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Bitcoin, stablecoins and central bank digital currencies should not be compared
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Author: Wang Yongli
In the current credit currency stage, without monetary credit, there can be no real credit currency. To imagine returning to the metal standard or to find a new anchor for the currency is to ignore or misunderstand the nature and development logic of the currency. It is a regression rather than progress and it is impossible to succeed!
Recently, experts and scholars have successively classified decentralized cryptocurrencies such as Bitcoin, stablecoins pegged to the fixed value (fixed ratio) of national sovereign currencies (such as USDT, USDC, etc. pegged to the equivalent of the US dollar), and central bank digital currencies (CBDC, such as digital RMB, etc.) as "digital currencies" or "cryptocurrencies", believing that they are all supported by advanced encryption technology and blockchain distributed ledger technology, and are several new forms of digital currencies that operate globally and efficiently on the Internet, but each has its own characteristics.
But in fact, Bitcoin, stablecoins, and central bank digital currencies are essentially different. Putting them together and calling them digital currencies or cryptocurrencies can easily lead to misleading in theory and practice. Especially in academic research and textual discussion, they must be accurately distinguished.
What is currency?
To explain the differences between Bitcoin, stablecoins and central bank digital currencies,we first need to figure out what "currency" is and accurately grasp the essence and development logic of currency.
Looking at the history of currency development in human society for thousands of years,
it mainly presents
four major development stages:
natural physical currency (such as shells, etc.); regulated metal (gold, silver, copper, etc.) coins; metal-based paper money (tokens of metal currency), and pure credit currency that is separated from any specific physical object
. In general, money shows a trajectory of continuous decoupling from reality (from concrete objects) to virtuality (intangible, digital), but it always serves exchange transactions. The essential attribute of money is the value scale, the core function is the medium of exchange, and the fundamental guarantee is the highest credit or authority protection, making it the most liquid value token in a certain area (a value claim certificate that can be exchanged and circulated). Among them, for money to become the most liquid value token, it must be protected by the highest credit or authority (divine power, royal power or national sovereignty) within the circulation range. This is an indispensable fundamental guarantee from the beginning to the end, and it is not needed only in the credit currency stage. It should be pointed out in particular that: shells, coins, and banknotes (cash) are all carriers or forms of expression of money, not money itself. The currency carrier or form of expression can be continuously improved, so as to continuously improve operating efficiency, reduce operating costs, strictly control risks, and better support exchange transactions and economic and social development, but the essential attributes and core functions of currency as a value scale and exchange medium cannot and have not changed.
As a value scale to support exchange transactions, the most basic requirement for currency is to maintain the basic stability of the currency value. This requires
the total amount of currency to change with the changes in the total value of tradable wealth, and maintain the corresponding relationship between the total amount of currency and the total value. From this perspective, any one or several specific physical objects (such as shells, bronze, gold, etc.) used as currency have limited natural reserves of such physical objects, and the amount that can be supplied and used as currency is even more limited. It is difficult to fully supply them in line with the unlimited growth of the value of tradable wealth. The increasing shortage of currency will inevitably severely restrict exchange transactions and economic and social development, presenting a typical "physical currency shortage curse". For this reason, physical objects (such as gold) that serve as currency or monetary standards (anchors of public commitments) must inevitably withdraw from the monetary stage and return to their original nature as tradable wealth; currency must be completely separated from specific physical objects, become the value scale and value token of tradable wealth, and maintain sufficient supply based on the overall correspondence between the total amount of currency and the total value of tradable wealth. Therefore, currency will inevitably develop towards intangibility, digitization, accountization (the so-called cryptocurrency is actually the encryption of currency accounts or wallet addresses), and intelligence. Therefore, it can be confirmed that cash will eventually withdraw from the currency stage like shells and coins. It is wrong to equate currency with cash! From the above, the "credit currency" that is separated from any specific physical object and developed towards the requirement of the overall correspondence between the total amount of currency and the total value