Digital fiat currency has been a heated topic regarding its definitions and usage. People’s Bank of China (PBoC) has announced the experimental run for Chinese currency’s digitalization, restricted in some cities. However, it is still a long journey actually to replace cash due to unexpected problems and criticism. The digital fiat currency is fundamentally different from bitcoin, yet related to the blockchain technology. Let us first define what DFC is.
A considerable amount of literature has been published on digital fiat currency (DFC). For example, Yao (2018) analyzes the properties of DFC from four aspects. Unlike private digital currencies such as Bitcoin, DFC is the central bank’s liability by its nature. Therefore it has the ability to perform the traditional functions of money in a much more efficient way. Moreover, DFC not only plays a vital role in credit creation, but it is also likely to stabilize the value of fiat currency as the DFC environment allows the existence of a negative effective interest rate.
To summarize, DFC is a credit-based currency from the value perspective. Second, since the digital economy tends to be an encrypted one in the future and the cryptographic technology is regarded as the essence of DFC’s credibility and technical security, DFC is a crypto-currency in terms of technology. Thirdly, DFC is designed with diversified encryption algorithms. There is an opportunity that the economy itself can decide endogenously on the money supply and achieve “automatic issuance and retrieval of currency” in the future. In this case, the central bank would act as “the decision-maker of the money supply” and the designer of relevant rules and algorithms. As a result, DFC is an algorithm-based currency from the aspect of implementation.
Last but not least, DFC has some new and superior qualities compared with traditional electronic payment instruments. It can bring much smarter user experience and a much more intelligent monetary policy implementation. Thus DFC is a smart currency in the application dimension.
First of all, the program will contribute to sustainable development since it aims to replace cash, even if it is for only a few cities in the future. Besides, the establishment of DFC ease people’s life in China and decrease the probability of money laundry. Some people also claim that China is seeking the dominance of currency, probably another battle between America and China. Please tell me what you think about this information.
Reference:
http://www.xinhuanet.com/fortune/2020-08/15/c_1126372237.htm
https://www.coindesk.com/bank-registration-china-digital-currency
http://www.fortunechina.com/shangye/c/2020-08/14/content_374043.htm
