【About the author】
Xu Jin is a well-known young scholar, senior financial observer, and editor-in-chief of the Chinese.com Finance Edition of the Financial Times (FT).
【Introduction】
The protagonist of modern finance is the central bank. Over the past four hundred years, the central bank has grown from scratch, from weak to strong, from the earliest Riksbank to the Bank of England, to the Federal Reserve and the European Central Bank, this gradually visible "hand of money" has created and redeemed several financial crises, and also left us with many questions:
How did the financial crisis form? How to avoid the next time? Should central banks play the role of "lender of last resort"? Who regulates market regulators? In the era of digital finance, how can we harmoniously "dance" on the historical stage of finance?
Based on financial common sense, the author depicts the interaction between central banking and economic development since the 17th century through a series of financial events and characters. This crisscrossing is inseparable from the soil and background in which it breeds, and it can also glimpse the evolutionary journey of financial history, and even the undercurrent of the rise and fall of national civilizations. With her grand vision and delicate brushstrokes, she takes us through 400 years of financial history, feels the rhythm of the real world economy, and interprets the essence of finance.
【Content Trial Reading】
Digital currency, disruption or inheritance
When it comes to central banks, many people think of issuing money. In fact, from the previous article, we can see that the central bank is a product of the last three to four hundred years. And the history of money is almost as long as the history of mankind.
From gold and silver to shells, pepper to cigarettes, money exists in various forms. Starting with electronic payment vouchers such as PayPal, the debate over whether the new currency can replace the old one has started to rise. Internet finance in China has once become a fashionable discourse for many traditional bankers, and cryptocurrencies such as Bitcoin, Libra and Diem are regarded as the future of money.
Bitcoin frenzy
Under the media hype, almost everyone knows about cryptocurrencies such as Bitcoin. So, what exactly is Bitcoin? Bitcoin is a cryptocurrency based on blockchain technology, the legendary inventor is called Satoshi Nakamoto, born in 1949, Japanese-American, hobby of collecting model trains, but perhaps this person does not exist at all. The price of Bitcoin has been rising recently, breaking through $1,000 at the end of 2013; In 2017, Bitcoin was iconic in price over an ounce of gold. By 2020, Bitcoin went from a minimum of $3,801 to a maximum of $41,946, a tenfold price difference, which is still the same roller coaster. By the beginning of 2021, it had exceeded $50,000 at the beginning of the year. The Bitcoin boom has been accompanied by a challenge to the existing mainstream monetary system. Bitcoin fans aren't willing to just make money, and for them, the significance of the Bitcoin revolution may be even more profound. As the leader of the latest trends, with the help of the changes of the times and technical discourse, Bitcoin looks so different from the alternative currencies of the past, but is its essence really different?
A few years ago, when Bitcoin was just emerging, I attended a conference. A Bitcoin expert was invited to the conference. After his speech, a Japanese audience member expressed concern that what if all bitcoins in the world belonged to one person? The speaker asked rhetorically, has there ever been a situation in human history where all gold belongs to one person?
Looking back at history, it seems that no one person monopolized all or even most of the gold. This conversation reminded me that the similarities between the most fashionable Bitcoin and the oldest gold are actually greater than everyone thinks.
In the case of Bitcoin, digital currencies emphasize decentralization, while gold issuance does not depend on central banks, and its collection exists all over the world due to its natural presence. Bitcoin emphasizes anonymity, in fact, gold has always been an intermediary for various transactions. In modern times, cash (e.g. dollars) has served a similar purpose. More importantly, both gold and bitcoin emphasize their finiteness, and even silver in Chinese history requires different forms of "mining", which cannot be simply "printed", let alone completed by a few keystrokes today.
Back to the question that everyone has been asking since the beginning, what is a currency? Does Bitcoin really count? Narayana Kocherlakota, former president of the Minneapolis Fed, wrote a famous paper, "Money Is Memory." Among them, he compares the characteristics of money, which refers to all historical knowledge directly or indirectly related to the past, and money, which is an object that has not entered production and use but is fixed supply, and the distribution and use of the two are close. Therefore, from a technical point of view, money is equivalent to a primitive form of memory. This leads to a corollary, is money similar to a central bookkeeping system?
