Author: Wang Yongli
In the current phase of fiat currency, without the injection of monetary credit, there cannot be true fiat currency. To imagine a return to a metallic standard, or to seek to re-anchor currency, is a disregard or misunderstanding of the essence and developmental logic of currency; it is a regression rather than progress, and it is bound to fail!
Recently, a number of experts and scholars have categorized decentralized cryptocurrencies like Bitcoin, stablecoins pegged to sovereign currencies (such as USDT and USDC pegged to the US dollar), and central bank digital currencies (CBDCs, such as the digital RMB) under the umbrella of “digital currency” or “cryptocurrency.” They believe that all of these represent new forms of digital currency that rely on advanced encryption technology and blockchain distributed ledger technology to operate efficiently and globally on the internet, each with its own characteristics.
But in reality, Bitcoin, stablecoins, and central bank digital currencies are fundamentally different, and comparing them to digital currencies or cryptocurrencies can easily be misleading in theory and practice. In particular, a distinction must be made between academic research and written discourse.
What is currency
To clarify the differences between Bitcoin, stablecoins, and central bank digital currencies, it is essential to first understand what “currency” actually is and accurately grasp the essence and development logic of currency.
Throughout the thousands of years of the development of currency in human society, there are mainly four major stages of development: natural commodity money (such as shells, etc.); regulated metal coins (gold, silver, copper, etc.); metallic standard paper money (tokens for metal currency), and purely credit money that is detached from any specific physical commodity. Overall, currency has shown a trajectory of continuously moving from the tangible (detached from specific physical commodities) to the intangible (dematerialized, digitized), but it has always served the purpose of facilitating exchange transactions. The essential attribute of currency is the measure of value, its core function is as a medium of exchange, and its fundamental guarantee is the highest credit or authority protection, making it the most liquid value token within a certain region (a claim voucher for exchangeable value). Among these, for currency to become the most liquid value token, it must receive the protection of the highest credit or authority (theocracy, monarchy, or national sovereignty) within the circulation scope, which has always been an indispensable fundamental guarantee, rather than something that is only required at the stage of credit currency.
It should be particularly noted that: Shells, coins, and paper money (cash) are all carriers or forms of currency, not currency itself. The carriers or forms of currency can be continuously improved to enhance operational efficiency, reduce operational costs, and strengthen risk control, thereby better supporting exchange transactions and economic and social development, but the essential properties and core functions of currency as a measure of value and medium of exchange have not changed.
As a measure of value to support exchange transactions, the most basic requirement of currency is to maintain the basic stability of the value of the currency. This requires that the total amount of money should change with the change of the total value of tradable wealth, and maintain the correspondence between the total amount of money and the total value. From this point of view, with any one or several specific physical objects (such as shells, bronze, gold, etc.) as currency, there is a limited natural reserve of this (like) physical object, which can be used as money supply and the quantity of use is more limited, and it is difficult to follow the infinite growth of the value of tradable wealth and fully supply, which will inevitably seriously restrict exchange transactions and economic and social development due to the increasing shortage of money, showing a typical “physical currency shortage curse”. Because of this, physical objects (such as gold, etc.) that act as money or the monetary standard (anchor of public commitment) must withdraw from the monetary arena and return to their original role as tradable wealth; Money, on the other hand, must be completely detached from the concrete physical object and become the value scale and value token of tradable wealth, and maintain sufficient supply on the basis of the overall correspondence between the total amount of money and the total value of tradable wealth. As a result, currency will inevitably develop in the direction of intangibility, digitization, and account (the so-called cryptocurrency is actually the encryption of currency accounts or wallet addresses). Therefore, it is certain that cash will eventually completely withdraw from the currency stage like shells and coinage, and it is wrong to equate money with cash! **
From the above, the “credit money” developed from any specific physical object towards the overall correspondence between the total amount of money and the total value is the objective requirement and inevitable result of the development of money. In order 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 monetary aggregates, and it is more necessary to have the highest level of credit or authority protection (the dual protection of money and wealth is required).