is the objective requirement and inevitable result of the development of currency. To maintain the overall correspondence between the total amount of money and the total value, it is necessary to strengthen the monitoring of currency value and the regulation of the total amount of money, and even more so the protection of the highest level of credit or authority (the dual protection of money and wealth is needed). In today's world, the highest credit or authority can only be the sovereignty of a country (or a union of countries), that is, the total amount of a country's money must correspond to the total value of tradable wealth that can be protected by law within the sovereignty of the country. Therefore, credit currency is also called the country's "sovereign currency" or "legal currency". The "credit" of credit currency is supported by the country's overall wealth, which is the credit of the country, rather than the credit of the currency issuing institution (such as the central bank) itself. It is inaccurate to say that "currency is the credit and liability of the central bank" now. This is only true during the metal standard paper currency stage (thereby, the independence of the central bank has been greatly weakened. Monetary policy, together with fiscal policy, has become one of the two major policy tools of national macroeconomic regulation and needs to be subject to the fundamental interests of the country). The "credit" of credit currency is not the credit of the government itself (the government is not equal to the country), and it is not supported by national taxation (national taxation can only support government debt at most).Under the condition of national sovereignty and independence, it is impossible to promote the denationalization (privateization) or supranationalization of currency (structurally linked to multiple sovereign currencies and reserves to create a supranational world currency and coexist with the linked currency). The euro is not a supranational currency, but a "regional sovereign currency". After the euro was officially launched, the original national sovereign currencies of its member states completely withdrew and no longer coexisted. Even if global integrated governance is achieved in the future and a global unified currency is formed, it can only be a world sovereign currency, not a supranational world currency.
After being completely separated from the constraints of specific physical objects, the issuance, management and operation of credit money have undergone fundamental changes:
First, credit has become the basic channel and method of money issuance. The principle is: when a social subject needs money, it uses the realizable value of the wealth it already has or will have within a set time as support, and proposes to the money issuance institution the amount and term of the money it wants to borrow and guarantees to repay the principal and interest as agreed. After the money issuance institution reviews and agrees and signs a loan agreement with the borrower, it can issue the money to the borrower. Credit methodsinclude lending institutions, account overdrafts, bill discounts, bond purchases, etc.not free money, borrowers must repay the principal and interest as agreed, thereby curbing the arbitrary expansion of money. Therefore, as long as social entities have real tradable wealth, the money they need can be supplied within the range of the realizable value of wealth, thus breaking the curse of physical currency shortage, making the total amount of money and the total value of tradable wealth correspond as a whole, and making money a real credit currency.
there can be no real credit currencywithout monetary credit.
Second, the principal and interest losses that cannot be recovered from credit need to be identified in a timely manner and loss provisions made. Credit is provided according to the future realizable value of tradable wealth. If the principal and interest of the credit can be recovered as agreed, it means that the money provided does not exceed the value of wealth. However, the realizable value of wealth will be deeply affected by the relationship between supply and demand, and has obvious procyclicality, and is not immutable. If the principal and interest of the credit cannot be recovered to form an actual loss, it means that the money provided in the early stage exceeds the realizable value of wealth, and there is a real over-issuance of money, which needs to be offset by setting aside loss reserves and reducing the profits of the providing institutions. Third, deposit accounts and transfer payments are increasingly replacing cash and cash payments as the main form of currency and payment. The money provided by credit can be directly credited to the borrower's deposit account without providing cash. After verifying the authenticity of the deposit account, the amount to be paid can be directly deducted from the account according to the instructions of the account owner and transferred to the deposit account of the beneficiary. This greatly reduces the scale and cost of cash printing, placement, payment, and custody, and makes the payment and collection of money traceable, effectively strengthening the supervision of the legality of payment and collection of money. As a result, deposits (accounts) have become a new form of currency, and the total amount of currency is expressed