral country, it is more difficult to track, so we can see some strange phenomena appear.

5.4. The original digital currency competition scene

The digital currency zone theory is what makes the United States anxious. In fact, when the “823 incident” occurred, this picture already appeared. In the international compliance market, country A launched its digital currency, and country B launched its digital currency. In the underground market, the digital currencies of countries A and B can be circulated, and there are also bitcoins circulating in the underground market. On the top, some compliant currencies are in circulation, and on the bottom, there is another Bitcoin circulating in the underground. This is a complex system.

The Bank of England’s digital currency has been developing for many years. If the Bank of England has successfully launched the digital pound on August 23, then it will be discovered that the United States is not ready at all, and the United States has never thought that digital currency can be used as the world’s reserve currency. Suppose country A is the United States, country B is the United Kingdom, and the currency of the United Kingdom is on the world stage, but the United States does not have country A. This will cause a major change in the world. This will result in a situation where there is only Digital Pound but no Digital Dollar. This matter hit the United States. Heart.

5.5. Current digital currency competition and cooperation scenario: complex courtyard model

In fact, this issue is more complicated, because Bitcoin will also be legalized in 2020. Therefore, in the compliance market, in addition to the currency of country A and country B, there is also Bitcoin circulating in the compliance market. The same currency appears almost simultaneously in both the compliance market and the underground market. Under this circumstance, the underground currency is becoming more and more hidden and harder to be discovered. Therefore, the underground currency has to be changed, and it can only go upwards and become a compliant currency without change. If it becomes a compliant currency, whether this country can make this kind of technology is another question, so it becomes a war of currency and a war of science and technology, which becomes a complicated quadrangle model.

5.6. Digital currency camp (Currency Bloc) competition and cooperation: the grand mansion door model

Now there is a more complicated phenomenon, the digital currency camp Currency Bloc, this term was used by the International Monetary Fund in October 2020.

In 2018, I proposed the blockchain group, the empire, and the United Nations, and several countries united to form a currency camp or digital currency camp. The following figure shows country A. A country A1, A2, A1 and A2 all use the same digital currency to represent that the country is relatively weak. Joining a digital currency group represents that the country’s currency is squeezed a bit, but it will also be protected by the group. Such businesses can also get convenience. The protection and benefits have contributed to the currency group, forming a camp and battle between camps.

This relationship appears in the report of the International Monetary Fund, which is a very complicated competition rule. Each camp has the boss and participating countries.

This becomes the model of a big house door. There are many small households in a large household. These are some small cases of differentiation in the digital currency area.

Appendix: Translation of Papers in the Digital Currency Zone

Digital currency area

MarkusK. Brunnermeier, HaroldJames, Jean-Pierre Landau

July 3, 2019

Thanks to digitization, we can now save money on mobile phones and transfer wealth to almost every corner of the world in real time. Currency can be exchanged on a smartphone within a few milliseconds, and people can hold multiple currencies in a digital wallet at the same time. This column discusses how digitization will affect the international monetary system and proposes a new type of currency area that will be integrated through digital interconnection. These digital currency fields will cross national borders, increase currency competition, and in the process may redefine the international monetary system.

Digitization has fundamentally changed the nature of society, economy and information interconnection, and the digital age has also completely changed the currency and payment system. Now, we can use mobile phones to hold funds and transfer wealth to any place in the world through a peer-to-peer network. These developments may break the barriers that define traditional currency areas.

What is the digital currency zone?

Definition We define the Digital Currency Area (DCA) as a network in which payments and transactions are made digitally using currencies specific to the network. “Specific” refers to one or all of the following two characteristics:

·The network runs a payment tool, a payment medium that can only be used internally by participants. Therefore, even if the network still uses official legal tender as the accounting unit and supports payment tools, the tool cannot be used for transactions and exchanges outside the network. This is usually the case when the systems of some large electronic money issuers cannot interoperate with other systems. Both Tencent and Ant Financial have developed such networks with hundreds of millions of users, but they are not interconnected or interoperable.

·The network uses its own accounting unit, which is different from the existing official currency. For example, Facebook recently announced the launch of Libra, which is designed as a digital representation of a basket of existing currencies, so it is a new unit of account.

Similarities and differences with traditional OCA concepts

Obviously, DCA is very different from the OCA defined in the literature (note: OCA is the currency of a physical area, the euro is an example, used in many European countries). OCA is usually characterized by geographical proximity and the exemption of exchange rate as an adjustment tool by participants. In turn, this means some commonality of macroeconomic shocks and sufficient factor liquidity. In contrast, DCAs are connected together by digital interconnection. When participants share the same form of currency, regardless of whether they are priced with their own accounting institutions, they will form a strong currency link. Prices within the network are more transparent, price discovery is easier, and the possibility of conversion to other payment instruments is less, but sometimes this is technically impossible. These currency links have further stimulated the accumulation of online currency balances.

However, apart from these differences, DCA and OCA have strong similarities. The fundamental reason why they appear is the same: to minimize transaction costs, and more broadly, to minimize friction in transactions.

How did DCA arise and what keeps them together?

In the digital economy, DCA often appears on integrated, multifaceted business and social platforms. The business models of these platforms are based on intensive data development and the complementarity between different activities to create economies of scale and scope.

