Wang Yongli: Bitcoin, stablecoins, and Central Bank Digital Currency should not be compared.

Written by: Wang Yongli

In the current stage of fiat currency, without the injection of monetary credit, there cannot be true fiat money. The idea of returning to a metallic standard or re-anchoring currency is a disregard or misunderstanding of the essence and developmental logic of currency; it is a regression rather than progress and is destined to fail!

Recently, experts and scholars have gradually categorized decentralized cryptocurrencies like Bitcoin, stablecoins linked to national sovereign currencies (fixed ratio) such as USDT and USDC (pegged to the US dollar), and central bank digital currencies (CBDCs, such as the digital yuan), all under the umbrella of "digital currencies" or "cryptocurrencies." They believe that these are all new forms of digital currencies that operate globally and efficiently on the internet, supported by advanced encryption technology and blockchain distributed ledger technology, each with its own characteristics.

However, in reality, there are essential differences between Bitcoin, stablecoins, and central bank digital currencies. Equating them and referring to them all as digital currencies or cryptocurrencies can easily lead to misunderstandings both theoretically and practically. Especially in academic research and written discussions, it is crucial to make accurate distinctions.

What is currency

To clarify the differences between Bitcoin, stablecoins, and central bank digital currencies, one must first understand what "currency" really is, accurately grasping the essence and development logic of currency.

Throughout the thousands of years of the development of currency in human society, there have been four major stages: natural commodity money (such as shells, etc.); standardized metal coins (gold, silver, copper, etc.); metallic standard paper money (tokens of metal currency); and purely credit money that is detached from any specific physical objects. Overall, currency has shown a trajectory of continuously detaching from the physical (separation from specific physical objects) towards the virtual (intangible, digital), but it has always served the purpose of facilitating exchange transactions. The essential attribute of currency is a 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 (a certificate of value claim that can be exchanged and circulated) within a certain area. For currency to become the most liquid value token, it must receive protection from the highest credit or authority within the circulation range (divine authority, royal authority, or national sovereignty). This fundamental guarantee has always been indispensable from the beginning, not something that is only needed 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, tighten risk control, and better support 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 cannot and 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 corresponding relationship 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 money, there is a limited natural reserve of this (quasi) physical object, and the quantity that can be used as money supply and use is even more limited, and it is difficult to fully supply with the infinite growth of the value of tradable wealth. 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, money will inevitably develop in the direction of intangibility, digitization, account (the so-called cryptocurrency, which is actually the encryption of currency account or wallet address), and intelligence. Therefore, it is certain that cash will eventually completely withdraw from the monetary stage like shells and coinage, and it is a mistake to equate money with cash!

From the above, the "credit currency" developed away from any specific physical object towards the requirement of a corresponding relationship between the total amount of currency and the total value is the objective requirement and inevitable result of the development of currency. To maintain the overall correspondence between the total amount of currency and the total value, it is necessary to strengthen the monitoring of currency value and the regulation of the total amount of currency, and it is even more necessary to have the highest level of credit or authoritative protection (which requires dual protection of both currency and wealth).

In today's world, the highest credit or authority can only be the sovereignty of a country (or a union of countries), 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 referred to as "sovereign currency" or "legal tender."

The "credit" of fiat currency is supported by the overall wealth of the country, 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 during the stage of metallic standard banknotes (hence, the independence of the central bank is greatly weakened, and monetary policy becomes one of the two major policy tools for national macro-control alongside fiscal policy, needing to obey the fundamental interests of the state). The "credit" of fiat currency is also not the credit of the government itself (the government does not equal the state) and is not supported by national tax revenue (national tax revenue can at most only support government debt).

In the case of national sovereignty and independence, it is impossible to promote the denationalization (privatization) of currency or the supranationalization (structurally linking with multiple sovereign currencies and creating a supranational world currency that coexists with pegged currencies) successfully. The euro is not a supranational currency, but rather a "regional sovereign currency". Once the euro was officially launched, the original national sovereign currencies of its member states were completely withdrawn and no longer coexist. Even if global integrated governance is achieved in the future, resulting in a global unified currency, it can only be a world sovereign currency, and cannot be a supranational world currency.