as "cash in circulation + deposits of social entities in banks". Now, cash placement is no longer the main channel for currency placement. Only when depositors need cash, they need to exchange deposits for cash. Deposit transfer payment is also constantly improving with the progress of related technologies, from paper vouchers and manual operations to online processing of electronic vouchers, and then to intelligent processing of digital currency networks. Fourth, the currency management system has undergone profound changes. For example: to prevent the society from having only one bank and all credit placements without interbank payment liquidity constraints, which can easily lead to excessive money issuance and threaten the security of the entire monetary system, it is necessary to divide the money placement institutions into central banks and commercial banks and other credit placement institutions for separate management. The central bank does not handle financial business such as credit placement for social entities such as enterprises, households, and governments, but is mainly responsible for cash management and total money control (monitoring currency value changes and implementing necessary counter-cyclical monetary policy adjustments, becoming the last lender of credit placement institutions to adjust market liquidity and maintain the stability of the monetary and financial system); commercial banks and other credit placement institutions handle financial business for social entities, but if excessive credit placement causes a serious liquidity crisis or even insolvency, bankruptcy reorganization or takeover by the central bank is required. Commercial banks must be multiple competing and have interbank payment liquidity constraints, not just one.
When credit is mainly provided by commercial banks and other credit institutions, the central bank is no longer the main body of money supply. Commercial banks and other credit institutions are the real main body of money supply, and the central bank has transformed into the main body of basic money supply and money supply control
.
Credit money has completely broken the shackles of the "shortage curse", but in practice, there are indeed more and more serious problems such as excessive money supply, inflation, and financial crisis. However, this is not a problem of credit money itself, but a serious lack of people's understanding of credit money (basically still at the stage of metal standard paper money) and serious deviations in management.
Now it is still envisioning a return to the metal standard or re-anchoring the currency, which is a disregard or misunderstanding of the nature and development logic of currency. It is a regression rather than progress, and it is impossible to succeed!At the same time,as a credit currency, in theory, as long as the total amount of currency and the overall value of wealth can be maintained, the basic stability of the currency value and the good credit of the currency can be maintained. In fact, it does not need any reserves (including gold, Bitcoin, etc.) as support.Even the United States, despite having more than 8,100 tons of gold reserves, has not changed much since it abandoned the gold standard in 1971, while the total amount of US dollars has continued to grow, especially after 2001, it has grown rapidly to more than 9 trillion US dollars now, and has actually long been out of the support of gold reserves.
Bitcoin can only be an asset, not a real currency
Bitcoin uses blockchain technologies such as advanced encryption and distributed ledgers, but at the monetary level, it highly imitates the principle of gold (gold, as a currency or monetary standard, has the widest range, longest time, and greatest influence in the world): the natural reserves of gold are limited (but the actual reserves are still unknown). Intuitively, it will be more difficult to mine in the future. If we do not consider factors such as technological progress, it seems that the new production will be lower and lower in the future until it is completely exhausted. Bitcoin thus generates a data block every ten minutes or so. In the first four years, each block is allocated 50 bitcoins by the system (owned by the person who first obtains the unique standard value of each block through calculation). In the second four years, the number of allocated bitcoins per block is halved to 25, and so on, and it will end in 2140, with a total of 21 million. As a result, the total amount and phased increase of Bitcoin are completely locked by the system, and no human adjustment is allowed. Its control is more stringent than that of gold. If it is used as a currency, it cannot meet the needs of unlimited growth in the value of tradable wealth. In the case that gold has completely withdrawn from the currency stage, Bitcoin, which highly imitates gold, cannot become a real currency. The price of Bitcoin also needs to be expressed in sovereign currency, and it is difficult to use Bitcoin as a pricing and settlement currency for exchange transactions. On June 18, 2021, El Salvador legislated to grant Bitcoin legal currency status in its territory, but the actual operation effect is far from satisfactory. Instead, it has brought many new problems and has been opposed by more and more people. By January 30, 2025, it had to amend the legislation and no longer use Bitcoin as legal tender.