In today’s world, the highest credit or authority can only be the sovereignty of a state (or a coalition of states), that is, the total amount of a country’s currency must correspond to the total value of tradable wealth that can be protected by law within that country’s sovereign territory. Therefore, credit currency is also known as a country’s “sovereign currency” or “legal tender”.
The “credit” of fiat currency is supported by the overall wealth of the nation, which is the credit of the state, rather than the credit of the monetary issuing institution (such as the central bank) itself. It is now inaccurate to say that “currency is the credit and liability of the central bank”; this only holds true in the stage of metallic standard paper currency (thus, the independence of the central bank is greatly weakened, and monetary policy, together with fiscal policy, becomes one of the two major policy tools for national macroeconomic regulation, needing to serve the fundamental interests of the state). The “credit” of fiat currency is also not the credit of the government itself (the government is not equivalent to the state) and is not supported by national tax revenue (national tax revenue can at most only support government debt).
Under the condition of national sovereignty and independence, promoting the denationalization (privatization) or supranationalization of currency (structurally linked with multiple sovereign currencies and creating a supranational world currency while coexisting with pegged currencies) is impossible to succeed. The Euro is not a supranational currency, but a “regional sovereign currency”. After the official launch of the Euro, the original national sovereign currencies of its member states completely exited and no longer coexisted. Even if global integrated governance is achieved in the future, resulting in a global unified currency, it can only be a world sovereign currency, but it cannot be a supranational world currency.
After completely breaking away from the constraints of specific physical objects, the issuance, management, and operation of credit currency has undergone fundamental changes:
Firstly, credit has become the basic channel and method for monetary injection. The principle is: when social entities need currency, they use the realizable value of the wealth they already own or will own within a set time as support, proposing the amount and term of currency they wish to borrow to the monetary injection institution and guaranteeing the repayment of principal and interest as agreed. After the monetary injection institution reviews and agrees, and signs a loan agreement with the borrower, it can inject currency into the borrower. Credit methods include loans issued by the institution, account overdrafts, bill discounts, bond purchases, etc. It is not a free gift of currency; the borrower must repay the principal and interest as agreed, thereby suppressing arbitrary currency expansion. Thus, as long as social entities possess real, tradable wealth, the currency they need can be supplied within the range of the realizable value of that wealth, breaking the curse of physical currency shortages, allowing the total amount of currency to correspond overall with the total value of tradable wealth, making currency truly credit currency. It can be said that without monetary credit injection, there cannot be true credit currency.
Second, the loss of principal and interest from unrecoverable loans needs to be identified and prepared for loss in a timely manner. Loans are issued based on the future realizable value of tradable wealth. If the principal and interest can be recovered as agreed, it indicates that the currency issued has not exceeded the value of the wealth. However, the realizable value of wealth is profoundly influenced by supply and demand, exhibiting evident pro-cyclical characteristics, and is not static. If the principal and interest of the loans cannot be recovered, resulting in actual losses, it indicates that the previously issued currency has exceeded the realizable value of wealth, leading to genuine currency overissuance. This requires preparing for losses and reducing the profit of the issuing institution to offset the loss.
Thirdly, deposit accounts and transfer payments are increasingly replacing cash and cash payments as the main forms of currency and payment. The currency injected through credit can be directly credited to the borrower’s deposit account without the need for cash. After verifying the authenticity of the deposit account, the required payment amount can be deducted directly from the account according to the account holder’s instructions and transferred to the recipient’s deposit account. This greatly reduces the scale and cost of cash printing, issuance, receipt, storage, and other aspects, and allows for traceable currency receipts, effectively strengthening the regulation of the legality of currency transactions. Thus, deposits (accounts) become a new expression of currency, with the total amount of currency represented as “cash in circulation + deposits of social entities in banks”. Now, cash issuance is no longer the main channel for currency issuance; cash is only needed when depositors require cash, at which point deposits need to be converted into cash. Moreover, deposit transfer payments are continually improving with advances in related technologies, evolving from paper vouchers and manual operations to electronic vouchers processed online, and further developing into smart processing through digital currency networks.
