Foreword:

Digital currency can be considered as a virtual currency based on node network and digital encryption algorithm.

The core characteristics of digital currency are mainly reflected in three aspects:

① Because it comes from some open algorithms, digital currency has no issuing entity, so no person or institution can control its issuance;

② Since the number of algorithm solutions is determined, the total amount of digital currency is fixed, which fundamentally eliminates the possibility of inflation caused by the excessive issuance of virtual currency;

③Since the transaction process requires the approval of each node in the network, the transaction process of digital currency is safe enough.

The emergence of Bitcoin poses a huge challenge to the existing monetary system. Although it belongs to a broad sense of virtual currency, it is essentially different from the virtual currency issued by online companies, so it is called digital currency. Digital currency is compared with electronic currency and virtual currency in terms of issuer, scope of application, issuance quantity, storage form, circulation method, credit guarantee, transaction cost, transaction security, etc.

1: Characteristics of digital currency

1. Low transaction costs

Compared with traditional bank transfers, remittances, etc., digital currency transactions do not require payment to third parties, and their transaction costs are lower, especially compared with cross-border payments that require high fees from payment service providers.

2. Fast transaction speed

The blockchain technology used in digital currencies is decentralized and does not require any centralized institution like a clearing center to process data, making transaction processing faster.

3. High degree of anonymity

In addition to the fact that physical currency can realize point-to-point transactions without intermediary participation, one of the advantages of digital currency compared to other electronic payment methods is that it supports remote point-to-point payment. It does not require any trusted third party as an intermediary. Both parties to the transaction Transactions can be completed with complete strangers without trusting each other. Therefore, it has higher anonymity and can protect the privacy of traders. However, it also creates convenience for cybercrime and is easily exploited by money laundering and other criminal activities.

2: The impact of digital currency

Digital currency is a double-edged sword. On the one hand, the blockchain technology it relies on is decentralized and can be used in other fields besides digital currency. This is one of the reasons why Bitcoin is so popular;

On the other hand, if digital currency is widely used by the public as a currency, it will have a huge impact on the effectiveness of monetary policy, financial infrastructure, financial markets, financial stability, etc.

1. Impact on monetary policy

If digital currency is widely accepted and can perform the functions of currency, it will weaken the effectiveness of monetary policy and cause difficulties in policy formulation. Because digital currency issuers are usually unregulated third parties, the currency is created outside the banking system, and the amount of issuance depends entirely on the will of the issuer, thus making the money supply unstable and the authorities unable to monitor the numbers. The issuance and circulation of currency make it impossible to accurately judge economic performance, causing problems in policy formulation. It will also weaken the effectiveness of policy transmission and implementation.

2. Impact on financial infrastructure

Decentralized mechanisms for value exchange based on distributed ledger technology change the fundamental setup of grossing and netting on which financial market infrastructure relies. The use of distributed ledgers will also create challenges for trading, clearing and settlement, as it can facilitate the disintermediation of traditional service providers in different markets and infrastructures. These changes may have potential impacts on market infrastructure beyond retail payment systems, such as large-value payment systems, securities settlement systems or transaction databases.

3. Impact on broad financial intermediaries and financial markets

If digital currencies and technologies based on distributed ledgers are widely used, they will challenge the intermediary role of current participants in the financial system, especially banks. Banks are financial intermediaries that perform the duties of agency supervisors and supervise borrowers on behalf of depositors. Typically, banks also carry out liquidity and maturity conversion operations to facilitate the financing of funds from depositors to borrowers.

If digital currencies and distributed ledgers become widely used, any subsequent disintermediation could have implications for savings or credit assessment mechanisms.

4. Impact of security risks and financial stability

Assuming that digital currency is recognized by the public, its use increases significantly and replaces legal currency to a certain extent, negative events such as cyber attacks on user terminals related to digital currency will cause currency value fluctuations, which will have a negative impact on the financial order and the real economy. Influence. In addition, virtual currencies based on blockchain technology are usually held by a few people at the beginning. For example, in May 2010, the first purchase of Bitcoin was 10,000 BTC for a $25 pizza. By the end of 2013, three purchases were made. The price of each Bitcoin has risen to US$1,200 in more than a year, and reached US$20,000 in 2017-2018.