Bitcoin is not a currency, but it does not mean that it has no value. Just like gold still exists as a precious metal after withdrawing from the currency stage, and there are spot, forward, futures and a variety of derivative transactions. Its price relative to legal tender has generally maintained an appreciation trend for a long time, becoming an important safe-haven asset. As a brand-new digital asset or encrypted asset created by the application of blockchain and other technologies, Bitcoin can also be traded in spot, forward, futures and a variety of derivatives as long as it can be used in application scenarios and widely trusted. Moreover, it can be traded across borders, online, and continuously for 24 hours. Its price relative to legal currency may also have greater room for growth than gold. However, as a pure chain-born digital asset, Bitcoin blockchain is a highly closed network system (it only has the functions of "mining" to produce coins, point-to-point transfer within the chain, and distributed verification and recording, which is highly separated from the real world and difficult to solve the pain points of the real world). Its security is relatively guaranteed, but its overall operating efficiency is very low, its operating costs are getting higher and higher, and it is mainly used in the gray area of evading supervision. If it does not receive the support of national sovereignty or is even strictly supervised, its application space will be very limited. Once it does not receive enough trust and subsequent capital investment, its price will fall sharply, or even be worthless. In terms of investment risk, Bitcoin far exceeds gold and is not "paper gold" at all. Due to the violent volatility and long-term uncertainty of Bitcoin prices, it is very dangerous to use Bitcoin as a currency reserve!
As a highly closed network system with a regional center (cross-border), can Bitcoin be used as a central platform for cross-border remittances of sovereign currencies of various countries (replacing SWIFT)? This is indeed a question that needs to be carefully explored.
The Bitcoin blockchain network system has been in operation for more than 15 years since its official operation in early 2009. It still maintains safe operation. Compared with the national sovereign currency operation system, it has the unique advantages of cross-border, online, and 24-hour operation. Intuitively, it can indeed become the central platform for cross-border remittances of sovereign currencies. But the problem is,this requires the connection between the sovereign currency operation system of each country and the Bitcoin system, and the exchange of Bitcoin and sovereign currency between the sender and the receiver (currently, both need to be connected to independent trading platforms to solve this problem, and a stable currency linked to the sovereign currency is needed as an intermediary) and the exchange rate risk control problem; it is necessary to add globally unified and standardized message content and format similar to SWIFT to the Bitcoin remittance instructions to meet the needs of matching sovereign currency clearing and underlying transactions; the remittance speed of Bitcoin needs to be greatly improved (the current speed of only processing more than a dozen transactions per second cannot meet the needs at all).From these aspects, there are still difficult internal and external resistances for Bitcoin to become the central platform for cross-border remittance of sovereign currencies.
Even if the Bitcoin network system can become the central platform for cross-border remittance of sovereign currencies, it is only an intermediary like SWIFT, and Bitcoin will still not become a real currency. Therefore, strictly speaking, Bitcoin and other assets can only be called "digital assets" or "crypto assets". Stablecoins can only be tokens of pegged currencies. Digital stablecoins such as USDT and USDC are actually tokens of their pegged currencies. It is an intermediary media and system that was born when the legitimacy of crypto assets such as Bitcoin was recognized and allowed to be traded across borders online 24 hours a day, but the existing sovereign currency system could not meet this requirement. Therefore, the emergence of stablecoins is reasonable.
As a token of sovereign currency, it cannot be a decentralized (to evade regulation) product like Bitcoin, and must be closely supervised by the monetary authorities and the regulatory system, including that the token reserves must be sufficient and entrusted to a regulatory-approved institution; it can only be used within the scope of regulatory permission and cannot be circulated without restriction (otherwise it will pose a threat to the pegged currency); the token can no longer provide credit, and new tokens can no longer be created without reserves; the trading of tokens (including derivatives trading) must be subject to sufficient financial supervision.
