Introduction
The introduction of Bitcoin in 2009 marked the beginning of the digital currency era. Broadly, digital currencies can be classified as private digital currencies and central bank digital currencies (CBDCs). Private digital currencies include cryptocurrencies like Bitcoin and Ethereum, as well as stablecoins like Libra (Diem) and Tether (USDT), both typically utilizing blockchain technology. CBDCs can be retail-focused, like China's e-CNY, or wholesale-focused, like Canada's CADcoin.
While private cryptocurrencies have seen the most rapid growth, CBDC development is accelerating globally. As of early 2024, 134 countries and jurisdictions, representing 98% of global GDP, were exploring or piloting CBDCs. China has been a pioneer in this space, beginning research in 2014 and launching extensive e-CNY pilots across 26 regions by 2024.
This article provides a comprehensive review of the academic literature and policy discussions surrounding digital currencies, focusing on private digital currencies, CBDCs, and the specific case of China's digital yuan.
Private Digital Currencies and Blockchain Technology
Cryptocurrency Mechanisms
From an economic perspective, cryptocurrencies and their underlying blockchain technology represent a significant innovation in transaction recording. Blockchain uses distributed ledger technology to enable peer-to-peer, decentralized transactions without third-party intermediaries through a "mining" mechanism.
Research indicates that while blockchain provides a form of public transaction record—theorized in monetary economics but not previously realized in practice—the current implementation has limitations. Studies show Bitcoin-type cryptocurrency payment systems face an "impossible trinity": they cannot simultaneously achieve accuracy, decentralization, and efficiency. The mining mechanism is costly, and the system appears better suited for large transactions rather than small retail payments.
Competition Among Digital Currencies
The proliferation of numerous cryptocurrencies has raised questions about their competitive dynamics and relationship with traditional fiat currencies. Theoretical models suggest that cryptocurrency values depend heavily on self-fulfilling but uncertain investor confidence. The ease with which similar cryptocurrencies can be "cloned" creates uncertainty in their relative prices and exchange rates.
Research indicates that because cryptocurrency developers and miners are profit-maximizing entities rather than public institutions, they may not optimally fulfill the public good functions of money. Some studies suggest that optimally efficient resource allocation requires fiat currencies to "crowd out" cryptocurrencies from the economy.
Cryptocurrency Transactions and Industry Organization
Empirical research reveals important characteristics of cryptocurrency usage. Bitcoin behaves more like a speculative asset than a currency, with a significant portion of transactions linked to illegal activities. Approximately one-quarter of Bitcoin users and transactions were associated with illegal activities, with an estimated $72 billion in annual illegal activity involving Bitcoin—roughly equivalent to the scale of drug markets in the US and Europe combined.
Research on mining and blockchain consensus mechanisms shows that decentralized mining has evolved into centralized "mining pools" as miners seek to share risks. This development has intensified competition among miners and increased the energy consumption associated with blockchain's "proof-of-work" mechanism.
The Rise and Impact of Stablecoins
Stablecoins emerged as a new category of private digital currency claiming stability through backing by sovereign currencies or high-credit government bonds. They can be categorized as asset-linked (backed by fiat currencies or other cryptocurrencies) or algorithm-linked (controlled through algorithms).
The potential of stablecoins to achieve relative stability against major currencies makes them more viable as payment instruments than highly volatile cryptocurrencies. This potential has raised concerns about their possible impact on traditional monetary and financial systems.
Research drawing lessons from historical monetary arrangements (like the Bank of Amsterdam, 1609-1820) and analyzing stablecoins through the lens of fixed exchange rate regimes has shed light on their operation and arbitrage mechanisms.
Recent studies indicate that stablecoins have strengthened the connection between crypto assets and traditional financial markets since 2019. Risk transmission occurs in both directions between traditional assets (through stablecoins) to crypto assets and vice versa, with the former channel being more significant.
Policy reports from organizations like the Financial Stability Board have highlighted increasing vulnerabilities in the stablecoin ecosystem. As stablecoins increasingly serve as bridges between traditional finance and crypto assets, they could potentially erode trust in traditional financial systems and present challenges to existing regulatory frameworks.
Central Bank Digital Currencies (CBDCs)
The Case for Issuing CBDCs
The question of whether central banks should issue digital currencies has generated significant debate. Research approaches this question by weighing the benefits of replacing declining cash usage and improving payment efficiency against potential new risks and monitoring challenges.
Some studies suggest that private institutions generally cannot optimally provide "safe payment methods" equivalent to central bank money due to negative externalities that users cannot fully internalize or distortions created by deposit insurance mechanisms.