The biggest difference between cryptocurrencies and modern money
What is the difference between digital currency and modern money? Some think it's anonymity, others think it's decentralization, and more players interpret it as countering central bank money printing. However, from the above comparison, digital currencies such as Bitcoin have a covert resemblance to gold or even strong paper money. If money is just a bookkeeping system, then digital currencies such as Bitcoin may not seem much different from existing currencies.
But thinking deeper, I came up with new ideas. The post-Keynesian American economist Heyman Minsky, who rose to prominence during the financial crisis, has a quip: "Everyone can create money, but the question is whether it is acceptable." This brings us back to the fundamental question, why is money accepted? This statement shows that the essence of money lies in credit, even debt, and the key to the creation of money is that it can be accepted.
At the moment, digital currencies don't seem to have their own central bank, which is a concern, but this is probably not the point, the point is that there is no Bitcoin bank, which is the key. Back to the core concept of money is credit, in the affirmation of the endogeneity of money, the creation of money is not only determined by the central bank, that is, the amount of money is not determined by the amount of central bank issuance, but in thousands of transactions in response to the activities of the real economy and created, its intermediaries are actually mainly commercial banks, the private banking system plays a more decisive role than the central bank.
In a word, the central bank may be able to print money, but what really dominates the currency is actually more in the interaction between the commercial banking system and the real economy, and perhaps when the digital currency bank is more involved in economic activities, you can talk about whether digital currency can replace money.
A battle between desire and belief
From a historical perspective, the rise of cryptocurrencies such as Bitcoin has only been more than a decade. In the past decade, Bitcoin has changed from an undercurrent of the Internet to a mainstream topic, and in recent years it has become an investment outlet. The drunken gold fans of the currency circle have made the traditional securities industry, which originally belonged to the virtual economy, also appear to be much more disciplined, and practitioners are even dubbed "financial migrant workers who move bricks".
The core of the success of virtual currency is largely a legend driven by technological innovation and the concept of freedom, and it is a modern copy of bubble stories such as the tulip legend and the gilding fever - don't get me wrong, the initial stage of any technology often needs bubbles or money to smash out, but whether it can get out of its own way, it will eventually take time to test. Blockchain technology certainly has a future, but what and how it is suitable to play is still being explored. Until the exploration is complete, any slogan that declares its inevitable success or inevitable failure is only a slogan, not a prophet, but ignorance and fearlessness. Without looking at the temporary twists and turns, how can we guess the future of digital currencies such as Bitcoin?
The past success of digital currencies such as Bitcoin was first based on the premise that algorithms guarantee their finitude. Secondly, it lies in the advantages of decentralization and anonymity. In fact, if you think back to the history of finance, these factors played a decisive role in the way of gold becoming the world's currency. At the beginning of its birth, the belief in bitcoin was consistent with the fanaticism of gold "fans" at the time, so much so that economist Paul Krugman called it a techno-mystic bubble wrapped in the cocoon of liberal ideology.
Digital currencies such as bitcoin and gold's monetary path have a similar starting point, but the path quickly forks. The point is that any currency is based on the existence of credit. What sustains the belief in gold money is the collective consciousness of all human beings; What maintains digital currency is a small group in the currency circle. This group, although fanatical, is overly niche and closed. What's more, this group is as passionate about inventing a wider variety of virtual currencies as they are about Bitcoin, and arguably this enthusiasm is destroying Bitcoin's intrinsic value. The truth is that unlike gold's huge real-world role, the vast majority of people in the real world, and the vast majority of transactions, are outside the cryptocurrency circle.
Authoritarian central banks and divided currency circles
In any case, Bitcoin represents the frontier of digital currencies. Bitcoin's multiple crashes will be recorded in the history of financial speculation as well as monetary history. At a broader level, the disputes in the Bitcoin circle also make people think about the underlying logic of money and monetary policy.
