What is Digital Money?

Digital currency is abbreviated as DIGICCY, which is the abbreviation of "Digital Currency" in English. It is an alternative currency in the form of electronic money. Both digital gold coins and cryptocurrencies are digital currencies (DIGICCY) ^[1] .

Digital currency is an unregulated, digital currency that is usually issued and managed by developers and accepted and used by members of a specific virtual community. The European Banking Authority defines virtual currency as: a digital representation of value that is not issued by a central bank or authority and is not linked to fiat currencies, but because it is accepted by the public, it can be used as a payment method and can also be transferred, stored or traded in electronic form ^[2] .

Chinese name: Digital currency
Foreign name: Digital Currency

Representative currency: Bitcoin
Short name: DIGICCY

Digital currency definition

Digital currency can be considered as a virtual currency based on a network of nodes and digital encryption algorithms. The core characteristics of digital currency are mainly reflected in three aspects: Because from some open algorithms, digital currency has no issuing body, so no person or institution can control its issuance; because the number of algorithm solutions is determined, the number The total amount of money is fixed, which fundamentally eliminates the possibility of inflation caused by the proliferation of virtual currencies; Because the transaction process requires the approval of various nodes in the network, the transaction process of digital currency is sufficiently secure ^[3] .

The advent of Bitcoin has presented a huge challenge to the existing monetary system. Although it belongs to the virtual currency in a broad sense, it is essentially different from the virtual currency issued by network enterprises, so it is called digital currency. The digital currency is compared with the electronic currency and virtual currency in terms of the issuing subject, the scope of application, the number of issuance, the storage form, the circulation method, the credit guarantee, the transaction cost, the transaction security, etc. ^[3] .

	Electronic money	Virtual currency	Digital currency
Issuer	Financial Institutions	Network operators	no
Use range	Generally unlimited	Inside the enterprise	Unlimited
issue number	Fiat currency decision	Decision of issuer	A certain amount
Storage form	Magnetic card or account	account number	digital
Circulation method	Two-way circulation	One-way circulation	Two-way circulation
Monetary value	Equivalent to fiat currency	Not equivalent to fiat currency	Not equivalent to fiat currency
Credit protection	government	enterprise	Netizen
Transaction security	Higher	Lower	Higher
transaction cost	Higher	Lower	Lower
Operating environment	Intranet, extranet, reading and writing equipment	Enterprise Server and Internet	Open source software and P2P networks
Typical representative	Bank card	Q coin, forum coin	Bitcoin, Litecoin

Digital currency type

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

First, it is completely closed, has nothing to do with the real economy, and can only be used in certain virtual communities, such as World of Warcraft Gold;

Second, it can be purchased in real currency but cannot be converted back to real currency, which can be used to purchase virtual goods and services, such as Facebook credit;

Third, you can exchange and redeem with real currency at a certain rate, you can buy virtual goods and services, and you can also buy real goods and services, such as Bitcoin ^[2] .

Digital currency trading model

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 appeared, and it cannot be used as a means of payment. As an investment product, digital currency cannot be developed without trading platforms, operating companies and investors ^[4] .

Trading platforms act as trading agents, and some of them act as market makers. The profits of these trading platforms come from the transaction fees of investors during transaction or withdrawal and the premium income brought by holding digital currencies. The platforms with larger transaction volume include Bitstamp, Gathub, Ripple Singapore, SnapSwap, and Japan's largest Bitcoin trading platform Mt.Gox and Chinese rookie Ruihu ^[4] .

The process of digital currency transactions through the platform is as follows:

(1) Investors must first register an account and obtain a digital currency account and a USD or other foreign exchange account.

(2) Users can buy and sell digital currencies with the money in their cash accounts, just like buying and selling stocks and futures.

(3) The trading platform will sort the buy request and sell request according to the rules and start matching. If the requirements are met, the transaction will be concluded.

(4) A buy or sell request may be partially executed due to the difference between the amount of buy and sell submitted by the user.

The mode of digital currency transactions through operating companies is: Take Ripple as an example. Ripple is operated by professional operating company OpenCoin. The Ripple protocol was originally designed based on payment methods. The design idea is based on the acquaintance network and trust chain. To use the Ripple network for remittances or loans, the premise is that the payee and payer in the network must be friends (establish a trust relationship with each other), or have a common friend (through a friend to form a trust chain), otherwise you cannot A trust chain is established between users and other users, and transfers cannot be performed ^[4] .

Digital currency characteristics

Low digital currency transaction costs

Compared with traditional bank transfer and remittance methods, digital currency transactions do not require payment to third parties, and their transaction costs are lower, especially compared to cross-border payments that provide high service fees to payment service providers ^{[2 ]} .

Fast digital currency transactions

The blockchain technology used by digital currencies has the characteristics of decentralization, and does not require any centralized institution like a clearing center to process data, and the transaction processing speed is faster ^[2] .

High anonymity of digital currencies

In addition to the physical form of currency, which can realize peer-to-peer transactions without intermediary participation, one of the advantages of digital currencies over other electronic payment methods is that they support remote peer-to-peer payment. Can complete transactions in completely unknown situations without trusting each other, so it has higher anonymity and can protect the privacy of traders, but it also creates convenience for cybercrime and is easily used by money laundering and other criminal activities ^{[ 2]} .

Digital currency impact

Digital currency is a double-edged sword.On the one hand, the blockchain technology on which it relies is decentralized and can be used in other fields than digital currency. This is one of the reasons why Bitcoin is 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, and financial stability ^[5] .

