The Conjecture on Legal Digital Currency
Author：Dr.Feng Xiao，founder of PlatON
A conjecture is a wild imagination.
“Digital economy” has gradually become a hot word. So, what is the digital economy? It is born in the digital world and operates according to mathematical algorithms. The digital economy can not be equated to the Internet economy, nor is it as simple as “Internet plus”. I strongly agree with Wang Feiyue, a researcher from the Chinese Academy of Sciences, that the relationship between the digital world and the physical world is a parallel world. It is a mapping of the physical world and they are a pair of twins. It can be seen that digital economy and industrial economy are also a mapping and parallel relationship, which has its own unique and completely different new rules from the industrial economy we are familiar with.
The Underlying Technology
The running rule of digital economy is algorithm rule. In fact, no matter artificial intelligence or blockchain, the core driving factor is actually various algorithms. One is AI algorithm and the other is cryptographic algorithm. To make the algorithm run efficiently, it must be engineered into computer code. In a digital economy world where “code” is the lingua franca, economic transactions are also coded, automated and intellectualized. Coded economic transactions need coded accounting methods. Coded accounting methods need coded accounting system and coded accounting system needs coded currency.
The birth of BitCoin blockchain in 2009 coincided with the timely delivery of distributed ledger, which is the code-based accounting method called for by the digital economy. The basis of distributed accounting method is cryptographic accounting system whose unit can only be digital currency. No matter in physical or electronic form, legal tender is impossible to put it into a digital account, let alone write it into a smart contract and let it run automatically.
Distributed accounting method, cryptographic accounting system and encrypted digital currency are integrated and inseparable. There are many characteristics of distributed accounting. All parties are involved in the joint maintenance of a ledger where the information is completely transparent. All information related to the transaction is recorded in one book, and the data is completely penetrated. The features of cryptographic account are as follows: no permission to open accounts, no intermediary for point-to-point transactions, synchronous completion of transactions and clearing accounts, no centralized accounting entity and private key of accounts is the proof of ownership. Digital currency are essentially a programmable computer code, which is issued by a set of algorithms. Currently, digital currency in circulation belongs to private currency, with zero marginal cost of transaction.
Sometimes people ask me: what is the practical applications of blockchains? Before answering this question, I would like to ask another question: did the Internet or the Internet plus come first? I mean, how can we convince the traditional industries to do “Internet +” without the massive growth of the Internet native and pure online applications? Only when the original business model of the Internet has developed strongly enough to bring great pressure on the offline traditional business and traditional finance, and at the same time, the Internet technology and business model are also mature, can we talk about “Internet +” and “Internet +” be successful. Without Yu’E Bao, commercial banks would not feel the pain of “Internet plus”. Similarly, there should be a blockchain before there is a “blockchain +” (that is, the combination of blockchain and traditional industries).
The Origin of Digital Currency
The ten-year experiment of BitCoin blockchain tells us that a commercial system can be successfully and effectively operated without shareholders, board of directors, management, employees, office space, assets, operating income, financial statements and legal subjects. Central Banks around the world must have seen the success of the BitCoin blockchain experiment before they began to study the idea of issuing legal digital currency.
So, is legal digital currency something in the “blockchain” stage or the “blockchain +” stage? From different perspectives, we do have different opinions on this issue. Generally speaking, the research conclusion of legal digital currency is to plan legal digital currency from the perspective of traditional financial monetary theory, which emphasizes more on the legality of it. Of course it is impeccable. The other side of legal digital currency is “digital currency”. We can almost say that there is no legal digital currency without BitCoin. The ideological and technological sources of legal digital currency come from the blockchain and BitCoin.
Therefore, the purpose of legal digital currency should not be to “blockchain +”, which is to say, it should not transform the existing monetary system and eliminate legal tender in the form of cash. Its first goal is to link the digital economy to the digital currency, the physical world to the digital world, the industrial economy to the digital economy, and the legal tender to the digital currency.
If we design the mechanism of legal digital currency from the point of view of digital economy and digital currency, we will no longer have the compromise of double-layer issuance structure of legal digital currency, nor will we have the grievance of legal digital currency replacing M0, nor will we have the helplessness of not pursuing the programmability of legal digital currency. In the circulation of digital currency, the double-layer issuance structure stiffly joins the role of “intermediary” in the existing financial system, while there are no various “money creation” intermediaries in the real blockchain digital currency system. From the perspective of monetary system, the BitCoin blockchain has only the central bank and users, and users can do point-to-point transactions.