Three: Application of digital currency

1. Fast, economical and safe payment settlement

Cross-border payments support the internationalization of the RMB. In 2018, the national settlement volume for cross-border payments involving current items was approximately RMB 8 trillion. Accelerating the internationalization of RMB requires low-cost, high-efficiency, and low-risk cross-border payment and settlement products and solutions. According to McKinsey’s calculations, from a global perspective, the application of blockchain technology in B2B cross-border payment and settlement business will reduce the cost of each transaction from approximately US$26 to US$15. That is, blockchain applications can help cross-border Payment and settlement business transaction participants save approximately 40% of transaction costs, of which approximately 30% is the payment network maintenance cost of the intermediary bank, and 10% is compliance, error investigation and foreign exchange costs.

In the future, the point-to-point payment method created using digital currency and blockchain technology will eliminate the need for intermediate links from third-party financial institutions. It will not only provide 24-hour real-time payment, real-time payment, and no hidden costs, but also help reduce cross-border e-commerce funds. risks and meet the timely and convenient needs of cross-border e-commerce for payment and settlement services.

2. Digitization of collateral property rights

At present, banks' electronic loan processes and processing procedures still involve a lot of repetitive manual work. As the basic support for loan issuance, many collaterals are mispriced or mortgaged multiple times or even have no collateral.

You can consider using digital currency to price banks' collateral and track transactions: In theory, through the automatic implementation of smart contracts, the situation of collateral being mortgaged multiple times will be eliminated; using digital currency to issue loans and build digital processes will enable banks to To streamline costs and improve efficiency, the digital mortgage application process can be set up and processed in an automated manner in the cloud.

3. Bill finance and supply chain finance

In recent years, various types of bill market businesses based on commercial bills have grown rapidly, and bill financial products have become a popular area of ​​Internet financial management. However, about 70% of the current domestic bill business is still paper-based transactions, and supply chain finance is also highly dependent on labor costs. . In the future, if bills are digitally monetized and blockchain transactions are adopted, related information such as bills, funds, and financial plans will be more transparent. Smart contracts will be used to generate unforgeable, public and unique electronic contracts for both borrowers and lenders, directly realizing point-to-point value transfer. It does not require specific physical bills or a central system for control and verification. It can prevent multiple sales of one ticket, track the flow of funds in a timely manner, protect the rights of investors, and reduce the cost of regulators.

In terms of bills, the Shenzhen government has used blockchain technology to combine traditional bills to develop a new electronic bill system and vigorously promoted it throughout the city. This represents another successful application of blockchain technology.

Four: Types of digital currencies

According to the relationship between digital currency and the real economy and real money, it can be divided into three categories:

1. Completely closed, has nothing to do with the real economy and can only be used within a specific virtual community, such as World of Warcraft gold;

2. Can be purchased with real money but cannot be redeemed back to real money, and can be used to purchase virtual goods and services, such as Facebook Credit;

3. It can be exchanged and redeemed with real currency at a certain ratio, and you can purchase virtual goods and services as well as real goods and services, such as Bitcoin.

Five: Transaction model of digital currency

At this stage, digital currency is more like an investment product because it lacks a strong guarantee institution to maintain the stability of its price. Its role as a measure of value has not yet emerged and it cannot serve as a means of payment.

As an investment product, the development of digital currency is inseparable from trading platforms, operating companies and investors.

Trading platforms act as trading agents, and some act as market makers. The profits of these trading platforms come from the handling fees when investors trade or withdraw money and the premium income from holding digital currencies.

P.S.: Writing is not easy. If you can read it, I hope you can make millions in the crypto industry in the future. Thank you for following and liking it! ❤️