Qian YAO, Head of the Institute of Digital Money of the People's Bank of China. This paper represents academic views of the author and does not represent the opinions of the author's organization.
From the Industrial Revolution, the electrical revolution to the information and technological revolution, every significant step in technological progress has reinvented mankind's way of production and living, causing huge economic and social transformation. As a representation of social relationships, currency is no exception in that the evolution of its form and extension of its connotation are also greatly influenced by technologies. With rapid IT development in the 21st century in areas such as big data, mobile internet, cloud computing and AI, digital currency and IT have started to emerge deeply, leading to a new type of currency–digital currency.
It is significant for central banks to research on and develop digital fiat currency given the fast development of digital currency-related technologies and how it might reshape and transform the way financial sector operates. Currently, central banks around the world pay more attention to the application of distributed ledger technology (DLT) in RTGS for wholesale market. There is not yet a clear idea and blueprint of what exactly a DFC should look like.
To figure out what DFC looks like, we have to be more imaginative and visionary because it is indeed an unprecedented thing. A paper published in SCIENCE CHINA Information Sciences tries to establish a systematic framework to analyze the essence and connotation of DFC from four new dimensions, namely currency value, technical aspects, means of implementation and application scenarios. Covering mechanisms of monetary economics and logics of digital currency technologies, this paper not only presents a grand blueprint for digital currency in the future but also offers a feasible roadmap to realize DFC based on current situation. This paper provides directional references on R&D and application of DFC and is inspirational for central banks to find their positions and to transform policies in a future digital currency environment. Major conclusions of the paper are as follows.
In terms of value, the paper argues that DFC is a form of currency issued by central bank and delivered with specific digital crypto-technologies. By its nature, DFC is still central bank's liability against the public with its value supported by sovereign credit, which gives it two unconquerable advantages over private digital currencies. First, DFC has anchor of value that enables it to perform functions of money effectively. Second, DFC can play a part in credit creation and has real economic impact. In contrast, it is difficult for private quasi-digital currencies such as Bitcoin to become real currencies as they do not have anchor of value and cannot meet the demands of the credit-based economy that is becoming increasingly complex. It would definitely be disastrous to use Bitcoin as currency. In addition, DFC will facilitate the mitigation of central bank's tendency to inflation, thus contributing to stability of currency value.
From a technical perspective, the paper argues that DFC should be crypto-currency given the digital economy in future. Cryptographic technology is the key to the technical security and credibility of DFC, and it is an indispensable basis for DFC design, transaction, user experience and regulation. Current theoretical and practical achievements of crypto-currency have provided insights for exploration on DFC. It is important that the DFC makes flexible adoption of blockchain technology based on actual business demands. In terms of technical evolution, account, currency and token are actually intertwined with each other. Therefore, it may be prudent for central banks to pursue a path of CBDA+CBDC+CBCC for DFC issuance.
In terms of implementation, this paper points out that DFC is algorithm-based currency in actual currency business. First, various encryption algorithms are applied in the design of DFC to ensure security and credibility while special fields are also reserved for possible new algorithms in the future. Second, in terms of currency issuance, DFC design fully considers the executable script in a way that allows its issuance to be based on pre-installed and credible algorithm in the future. Algorithms for DFC issuance might be realized with a sophisticated AI model based on machine learning algorithms. Third, big data technology can be applied to conduct in-depth analysis of the issuance, circulation and storage of currency and to understand currency operation so as to provide data support for monetary policy, macro-prudential regulation and financial stability analysis. It is possible in the future that in a DFC context central banks may serve as not only the decision-maker of money supply but also the designer of algorithms and rules.
In application scenarios, DFC is not merely about digitalizing currency and moving it onto a network. What's more important is that it makes money smarter and offers brand new and higher qualities. First, DFC will make user experience smarter. The smart world in the future will require smart currency. Smart contracts can be executed in an automatic and credible way that provides technical solutions to lowering risks of contract default and credit default, which is a direction for DFC development in the future. Second, DFC will make the implementation of monetary policy smarter and more effective because it is traceable and programmable. With proper design, many challenges faced by central banks will be resolved, such as inefficiencies in policy transmission, difficulties in counter-cyclical control, the flow of money from real economy to virtual economy and lack of policy communication.
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