PBOC Media: Private Digital Currency Threatens Financial Stability
Why Bitcoin exchanges in China are asked to shut down? Will they re-open if dust settles down? Reporter from Financial News, media under PBoC, interviewed Zhou Ziheng, the Associate Professor of the Finance Academy of Social Sciences Institute of China.
Q: Why is the regulatory attitude towards digital currency getting tougher?
The economy in the world and China is migrating to the digital world, which is the most profound, far-reaching socio-economic change after the marketization, liberalization and globalization of economy. Among them, the most critical part is the digitalization of currency. It can be said that the progress of currency digitization will directly determine the fate of economic digitization.
There are two engines to drive digitization of social economy and currency. One is private and spontaneous the other is public and led by government. In terms of digital currency, the digitization includes private digital currency or quasi-digital currency and fiat digital currency. The monetary authorities in the world did not issue any (legal) digital currency while Bitcoin, Litecoin, Ethereum and other quasi-digital currency has been gaining momentum and influence. In the past, the global monetary authorities display various attitudes and standings. But in general, a more open and inclusive attitude has been adopted. Here is why. First, the impact has the catfish effect, bringing stimulus to financial technology and renovation to technical innovation, and can be regarded as driving force of currency digitization. Second is that the impact is still in a relatively safe and acceptable range and authorities in the world believe that they are able to follow up on their supervision in a timely manner. Therefore, although private digital currency or quasi-digital currency has been tagged with risk alert or regulatory alert, a specific regulatory measures is neither clear nor harsh. This gives private digital currency or quasi-digital currency to grown in a limbo area.
However, the “balance” is broken by lots of innovations of digital currency, the soaring trading scale and price of digital currency, which prompted the regulatory authorities to take stringent restrictions to ensure the stability of the monetary and financial system.
Q: After the situation is stable, will private digital currency trading be re-opened?
The ultimate question is whether private digital or quasi-digital currency brings us positive or negative impact on the economy? It is problematic to take 100% support or opposition standing. In fact, it is almost impossible to pick a so-called “neutral” position. At present, private digital currency or quasi-digital currency has developed into an “unstable force” within the socio-economic system, which in turn constitutes a real threat or a real impact on financial stability. This is a basic judgment. This forces the supervisory authority to present a clear position and a clear fight back strategically. The bottom line is that the financial instability brought about by innovation must be subject to regulatory constraints and be curbed. So when this “unstable” impact on financial stability is not that strong or even retreating, will the regulatory authorities allow trading or restore the “balance” and the limbo area?
In fact, there will not be such a “cha-cha dance”. As I said before, there are two engines for currency digitalization, private sector and the government sector. When private digital money slow down or even stop, it is time for fiat digital money to move on. Currency digitalization is no longer no longer influenced by private digital money or quasi-digital money, but by legal digital currency. Such trend is becoming clean and clear. Therefore, the gray area is bound to vanish and fiat digital currency will be “main theme.” In other words, the era of private digital currency or quasi-digital currency dance is over, and the innovation of money digitization will evolve around the legal digital currency and there is no other way to bypass it.
Q: What are the shortcomings of private digital currency or quasi-digital currency?
It could be summarized in two points. The first is the lack of pubic use case by private digital currency. Specifically, can private digital currency be used to pay taxes? Can it be used as a financial expenditure? Can it become a company’s assets and be included in the financial statements? These cannot be achieved and there is public use case. Therefore private digital currency is walking in single leg. Some people say that if the relevant authorities recognize the legal status of private digital currency, then it would be used in pubic scenarios. Technically speaking it is viable. There are historical cases that private currency was admitted as legal fiats. The assumption leads to our second problem – there is a structural “imbalance” in the transactional demand for private digital or quasi-digital money. Most private digital or quasi-digital currencies are supported by investment or speculative demand rather than general trading. In other words, private digital currency is weak in private use case. To sum up, private digital money or quasi-digital money is not “strong” enough for the monetary authorities to tolerate or even accept it as a legal currency. Also it must be restricted or forbidden due to its impact to financial stability by stirring up speculation.
Q: Is digital fiat currency the “real” digital currency?
Some claim that the core of digital currency is “decentralized”. Digital fiat current is not decentralized and therefore it is not digital currency. Therefore, the restriction or prohibition of private digital currency and its transactions is a large repression of digital currency. Such knowledge is logically wrong. The digital fiat currency is a legal arrangement while the decentralization of digital money is a technical setting. The two elements are not mutually exclusive. Therefore, words like legal digital currency is not decentralized confuse the parallel relationship between technology and law and distort them as mutually exclusive relationship structure. Such impression must be discarded.
It is an important step for central banks to issue legal digital currency in the process of currency digitization. The primary job is to establish private and public user cases and an overall account system. The issuance of digital fiat currency is the central bank’s own revolution, which will reshape the relationship between the central bank and commercial banks, and will re-define the relationship between the central bank and the government and the government as a whole. The evolution of the relationship between the digital central bank and the digital economy is a complex, dynamic process, which should not be abstracted into a “decentralized” concept.
Q: How do you view the development prospects of digital currency?
The core of economic activity is to make “choice”. Choosing relates to opportunity costs and transaction costs. Networking and digitization can minimize opportunity costs to boost economic freedom and transaction costs reduction improve economic efficiency. The essence of the digital economy is to make economic choices in a mathematical environment, which is a economic system supported by a general digital account system. A general economic relations system is presented as a general account system, in which the transaction must be “digitalized”. A digital currency allows the transaction to be timestamped, which means a transaction or an economic decision takes place only at one particular time. It is the greatest guarantee of efficiency and freedom. The existing banking system cannot deliver such feature. A transaction involves multiple timestamps and cannot entertain the requirement of digitalized economy.
Currency digitization is a change in the form of money, not a change in monetary material that we have been familiar with. It is true that this is a change from physical material to a non-physical material. It must be recognized that there are many changes in the digitization of money that go beyond the scope of both current experience and knowledge on currency. The decisive power is from the reality itself.