Fourthly, profound changes in the currency management system. For example: To prevent a situation where there is only one bank in society, and all credit disbursements lack interbank payment liquidity constraints, which can easily lead to excessive currency issuance and threaten the security of the entire currency system, it is necessary to classify currency issuance institutions into central banks and commercial banks, managing them separately. The central bank does not engage in credit issuance or other financial services to enterprises, households, or governments, but is mainly responsible for cash management and controlling the total money supply (monitoring currency value changes and implementing necessary counter-cyclical monetary policy adjustments, acting as the lender of last resort to regulate market liquidity and maintain the stability of the monetary financial system); commercial banks and other credit issuance institutions provide financial services to societal entities. However, if excessive credit issuance leads to a serious liquidity crisis or insolvency, bankruptcy restructuring or takeover by the central bank is required. There must be multiple competing commercial banks with interbank payment liquidity constraints, and there cannot be just one.
In the case where credit is primarily issued by commercial banks and other credit institutions, the central bank is no longer the main entity for monetary issuance; commercial banks and other credit issuance institutions are the true entities of monetary issuance, while the central bank transforms into the main entity for base currency issuance and total money supply control.
Credit currency has completely broken free from the constraints of the “scarcity curse,” but in practice, increasingly serious issues such as excessive currency issuance, inflation, and financial crises have emerged. However, this is not a problem inherent to credit currency, but rather a result of people’s severe misunderstanding of credit currency (which is essentially still at the stage of metallic standard banknotes) and significant deviations in management. The current consideration of returning to a metallic standard or seeking a new anchor for currency is a disregard or misunderstanding of the essence and development logic of currency; it is a regression rather than progress and is unlikely to succeed!
At the same time, as a fiat currency, theoretically, as long as the total amount of currency corresponds well with the overall wealth value, it can maintain the basic stability of the currency value and good credit of the currency, and in practice, it does not require any reserve assets (including gold, Bitcoin, etc.) as support. Even in the case of the United States, despite having over 8,100 tons of gold reserves, there has been little change since it abandoned the gold standard in 1971, while the total amount of US dollars has been continuously increasing, especially growing rapidly after 2001 to now exceed $90 trillion, effectively having long since detached from the support of gold reserves.
Bitcoin can only be an asset and not a true currency
Bitcoin technically utilizes advanced encryption and distributed ledger technologies such as blockchain, but on the monetary level, it highly mimics the principles of gold (gold as currency or monetary standard has the widest global reach, the longest duration, and the greatest influence): the natural supply of gold is limited (but the actual supply is still uncertain), and intuitively, it becomes increasingly difficult to mine as time goes on. If we disregard factors like technological advancement, it seems that the new supply will decrease over time until it is completely exhausted. Bitcoin thus generates one data block approximately every ten minutes, with the first four years having each block configured to 50 bitcoins (held by the person who first calculates the unique standard value of each block), and in the second four years, the number per block is halved to 25, and so on, concluding in 2140 with a total of 21 million. Therefore, the total supply of Bitcoin and its phase-based increments are completely locked by the system, not allowing for human adjustment, and its regulation is stricter than that of gold. If treated as currency, it fails to meet the need for unlimited growth in tradable wealth value. In the case where gold has completely exited the monetary stage, Bitcoin, which highly mimics gold, cannot become a true currency. The price of Bitcoin also needs to be expressed in sovereign currency, making it difficult to use Bitcoin as a medium for pricing and settlement in transactions. On June 18, 2021, El Salvador’s legislation granted Bitcoin legal tender status within its territory, but the actual operational effect has fallen far short of expectations, bringing about many new problems and facing increasing opposition. By January 30, 2025, it was necessary to amend the legislation, no longer recognizing Bitcoin as legal tender.