After completely breaking away from the constraints of specific physical objects, the issuance, management, and operation of fiat currency have undergone fundamental changes:

Firstly, credit has become the basic channel and means of monetary issuance. The principle is as follows: when social entities need currency, they use the realizable value of the wealth they already possess or will possess within a set time as support, proposing the amount and duration of currency they wish to borrow to the monetary issuing institution while guaranteeing to repay the principal and interest as agreed. After the monetary issuing institution reviews and agrees, and signs a loan agreement with the borrower, it can then issue the currency to the borrower. The methods of credit include loans issued by the institution, account overdrafts, bill discounts, bond purchases, etc. This is not a gratuitous gift of currency; the borrower must repay the principal and interest as agreed, thereby restraining arbitrary expansion of currency. Thus, as long as social entities possess real tradable wealth, the currency they need can be supplied within the realizable value range of that wealth, breaking the curse of physical currency shortage, and achieving a correspondence between the total amount of currency and the total value of tradable wealth, making currency truly a credit currency. It can be said that without monetary credit issuance, there can be no true credit currency.

Second, the principal and interest losses from unrecoverable loans need to be promptly identified and accounted for as loss provisions. Loans are disbursed based on the future realizable value of tradable wealth. If the principal and interest can be recovered as agreed, it indicates that the disbursed currency has not exceeded the value of the wealth. However, the realizable value of wealth is profoundly affected by supply and demand dynamics, exhibiting significant pro-cyclical characteristics and is not static. If the principal and interest cannot be recovered, resulting in actual losses, it indicates that the currency disbursed earlier has exceeded the realizable value of the wealth, leading to genuine currency overissuance. Loss provisions need to be made, and the profits of the lending institution should be reduced accordingly.

Thirdly, deposit accounts and transfer payments are increasingly replacing cash and cash payments as the main forms of currency and payment. The currency from credit issuance 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 directly deducted 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 associated with cash printing, distribution, receipt, and storage, and makes currency transactions traceable, effectively strengthening the supervision of the legality of currency transactions. As a result, deposits (accounts) have become a new manifestation of currency, with the total amount of currency represented as "cash in circulation + deposits of social entities in banks". Currently, cash issuance is no longer the main channel for currency issuance; cash is only needed when depositors require it, necessitating the conversion of deposits into cash. Deposit transfer payments are also continuously improved in line with advancements in related technologies, evolving from paper vouchers and manual operations to electronic vouchers processed online, and further to intelligent processing in digital currency networks.

Fourth, there are profound changes in the currency management system. For example: to prevent a situation where there is only one bank in society, and all credit issuance does not have interbank payment liquidity constraints, which can easily lead to excessive currency issuance and threaten the security of the entire monetary system, it is necessary to classify currency issuance institutions into central banks and commercial banks, etc., for separate management. The central bank does not conduct credit issuance and other financial businesses for enterprises, households, governments, and other social entities, but is mainly responsible for cash management and control of the total money supply (monitoring currency value changes and implementing necessary counter-cyclical monetary policy adjustments, becoming the lender of last resort for credit issuance institutions to adjust market liquidity and maintain the stability of the monetary financial system); commercial banks and other credit issuance institutions conduct financial businesses for social entities, but if excessive credit issuance leads to serious liquidity crises or insolvency, bankruptcy restructuring needs to be implemented or taken over by the central bank. Commercial banks must be multiple competitors with interbank payment liquidity constraints, and cannot have only one.

In a situation where credit is primarily provided by commercial banks and other credit institutions, the central bank is no longer the main entity for monetary supply; commercial banks and other credit supply institutions become the true entities of monetary supply, while the central bank transforms into the主体 for base currency supply and overall monetary control.