Everything is in a moment. If the central bank approves digital currency such as BitCoin is a kind of currency (private currency), the legal digital currency system can be designed. The only purpose of the legal digital currency is to link the digital economy and digital currency, so that the existing currency issuance and money creation system under the blockchain can be completely uninvolved, and the existing financial system will not be impacted. Then the realization of legal digital currency in law, economy, system and technology will not face such a complicated and difficult situation.
Within this framework, the first goal of the central bank issuing legal digital currency is to replace the stable digital currencies currently offered by private institutions in the digital currency market, such as the USDT, which are anchored to the USD, and the MarkerDao, which are exchanged for ETH through point-to-point collateral in ethereum. The difference between the credit ratings of legal digital currencies and privately issued stable digital currencies is, of course, huge. If the People’s Bank of China issues stable digital currency, the benefits will not be limited to replacing private stable digital currency.Any digital currency based on blockchain is a global currency. The internationalization of RMB opens up a new way through the technology of blockchain digital currency. First of all, RMB legal digital currency linked the digital currency world will have first-mover advantage and seize the initiative of rule making in shaping the rules of blockchain digital currency. The issuance of RMB legal digital currency will not require any underlying assets, and the credibility of the Chinese government alone will be enough to compete with, and even outcompete, any stable digital currency issuer in the current market.
In an ideal digital economy, the central bank issues legal digital currency, and each market entity can issue its own token to integrate into the legal digital currency, just as in the real world entrepreneurs issue shares to integrate into the legal currency. Stock or token is just a kind of voucher, since we allow start-ups to issue stock financing, why can’t we allow start-ups to issue token financing? The reason why issuing stock financing is generally recognized now is that after hundreds of years of supervision and regulation, a set of effective legal system has been formed, which can give clear guidance to the actors of issuing stock financing. A lot of behavioral guidelines to regulate the issuance of stocks can be transplanted into the norms of token financing.At present, most of the token financing adopts the method of private placement, and the timing of token listing has also been delayed to the time after the main network is put into operation (especially in the United States), which is the action of transplanting mature experience of stock financing. In my opinion, the two biggest problems of “ICO” are public issuance and public transaction, especially for a start-up project. The existing securities laws can be transplanted to regulate these problems.
The Urgent Demand for Digital Currency
The essence of legal digital currency is “digital currency”! Not “legal tender”! As far as the real world is concerned, we already have a good legal currency system, which does not need to restart and rebuild another one. Now the urgent need is that the emerging digital economy requires a new set of digital financial system to serve and promote it.
The new demand for financial services in the digital economy has the following unique service needs that the traditional financial system cannot effectively provide:
Firstly, in the digital world, the general rule is the mathematical algorithm which is driving force of digital economy. In order to make the algorithm run effectively, the algorithm must be programmed into a computer program, which means turning the algorithm into “code”. The common language in digital economy is code. Legal tender cannot be coded. Digital currency is the exclusive code currency of digital economy.
Secondly, in the digital world where everything is interconnected, economic exchange activities are gradually developing from human-to-human exchange to the exchange between human and machine, machine and machine. Machines have their own accounts and currency. Transactions between machines must be done point-to-point and automatically.
Thirdly, digital economic activity is a trans-time-and-space economic phenomenon, which requires the financial service system must provide seamless and restless financial services with the trans-time-and-space digital economic activity. The unit of its bookkeeping time is “second”, while the traditional financial system’s bookkeeping time unit is “day”.
Fourthly, the friction coefficient of digital economy is almost zero. Digital economy follows the rule of “zero marginal cost”. In digital economic activities, various intermediaries charging intermediary fees have no room for survival.
Fifthly, compared with the physical world, the digital world is a parallel universe. In the digital world, manual intervention in digital economic activities will become a waste that is not cost-effective. Even in the digital world, it is difficult for us to deal with the virtual, rapid and changeable digital economic activities by artificial decision-making.
The traditional financial system was established in accordance with the structure, logic and demands of the industrial economy. Compared with the digital economy, it was created for the past, not for the future. We need a new and futuristic finance — digital finance.
Digital economy needs digital finance, and digital finance needs digital currency. Digital currency is programmable currency which brings programmable finance, amd programmable finance brings programmable economy.
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