Bitcoin is not a currency, does not mean that it has no value, just like gold after withdrawing from the currency stage, it still exists as a precious metal, and there are spot, forward, futures and a variety of derivatives trading, its price relative to legal tender, has generally maintained an appreciation trend for a long time, becoming an important safe-haven asset. As a new digital asset or crypto asset created by the application of blockchain and other technologies, as long as it can be used in application scenarios and widely trusted, it can also have spot, forward, futures and a variety of derivatives transactions, and it can be cross-border, online, 24-hour continuous trading, and its price relative to fiat currencies may also have more room to rise than gold. However, Bitcoin as a pure chain digital asset, Bitcoin blockchain as a highly closed network system (only “mining” coins and intra-chain peer-to-peer transfer and distributed verification and recording functions, highly separated from the real world, it is difficult to solve the pain points of the real world), the security is relatively guaranteed, but the overall operation efficiency is very low, the operating cost is getting higher and higher, and it is mainly used in the gray area of evading supervision, if it is not supported by national sovereignty or even strictly supervised, The space for its application is very limited. If there is not enough trust and subsequent capital investment, its price will fall sharply or even be worthless. In terms of investment risk, Bitcoin far surpasses gold and is not “paper gold” at all. Due to the high volatility and long-term uncertainty of the Bitcoin price, it is very dangerous to use Bitcoin as a currency reserve! **
Can Bitcoin, as a highly closed network system across borders (transnational), serve as a central platform for cross-border remittances of sovereign currencies (replacing SWIFT)? This is indeed a question that requires careful discussion.
The Bitcoin blockchain network system, since the official operation in early 2009, has been more than 15 years of history, and still maintains safe operation, and compared with the national sovereign currency operation system, it has the unique advantages of cross-border, online and 24-hour operation. But the problem is, this requires the sovereign currency operation system of each country to be connected to the Bitcoin system, and to solve the problem of bitcoin and sovereign currency exchange between the remitter and the remitter (which currently needs to be connected to an independent trading platform, and there is also a stablecoin linked to the sovereign currency as an intermediary in the middle) and exchange rate risk control; It is necessary to add a globally standardized message content and format similar to SWIFT in the Bitcoin remittance description to meet the needs of matching the sovereign currency clearing with the underlying transactions; The speed of Bitcoin transfer needs to be greatly improved (the current speed of only a dozen transactions per second is simply not enough to meet the demand). From these aspects, there are still internal and external obstacles that are difficult to solve in order for Bitcoin to become a central platform for cross-border remittance of sovereign currencies of various countries.
Even if the Bitcoin network can become a central platform for sovereign currency cross-border transfers, it is still just an intermediary similar to SWIFT, and Bitcoin will not become a true currency. Therefore, to be precise, Bitcoin and similar assets can only be referred to as “digital assets” or “cryptographic assets”.
Stablecoins can only be tokens pegged to fiat currencies
Digital stablecoins such as USDT and USDC are essentially tokens pegged to their respective currencies. They emerged as intermediary media and systems in the context of acknowledging the legitimacy of cryptocurrencies like Bitcoin and allowing cross-border transactions online 24 hours a day, while the current system of sovereign currencies struggles to meet such demands. Therefore, the emergence of stablecoins is rational.
As a token of sovereign currency, it cannot become a decentralized product like Bitcoin (to evade regulation) and must be strictly regulated by monetary authorities and regulatory systems. This includes that the token reserves must be sufficient and held in custody by regulatory-approved institutions; it can only be used within the scope permitted by regulation and cannot circulate without limits (otherwise it would pose a threat to the pegged currency); tokens cannot provide credit, creating new tokens out of reserves; the trading of tokens (including derivative trading) must receive adequate financial regulation.