Credit currency has completely broken the shackles of the "scarcity curse", but in practice, there are indeed increasingly severe problems such as currency overissuance, inflation, and financial crises. However, this is not an issue with credit currency itself, but rather a serious lack of understanding among people regarding credit currency (essentially still stuck in the metallic standard paper currency stage) and significant deviations in management that have led to these problems. The current ideas of returning to a metallic standard or reanchoring currency are 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 money supply corresponds well with the overall value of wealth, it can maintain the basic stability of its value and a good credit for the currency, without needing any reserves (including gold, Bitcoin, etc.) to support it. Even for the United States, despite having over 8,100 tons of gold reserves, there has not been much change since it abandoned the gold standard in 1971, while the total money supply of the dollar has been continuously increasing, especially after 2001, rapidly growing to over 9 trillion dollars now, effectively having long since detached from the support of gold reserves.

Bitcoin can only be an asset, not a real currency.

Bitcoin technically employs advanced encryption and distributed ledger technologies such as blockchain, but on the monetary level, it closely mimics the principles of gold (gold as currency or currency standard has the widest global reach, longest duration, and greatest influence): the natural supply of gold is limited (but the actual supply remains uncertain to this day), and it becomes increasingly difficult to mine as time goes on; if we disregard factors such as technological advancement, it seems that the new output will decrease as time progresses until it is completely exhausted. Bitcoin thus generates a data block approximately every ten minutes, with the first four years having 50 bitcoins allocated per block (owned by whoever computes the unique standard value of each block first), and in the second four years, the amount allocated per block is halved to 25 bitcoins, and so on, concluding in 2140 with a total of 21 million bitcoins. Therefore, the total amount of Bitcoin and its phase-wise new additions are completely locked by the system, not allowing for human adjustment, and its control is more stringent than that of gold. As a currency, it cannot meet the need for unlimited growth in tradable wealth value. With gold having completely exited the currency stage, Bitcoin, which closely imitates gold, also 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 settling exchanges. On June 18, 2021, El Salvador's legislation granted Bitcoin legal tender status within its territory, but the actual operational effect was far from satisfactory, instead bringing about many new problems and facing increasing opposition. By January 30, 2025, it had to amend the legislation and no longer recognize 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 legal tender may also have more room to rise than gold. However, as a pure chain-generated digital asset, the Bitcoin blockchain is a highly closed network system (only the functions of "mining" coins and intra-chain peer-to-peer transfer and distributed verification and recording, which are highly separated from the real world, and 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!

As a highly closed network system that is decentralized (cross-border), can Bitcoin serve as a central platform for cross-border remittances of sovereign currencies (replacing SWIFT)? This is indeed a question that requires careful discussion.

Since its official operation began in early 2009, the Bitcoin blockchain network has a history of over 15 years and continues to operate securely. Compared to national sovereign currency systems, it has unique advantages such as cross-border capabilities, online operations, and 24-hour availability, making it a potential central platform for cross-border remittances of sovereign currencies. However, the issue is that this requires the connection of various national sovereign currency systems with the Bitcoin system, and it must address the problems of converting Bitcoin to sovereign currency for both the remitting and receiving parties (currently, this requires connections to independent trading platforms, and there must also be stablecoins linked to sovereign currencies as intermediaries) and controlling exchange rate risks. Additionally, the Bitcoin remittance instructions need to incorporate standardized message content and formats similar to SWIFT to meet the demands of sovereign currency settlement and corresponding transactions. The speed of Bitcoin remittances needs to be significantly improved (currently, it can only handle a dozen transactions per second, which does not meet the demand). From these aspects, Bitcoin faces significant internal and external resistance in becoming a central platform for cross-border remittances of various national sovereign currencies.

Even if the Bitcoin network system can become a central platform for sovereign currency cross-border remittances, it is still just an intermediary similar to SWIFT, and Bitcoin will not become a true currency. Therefore, strictly speaking, Bitcoin and similar assets can only be referred to as "digital assets" or "crypto assets."

Stablecoins can only be tokens pegged to fiat currencies.

Digital stablecoins such as USDT and USDC are essentially tokens tied to their pegged currencies. They emerged as intermediary media and systems in a context where the legitimacy of crypto assets like Bitcoin is recognized, allowing for 24-hour cross-border transactions online, but the existing framework of sovereign currency struggles to meet these requirements. Therefore, the existence of stablecoins is rational.