The problem now is that the emergence and operation of stablecoins, like Bitcoin, are new things. At present, the relevant regulatory laws and actual supervision are not sound and strict. The trading of stablecoins has quickly extended to various derivatives, and the risks are very high.
Central bank digital currency should be the digitization of sovereign currency
After the Ethereum system was launched in 2013 and promoted the accelerated development of cryptocurrency ICO, which promoted the rapid increase in the prices of Bitcoin and Ethereum, the sayings that blockchain will become a machine of trust and the Internet of Value, cryptocurrency will subvert sovereign currency, and Internet finance will subvert traditional finance have caused a huge shock in the international community. How to deal with the impact of cryptocurrency has also become a new focus of great concern at the 2013 G20 Finance and Central Bank Governors Meeting. The governors of many central banks believe that the introduction of "Central Bank Digital Currency (CBDC)" should be accelerated. Subsequently, the central banks of many countries (including China) began to promote CBDC research.
However, since CBDC was hastily proposed under the impact of Bitcoin and Ethereum, there was no preparation in the early stage, and there were no clear answers to the most basic questions such as its relationship with the existing sovereign currency and financial system, and whether blockchain technology can be used to create it. CBDC has been in the exploratory stage, and unconsciously tried to use Ethereum blockchain technology to create it. As a result, it was found that it may pose a serious impact on the existing "central bank-commercial bank" dual financial operation system, and many countries have to stop the research and development of CBDC.
Since 2017, the People's Bank of China has proposed that it will develop a digital RMB, and it is positioned as cash in circulation (M0), and it will still implement a dual operation system. However, this kind of digital RMB is limited to M0 and highly imitates cash management. Therefore, it cannot be created through credit (including the central bank cannot use digital RMB to release base currency), its exchange is free, and digital RMB wallet deposits do not bear interest, which seriously hinders the precipitation and application of digital RMB. Since the research and development started in 2014, it has been more than 10 years, and there is still no clear timetable for when it can be officially launched. The newly elected president of the United States, Trump, has made it clear that he will not promote the development of digital dollars.In fact,digital RMB is the full digitization of RMB, not just the digitization of RMB cash. The name "central bank digital currency" itself is inaccurate, because credit currency is no longer the credit or liability of the central bank, no longer the central bank currency, but the national credit, the national sovereign currency or legal tender. At the same time, currency is no longer just cash, but more deposits (including electronic wallets). Even if the central bank releases base currency, it is not only cash, but more of it is directly credited to the deposit account of the financing party. Therefore, positioning the central bank's digital currency at M0 is itself an inaccurate understanding of credit currency. This positioning will inevitably lead to serious mismatches in the input-output of the digital RMB, and it will be difficult to launch and implement.
From the above, "central bank digital currency" should be called "sovereign digital currency", and it is necessary to promote the comprehensive digital operation of sovereign currency and replace the existing sovereign currency operation system as soon as possible, rather than just promoting the digitization of cash and maintaining the coexistence of two sets of currency operation systems for a long time.
As a sovereign digital currency, it is impossible to completely borrow the Bitcoin or Ethereum blockchain system to create a decentralized currency system, but it must be a centralized currency system that meets the needs of national sovereign supervision. Among them, considering that stablecoins (actually tokens of pegged currencies) pegged to sovereign currencies have been launched and run for 10 years and are becoming more and more perfect and stable, one possible path may be to use the technical system of stablecoins to transform sovereign currencies, so that sovereign digital currencies can be launched as soon as possible and replace stablecoins (no longer need special tokens).
In summary, for Bitcoin, stablecoins, and sovereign digital currencies, it is necessary to carefully consider and accurately define them on the basis of accurately grasping the essence and development logic of "currency", especially accurately grasping credit currency. Otherwise, it is easy to blur the concept and lead to major management errors.
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