In the book "Silver Empire", I once concluded that no matter how powerful and brilliant the empire is, it is difficult to avoid the fate of falling from a height. From gold fanatics who insisted on holding gold, to today, gold is becoming an ordinary commodity; Gold demonetization has been going on for decades. Bitcoin's monetary journey has similarities. Before this round of bitcoin rally, I asserted that the bitcoin dispute will be a battle of faith, "the future will be the process of believing in the believers and the doubters becoming more and more suspicious, without going through a long period of several rounds of bubble purging, the two sides will not completely let go." In addition to the huge rise and fall of the digital currency itself, the number represents an undercurrent of distrust of mainstream central banks, which is actually more worth considering. This anti-establishment trend of thought is also vaguely related to Trump's rise to power. Mainstream institutions seem to have temporarily maintained the original situation before the collapse of Bitcoin, and the rise of the blockchain behind Bitcoin is already a force to be reckoned with. The struggle between traditional forces and this emerging power will continue. At the same time, one of the original intentions of digital currency is to resist the seemingly uncontrolled currency issuance of the central bank, but now it seems that the currency circle without consensus is also facing trust problems, and the split of the consensus in the currency circle will not only bring new currency, but also trigger new indiscriminate issuance - so how can virtual currencies have the confidence to ridicule the central banks that gradually obtain independence in various countries?
Central bank strikes back: central bank digital currency
The birth of digital currencies can itself be seen as a rebellion against the global central banks becoming "money printers" after the financial crisis. For central banks, the challenges posed by digital currencies are clear. They have now also begun to release official digital currencies, including China's central bank. Initially, the central bank issued the currency DCEP (Digital Currency Electronic Payment). Later, it was named "E-CNY" (digital yuan).
According to the industry's view, central bank digital currencies are divided into two types, retail and wholesale, and these two use scenarios are somewhat different. Specific to the People's Bank of China, it is generally believed that the central bank digital currency can partially replace the function of cash (M0) in narrow money circulation. You know, M0 refers to the sum of the cash on hand of various units outside the banking system and the cash in hand of residents. Therefore, DCEP can basically be seen as the digitization of cash, and the renminbi is freely convertible on a 1:1 basis. From a technical point of view, the central bank digital currency adopts a two-tier system of commercial banks and central banks, which is consistent with the existing monetary system of sovereign countries in the world, and does not even necessarily adopt blockchain technology. It seems that the central bank digital currency is similar to Alipay and WeChat Pay, but there are essential differences in monetary attributes: one is the central bank debt M0; The other is commercial bank liabilities, which belong to the broad money volume M2, and M2 belongs to cash circulating outside the banking system, plus enterprise deposits, resident savings deposits and other deposits.
The definition of China's central bank's digital currency model is not so clear, and most central banks are still on the sidelines. Not to mention, China's central bank digital currency from issuance to landing, and then to the final evaluation of success or failure, each step is actually a long way off. The decentralization of China's central bank's digital currency is bound to be not very radical. But there are also some questions, such as how to protect privacy? For example, China's central bank digital currency often needs to face customers directly, how can it prove that it can have the experience of facing customers directly? Former Federal Reserve Chairman Alan Greenspan and other "old quacks" have also expressed a lot of doubts about the issuance of digital currencies by the People's Bank of China. At present, it seems that China's central bank digital currency is more conservative in design than Alipay and the like, and the significance is intriguing. These problems are not only technical problems, but also problems that can be clarified by talking about public chains or private chains.
You may be wondering, if there are so many unsolved problems in China's central bank digital currency, why rush to launch it? The reason is that it faces competition for digital currencies such as Libra - it can be said that the central bank, as a "money printer", needs to compete for the right to define digital currency, "rather than waiting for others to revolutionize, it is better to change one's own life".
The story of digital currency has not yet been written. The digital currency of the central bank will eventually appear and even become popular. In addition to the digital currency problem, there is actually more underlying story, that is, blockchain technology. The so-called blockchain is a kind of bookkeeping technology that is jointly maintained by multiple parties, uses cryptography to ensure transmission and access security, and can achieve consistent data storage, difficult to tamper with, and prevent repudiation, also known as distributed ledger technology. This also means that blockchain databases can be managed autonomously.
By 2021, the concept of the metaverse became popular overnight, and was regarded by many critics as the key to opening the future world, in which blockchain played the role of core infrastructure, and digital currency also had the possibility of large-scale application. In this way, the application of digital currency and the blockchain behind it in the meta-field has just begun.
—End—
"The King of Money: How Central Banks Created and Redeem the Financial Crisis," by Xu Jin, Shanghai People's Publishing House, August 2022
This article is excerpted from
The King of Money: How Central Banks Made and Saved the Financial Crisis
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