Understanding central bank digital currency: a systemic framework

Abstract

The rapid development of digital currency has raised big concerns among policy makers, regulators, industry and academia about the future of fiat currency. Increasingly the issuance of legal digital currency or digital fiat currency (DFC) is interesting central banks all over the world. However, what digital fiat currency should central banks need still remains obscure and need to be more deeply explored. This paper analyzes the essence and connotation of the legal digital currency from four dimensions — value connotation, technical means, implementation means and application scenarios. It is argued that DFC is a credit-based currency from a value perspective, a crypto-currency from a technical perspective, and algorithm-based currency in terms of its implementation and a smart currency when it comes to application scenario, these characteristics will enable DFC to excel over existing tools of electronic payment, be it private digital currency or electronic currency. DFC in China is expected to contribute to more stable value, more secure data, more powerful regulation, stronger empowerment of individuals in payment activities and smarter application and it can not only provide new tools for macroeconomic control but also lay a solid foundation for RegTech development and application.