As a token of sovereign currency, it cannot become a product of decentralization (evading regulation) like Bitcoin. It must be subject to strict supervision by monetary authorities and regulatory systems, including that the reserves of the token must be sufficient and held in custody by regulatory-approved institutions; it can only be used within the limits permitted by regulation, and it cannot circulate without restrictions (otherwise it poses a threat to the pegged currency); tokens cannot provide credit again, creating new tokens outside of the reserves; the trading of tokens (including derivatives trading) must be subject to adequate financial regulation.

The current issue is that the emergence and operation of stablecoins, like Bitcoin, belong to a new phenomenon. Currently, the relevant regulatory laws and actual supervision are not well-established and rigorous. The trading of stablecoins has rapidly extended to various derivatives, and the risks are significant.

Central bank digital currency should be the digitization of sovereign currency.

After the launch of the Ether system in 2013 and the acceleration of the development of cryptocurrency ICOs, and the rapid increase in the prices of Bitcoin and Ether, the statement that blockchain will become a trust machine and an Internet of value, that cryptocurrencies will subvert sovereign currencies, and that Internet finance will subvert traditional finance has caused a huge shock in the international community. How to deal with the cryptocurrency shock has also become a new focus of great attention at the 2013 G20 Fiscal and Central Bank Governors Meeting, and many central bank governors believe that the launch of "central bank digital currencies (CBDCs)" should be accelerated. Subsequently, the central banks of many countries, including China, began to promote CBDC research.

However, due to the fact that CBDC was hastily proposed under the impact of Bitcoin, Ether, etc., there was no preparation in the early stage, and there was no clear answer to the most basic questions such as its relationship with the existing sovereign currency and financial system, whether it can be built by blockchain technology, etc., CBDC has been in the exploration stage, and unconsciously is trying to borrow Ethereum blockchain technology to build, and it is found that it may have a serious impact on the existing "central bank-commercial bank" dual financial operation system, and many countries have to stop the research and development of CBDC. Since 2017, the People's Bank of China (PBOC) has proposed to develop the digital yuan, which is positioned as cash in circulation (M0), and will still implement a dual operating system. However, this kind of digital yuan is only limited to M0, and highly imitates cash management, so it cannot be created through credit (including the central bank can not use digital yuan to put the base currency), its exchange is free, and digital yuan wallet deposits are not interest-bearing, etc., which seriously hinders the precipitation and application of digital yuan, since the start of research and development in 2014, it has been more than 10 years, and there is still no clear timetable for when it can be officially launched. And Trump, the newly elected president of the United States, made it clear that he would not promote the development of a digital dollar.

In fact, digital renminbi is the comprehensive digitization of renminbi, and it cannot simply be the digitization of renminbi cash. The term "central bank digital currency" itself is inaccurate, as credit currency is no longer the credit or liability of the central bank, nor is it central bank currency, but rather national credit, which is national sovereign currency or legal tender. At the same time, currency is no longer just cash, but more about deposits (including electronic wallets). Even when the central bank issues base money, it is not only cash; more 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 a serious mismatch between the input and output of digital renminbi, making it very difficult to launch and implement.

From the above, "central bank digital currency" should be called "sovereign digital currency", aiming to promote the comprehensive digital operation of sovereign currency and quickly replace the existing sovereign currency operating system, rather than just promoting the digitization of cash and maintaining a coexistence of two currency operating systems for a long time.

As a sovereign digital currency, it is impossible to completely borrow from the blockchain systems of Bitcoin or Ethereum to create a decentralized currency system; instead, it must be a centralized currency system that meets the regulatory needs of national sovereignty. Among these, considering that stablecoins (which are essentially tokens pegged to fiat currencies) have been launched and operated for 10 years, becoming increasingly refined and stable, one possible path is to adapt the technology framework of stablecoins to transform sovereign currencies, allowing 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 scrutinize and define it accurately based on a correct understanding of fiat currency, otherwise, it is easy to blur concepts and lead to significant management errors.