Impact of digital currency on monetary policy

If digital currency is widely accepted and functions as a 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 volume of circulation is entirely dependent on the issuer's will, which will make the money supply unstable and the authorities cannot monitor the numbers The issuance and circulation of currency makes it impossible to accurately judge the operation of the economy, which causes trouble to policy formulation, and also weakens the effectiveness of policy transmission and implementation ^[2] .

Impact of digital currencies on financial infrastructure

The decentralized mechanism of value exchange based on distributed ledger technology has changed the basic setting of total and net settlements that financial market infrastructure depends on. The use of distributed ledgers also poses challenges for transactions, clearing and settlement, as it can facilitate the disintermediation of traditional service providers in different markets and infrastructures. These changes may have a potential impact on market infrastructure outside the retail payment system, such as large-value payment systems, securities settlement systems or transaction databases ^[2] .

The Impact of Digital Currency on Broad Financial Intermediaries and Financial Markets

If digital currencies and distributed ledger-based technologies are widely used, they will challenge the intermediary role of current participants in the financial system, especially banks. Banks are financial intermediaries, performing their duties as acting supervisors and supervising borrowers on behalf of depositors. Generally, banks also carry out liquidity and maturity conversion services to realize the financing of funds from depositors to borrowers. If digital currencies and distributed ledgers are widely used, any subsequent disintermediation may have an impact on savings or credit evaluation mechanisms ^[2] .

The hidden dangers of digital currency security and the impact of financial stability

Assuming that digital currency is recognized by the public, its use has increased significantly and replaced fiat currency to a certain extent, negative events such as cyber attacks on user terminals related to digital currency will cause fluctuations in the value of the currency, which in turn will cause financial order and the real economy influences. In addition, blockchain-based virtual currencies are usually held by a small number of people. For example, Bitcoin s first purchase in May 2010 was 10,000 BTC and $ 25 of pizza was purchased. Over the years, the price of each bitcoin rose to $ 1,200 ^[6] .

Digital currency applications

Fast, economic and secure payment settlement of digital currency

Cross-border payments facilitate the internationalization of RMB. In 2015, the settlement of cross-border payments involving current projects across the country was approximately RMB 8 trillion. Accelerating RMB internationalization requires low-cost, high-efficiency, low-risk cross-border payment and settlement products and solutions. According to McKinsey's estimates, 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 about 26 US dollars to 15 US dollars, that is, blockchain applications can help cross-border Participants in payment and settlement business transactions save about 40% of transaction costs, of which about 30% are payment network maintenance costs of intermediary banks, and 10% are compliance, error investigation, and foreign exchange exchange costs ^[7] . In the future, peer-to-peer payment methods created using digital currency and blockchain technology will eliminate the intermediate links of third-party financial institutions, which will not only provide real-time 24-hour payment, real-time payment, no hidden costs, but also help reduce cross-border e-commerce funds Risks and meeting the timeliness and convenience of payment and settlement services of cross-border e-commerce ^[4] .

Low-cost fund transfers and small payments. The electronic payment makes the proportion of cash in circulation in the total amount of money continuously decrease. In 2015, financial institutions in the banking industry incurred 105.234 billion e-payment transactions, with a total value of 250.23 trillion yuan. Among them, 13.837 billion mobile payment services amounted to 108.22 trillion yuan, 8 times and 11 times that of 2013, respectively. In terms of third-party payments, in 2015, non-bank payment institutions accumulatively generated 8.421 billion online payment transactions with an amount of 48.48 trillion yuan, a year-on-year increase of 119.51% and 100.16%. According to data released by eMarketer, China s mobile Internet retail sales in 2015 were US $ 333 billion, four times that of the United States; Alipay transactions were more than three times that of PayPal. The U.S. financial industry is well developed, but Fed data shows that 11% of consumers still do not have access to banking services and 11% do not fully enjoy banking services. With the popularity of smartphones, these people can more easily use bank digital currency payment services. China s mobile phone penetration rate is 94.5 units / 100 people, and only 64% of people have bank accounts. Banks can actively develop a large number of customers who cannot obtain bank accounts but connect via the Internet. One way is to establish digital wallets through digital currencies, to achieve lower cost and more secure micropayments and fund transfers in areas with insufficient financial coverage and underdeveloped economies, and to increase intermediary business income ^[4] .

Digitalization of digital currency collateral property rights

At present, the bank's electronic loan process and processing process still have a lot of duplicated human work, and as the basic support for loan issuance, many collaterals are mispriced or mortgaged multiple times or even without collateral. You can consider using digital currencies to price and track bank collateral: In theory, the automatic implementation of smart contracts will eliminate the situation where collateral is repeatedly mortgaged; using digital currency to issue loans and build digital processes will enable banks The industry has streamlined costs and improved efficiency. Digital mortgage application processes can be established and processed in the cloud in an automated manner ^[4] .

Digital currency bill finance and supply chain finance

In recent years, the business of various bill markets based on commercial bills has grown rapidly. Bill wealth management products have become a popular area of Internet wealth management, but about 70% of the current domestic bill business is paper transactions, and supply chain finance also relies heavily on labor costs. . In the future, if the digital monetization of bills and the use of blockchain transactions will make the relevant information such as bills, funds, and financial planning more transparent, the use of smart contracts to generate lenders and borrowers cannot forge, open and unique electronic contracts, and directly realize point-to-point value transfer. No specific physical bill or central system is needed for control and verification, which can prevent one ticket from being oversold, timely track the flow of funds, protect investor rights, and reduce the cost of the regulator ^[4] .