Adding payment features will significantly enhance these complementarities, because payment, social, and messaging activities all rely on the same network externalities. In fact, a universal digital currency may be the only way for network participants to take full advantage of interconnection.

When the network allows direct transfers between participants and purchases of goods and services are not restricted, a decisive evolution will occur. These bilateral payments are realized through mobile technology. Debit cards and credit cards (even contactless) can only be used for purchases, and they do not allow direct transfers between individuals. Mobile payment can be done. This is the key to technology. The emergence of mobile payment has greatly promoted the development of digital currency.

Digitization and the International Monetary System

The digital network system is huge, in fact larger than the economic systems of many countries, and they are not restricted by national boundaries. In the future, the international monetary system may be built with digital currency as the core. Even if this does not happen, digitization will reshape international currency relations by increasing currency competition and currency internationalization.

New currency competition

In the digital world, currency competition (new or existing) will become more intense, because currencies supported by digital networks can quickly gain wide acceptance at home and abroad, and conversion costs (traditional barriers to currency competition) are lower, and mobile devices There are programs available for managing currency conversion. Some financial technology companies have opened accounts where users can exchange and pay in more than a dozen currencies. Existing and future applications should allow simple and instant calculation of relative prices, conversion of currency balances from one currency to another, and automatic arbitrage.

Digital currency competition will be completely different from traditional currency competition. It will no longer be mainly based on macroeconomic (inflation) performance. Hayek (1976) believes that macroeconomic performance is the most important factor in determining the application of the currency. DCA will compete in many ways. Certain networks may provide different types of automatic conditional payments (“smart contracts”) or provide interoperability with other financial services. The competition between digital currencies is actually a competition between a large number of information services provided by each network. A particularly important aspect is privacy. DCA currencies can be distinguished from each other by the way the network manages user data. Some networks may seriously use or sell user data, while other networks may prioritize absolute privacy.

The digital currency field may lead to an unstable currency system. If the conversion cost is low, then people may become part of multiple different DCAs at the same time, using each DCA for a specific purpose, even if they are all attached to the same unit of account. Although it is easy to convert from digital currency to other currencies, the additional information and social connections provided by digital networks promote greater cohesion of DCA, beyond the cohesion of the traditional currency field. In the network of economic activity, the competition between exchange media may no longer be a “winner takes all”, at least in the initial stage.

Currency internationalization

In short, currency internationalization can be achieved in two ways: as a storage tool to become a global value reserve; or as a medium of exchange for international payments. Historically, these two roles gradually merged. However, the ways and strategies for a currency to gain international status and use in the 21st century are different. When some economists analyze the current dominance of the U.S. dollar in the international monetary system,

According to the size, depth and liquidity of the U.S. financial market, it is believed that the function of the U.S. dollar as a reserve asset should be emphasized, while other economists (such as Gopinath et al. 2016) pay more attention to the U.S. dollar as a reserve asset in the valuation and settlement of international trade and transactions. In the role.

This distinction becomes relevant and important in the digital environment. The requirements for becoming a reserve asset are particularly high, because it specifically means that the capital account can be fully and unconditionally convertible. If international status can be achieved through trade, countries with large digital networks can find new ways for their currencies to gain international recognition by using the integration effect of DCA. Therefore, digitization can be a powerful tool to internationalize some currencies as a medium of exchange.

Digital currency replaces national currency (Digital Dollarization)

Correspondingly, other countries may face more intense currency competition from foreign currencies due to cross-border payment networks.

The existing cross-border system is currently a pure infrastructure. They use their national currency as a medium of exchange and accounting agency. However, this may change. As the Libra example shows, it is possible to create a private network that will allow people in many countries to use a new specific accounting unit. If supported by a strong digital network, even official currencies may gradually penetrate into the economies of other countries.

It is important that small economies (especially those with high or unstable domestic inflation rates) are vulnerable to the influence of traditional U.S. dollars and digital currencies instead of domestic currencies brought about by stable digital currencies. Or for an economy with an open society, it is particularly vulnerable to the replacement of domestic currency by digital currency. As the importance of digital delivery services increases, social networks and the way people exchange value become closer and closer, and the influence of large DCAs in smaller economies will become greater.

The best defense method may be for countries to issue their own currencies in digital form by creating a central bank digital currency (CBDC). People have launched a heated debate on the subject of CBDC from the perspective of monetary policy and financial stability. However, they may have a more fundamental reason: to adapt their national currencies to the new technological conditions, and in the process to protect them from fierce competition from the external digital currency field.

国际货币体系的新边界:一个悖论

有人可能认为数字化将导致个悖论中央银行数字货币(CBDC)以数字形式发行自己的货币。人们从货币政策和金融稳定的角度对CBDC数字货币涵盖了广泛的支付和数据服务，在不同国家，提供这些服务将面临不平等的监管类型。一个关键问题是隐私问题，欧洲、美国和中国的监管方法大不相同，不同的监管框架可能使网络运营商难以充分利用大数据提供的规模经济和范围经济，不同的司法管辖区可能无法使用相同的数字货币。

这可能是数字化的终极悖论。从技术上讲，数字化将打破壁垒，跨越国界。但是，由于其许多不可分割的方面，它最终可能导致国际金融体系更加分裂。