There are eight conflicts in the development of digital currency, which constitute the core issue of global digital currency and shape the national strategy and global pattern of digital currency.
The first is the east-west conflict centered on the contradiction between China and the United States. The root cause is the shift of world economic and political power from West to East as a result of China’s rise. The differences between the East and the West in money and finance are first reflected in their different philosophies on finance and their different policy options on debt.
Peter Nolan, professor at Cambridge University, argues that while China’s financial system is regulated for the public interest, western governments have become “regulatory prisoners” of the financial system. Michael Hudson, a professor at Peking University, argues that China’s policy options embody the philosophy of its Bronze Age rulers and build a largely productive public financial system, while western societies, represented by the United States, inherited the debt-oriented legal philosophy from the Roman Empire and became a predatory financial system.
In terms of digital currency strategy, a consensus has been formed in the West to weaken the first-mover advantage of China’s digital currency and exclude but not decouple China. Although China’s DC/EP is “one ride away”, the G7 has successfully won the right to dominate the international standards of cross-border payments, global stable currency and CBDC. However, among G7 countries, including the United States and Europe (Germany and France), Britain and Japan, their core appeals are also different.
The second is the conflict between strong and weak currencies, which is mainly reflected in currency substitution and regulatory restructuring. Us dollar, which gains “digital advantages” through private global stablecoins, or the Chinese DC/EP, which starts first, could create a “currency alternative” to other currencies. The US, Europe (Germany, France), and the UK are likely to engage in regulatory “bottom line racing”, while China is leaning towards tighter financial regulation.
The third is the conflict between central banks and commercial banks. The issuance of CBDC helps the central bank to comprehensively strengthen the control over the monetary system, but it has a serious negative impact on the business model of commercial banks: disintermediation, bank runs and profit losses, etc.
Whereas western central banks have balked at CBDC, the Chinese central bank has been quicker to promote it because of less banking lobbying. Through in-depth theoretical research, central bankers have proposed effective mitigation schemes, such as controlling the total circulation of CBDC, flexible interest-bearing and quota strategies, alternative lending tools and restricting the use of CBDC, which have cleared key obstacles for western central banks to promote CBDC.
The fourth is the conflict between the public sector and the private sector represented by BigTechs. The “digital advantage” of digital currency is epitomized by BigTechs’ DNA business model. And “Digital currency area” is the most subversive concept affecting the future shape of the international monetary and financial system. BigTechs’ private network platform is the most typical digital currency area. Hence the public sector has mixed feelings about BigTechs: while using it to safeguard national data, finance, economy and even national sovereignty, it should be wary of the negative side of its monopolistic market forces.
America’s regulatory strategy is to relax regulation at home and consolidate, assert American hegemony in the digital world through BigTechs’ global expansion. However, BigTechs is effectively regulated in China, but its global expansion could suffer a serious setback as a result of US-China rivalry.
The general consensus in central banking is that the private sector, which drives most innovation, should be regulated and stimulated. Striking a balance between the public and private sectors is important, but the boundary between public and private is very different in the world of central banking.
The fifth is the conflict between currency and finance. Money and finance are always two sides of the same coin. The USD, EURO and CNY zone respectively embody the harmonious, coordinated and confrontational relationship between the monetary and financial sectors. CBDC is a “game-changing” variable that gives the central bank pre — and in-event control over the flow of money and can significantly improve the efficiency of payment and transfer in China’s financial system.
Western central banks, stick to the idea of a “free market” and to their priority mission of “inflation targeting”, has been deterred from exploring this revolutionary use of CBDC. As for China, combined with the correct use of MMT, CBDC could be the “ultimate tool for redistribution” and the ideal destination for MMT.
The sixth is the conflict between the change of users’ payment habits (especially cross-border payment) and the insufficient payment system. A variety of factors are driving consumer demand for non-cash payments, online payments and cross-border payments.
BigTech has tapped into the global stability coin to address the pain point of cross-border payments. As a result, central banks have improved account-based systems — such as third-party payments and fast-track retail payment systems — and cross-border payment solutions, with China, Europe and the United States are top, passing and poor students, respectively.
The central banking community has made cross-border payments a priority for 2020 and has made support for cross-border payments by the global Stability currency and the CBDC an important aspect. However, CBDC interoperability in cross-border scenarios faces many challenges.
The seventh is the conflict between the inherent instability of the monetary and financial system and the insufficiency of traditional monetary policy tools. After the global financial crisis, the unconventional monetary policy tools of western central banks have gradually become the “new normal”, but it is also becoming almost ineffective.
Central banks with different monetary policy spaces have very different expectations for CBDC. The euro zone’s long moribund despair has led them to look to the CBDC as a new monetary policy tool; The People’s Bank of China, which has ample monetary policy space, does not consider DC/EP as a new monetary policy tool, but does not limit itself to exploring the limits of CBDC, such as controlling the flow and distribution of money; and the confident Fed, accused of being “on the verge of running out of ammunition”, insists that it is tackling the problem within the traditional framework.
The eighth is the conflict between centralized power and individual rights. In fact, this is a false proposition. The centralized power of money can hardly resist the power brought by CBDC. Privacy is only the “political correctness” of the discussion and is always the first to be sacrificed in the trade-offs. There is no fundamental difference between central banks on this issue, the difference is just the degree of dissemblance.
Article from Long Baitao
Translated by Yang(Mengyan Finance)
Long Baitao, graduated Ph.D. from Tsinghua University. He is an independent researcher of blockchain technology and monetary and financial theory, under the tuition-master of Zhu Jiaming, a famous economist, and the executive deputy director of the academic and Technical Committee of Digital Asset Research Institute. He is one of the authors of the first Libra monograph in China.