The current issue is that the emergence and operation of stablecoins, like Bitcoin, belong to a new phenomenon. At present, the relevant regulatory laws and actual supervision are not sound and rigorous. The trading of stablecoins has rapidly extended to various derivatives, which poses significant risks.
Central bank digital currency should be the digitization of sovereign currency
The Ethereum system was launched in 2013, accelerating the development of cryptocurrency ICOs and rapidly driving up the prices of Bitcoin and Ethereum. This led to significant global discussions about blockchain becoming a machine of trust, the value internet, and how cryptocurrencies would disrupt sovereign currencies and internet finance would overturn traditional finance. How to respond to the impact of cryptocurrencies also became a new focus of great concern at the G20 meeting of finance ministers and central bank governors in 2013, where many central bank governors believed that the launch of “Central Bank Digital Currency (CBDC)” should be expedited. Subsequently, the central banks of many countries, including China, began to promote research on CBDC.
However, since CBDC was hastily proposed under the impact of Bitcoin, Ethereum, and others, there was no preparation in advance, and there are no clear answers to the most basic questions regarding its relationship with existing sovereign currencies and the financial system, as well as whether blockchain technology can be used to create it. CBDC has always been in an exploratory phase and has unconsciously attempted to leverage Ethereum blockchain technology, only to find that it could pose a serious impact on the existing “central bank-commercial bank” dual financial operation system. Many countries have had to halt the development of CBDC. The People’s Bank of China proposed in 2017 that it would develop the digital RMB, positioning it as cash in circulation (M0), and it will still implement a dual operating system. However, this limitation of digital RMB to M0 and its high imitation of cash management prevents it from being created through credit means (including the central bank cannot use digital RMB to issue base currency). Its exchanges are all free of charge, and deposits in digital RMB wallets do not accrue interest, severely hindering the accumulation and application of digital RMB. Since the development started in 2014, it has been over 10 years now, and there is still no clear timetable for its official launch. Meanwhile, the newly elected President Trump has clearly stated that he will not promote the development of digital dollar.
In fact, the digital yuan is the comprehensive digitalization of the yuan, not just the digitization of yuan cash. The term “central bank digital currency” itself is inaccurate, as credit currency is no longer the credit or liability of the central bank; it is no longer central bank money, but rather state credit, which is national sovereign currency or legal tender. At the same time, currency is no longer just cash, but more so deposits (including electronic wallets). Even when the central bank issues base money, it is not just cash; more often it is directly credited to the financing party’s deposit account in the form of credit. Therefore, positioning central bank digital currency as M0 is itself an inaccurate understanding of credit currency, and such positioning will inevitably lead to serious imbalances in the input and output of digital yuan, making it very difficult to implement.
From the above, “central bank digital currency” should be called “sovereign digital currency”, aiming to promote the comprehensive digital operation of sovereign currencies and to quickly replace the existing sovereign currency operating system, rather than just promoting the digitization of cash and maintaining two sets of currency operating systems in parallel for a long time.
As a sovereign digital currency, it is impossible to completely borrow from the Bitcoin or Ethereum blockchain systems to create a decentralized currency system. Instead, it must be a centralized currency system that meets the regulatory needs of national sovereignty. Among them, considering that stablecoins (which are essentially tokens pegged to fiat currency) that are linked to sovereign currencies have been launched and running for 10 years, becoming increasingly完善和稳定, one possible path is to borrow the technology system of stablecoins to transform sovereign currencies, enabling sovereign digital currencies to be launched quickly and replace stablecoins (no longer requiring dedicated tokens).
In summary, compared to Bitcoin, stablecoins, and sovereign digital currencies, it is necessary to accurately grasp the essence and development logic of “currency”, especially to carefully analyze and define accurately based on the understanding of credit currencies; otherwise, it is easy to blur concepts and lead to significant management errors.