Analysis from a currency competition perspective suggests that countries with strong but not dominant international currencies have the strongest motivation to issue CBDCs to gain first-mover advantages. Countries with the strongest dominant international currencies have moderate motivation to respond to competition from cryptocurrencies and other digital currencies, while countries with the weakest currencies might ignore CBDCs and adopt cryptocurrencies directly.
Impact on Financial Intermediaries, Investment, and Welfare
A growing body of research examines how CBDCs might affect financial intermediation, corporate investment, and overall welfare. Studies using models with both CBDCs and commercial bank deposits suggest that introducing digital currency involves a policy trade-off: while it may improve circulation efficiency, it could also crowd out commercial bank deposits, increase bank funding costs, and negatively impact real investment.
However, different market structures yield different outcomes. In models with non-competitive deposit markets, CBDC introduction might actually increase banking competition and efficiency. If CBDCs pay interest, banks might raise deposit rates, potentially avoiding disintermediation.
Research specifically on China's two-tier CBDC system suggests that interest-bearing CBDCs may not necessarily cause financial disintermediation. Quantitative analysis indicates that rising CBDC interest rates could generally increase corporate investment, with effects on bank loans depending on general equilibrium conditions.
CBDCs and Privacy
The privacy implications of digital currencies represent an important research area. Studies comparing cash (which offers anonymity) with electronic payment methods (which collect varying degrees of consumer information) suggest that electronic payments enable price discrimination based on consumer information, creating negative externalities through privacy costs.
Research on CBDC design has explored the trade-offs between creating cash-like anonymity versus bank-like accountability. Designs closer to cash might further replace declining cash usage, while those closer to interest-bearing bank deposits could potentially crowd out bank credit and negatively impact output if not carefully designed.
Studies examining CBDCs from tax compliance perspectives have used complex game-theoretic models to analyze different design approaches and their implications for businesses and governments.
CBDCs and Financial Stability
The relationship between CBDCs and financial stability is another emerging research area. Studies building on Diamond-Dybvig bank run models have examined how CBDCs might affect financial stability, including how to design them to avoid exacerbating bank run risks.
Some research suggests that CBDCs could potentially enhance financial stability by providing central banks with more timely information about bank liquidity conditions during crises, improving regulatory effectiveness. However, this research also highlights the risk of "digital runs" where deposits rapidly convert to CBDCs during crises—a phenomenon that requires further study.
This research generally assumes individuals and businesses hold accounts directly with the central bank, which may not apply to two-tier systems like China's e-CNY, used by over 70% of countries considering CBDCs.
International Policy Discussions
International organizations like the BIS have begun synthesizing the growing literature on CBDCs. These comprehensive reviews cover motivations for issuing retail CBDCs, design trade-offs involving financial infrastructure, technology, and data privacy, potential macroeconomic impacts, and cross-border CBDC applications—an area where research remains sparse.
These reviews acknowledge that most academic studies are前瞻性的前瞻性研究, with limited research on countries that have actually issued or piloted CBDCs. This highlights an important future research direction: country-specific studies based on different national design choices.
Surveys of central banks reveal that 90% are actively researching CBDCs, with increasing focus on retail CBDCs. The percentage of banks moving to pilot stages has grown from 14% to 26%, with over 70% considering the two-tier model exemplified by China's e-CNY.
China's Digital Yuan (e-CNY)
Policy Discussions on e-CNY Positioning
China's digital yuan represents one of the most advanced CBDC initiatives among major economies. The official positioning of e-CNY as a cash-like payment instrument (M0) has been clearly stated in policy documents, emphasizing its status as a central bank liability with legal tender status.
However, practical challenges emerging during pilot programs have sparked discussions about whether this positioning should be maintained. Some experts have pointed to challenges including lack of commercial bank incentives for promotion, consumer path dependence on existing payment methods, and the high costs of maintaining the digital currency system.
Different perspectives have emerged regarding the future evolution of e-CNY. Some suggest maintaining the current M0 positioning but exploring programmability and smart contracts. Others have proposed potentially expanding its role to include broader monetary functions in the future.
Retail Focus and Potential Expansion
The e-CNY's current focus on retail applications is based on several considerations. The retail sector offers the greatest space for payment improvements, while wholesale payments already show high digitalization and efficiency. However, some experts note challenges in retail adoption, including competition with established mobile payment platforms and the need for merchant terminal deployment.
Looking forward, policymakers have suggested that e-CNY could eventually evolve into a universal payment tool covering retail, wholesale, and cross-border scenarios after system upgrades are complete. Short-term strategies include standardizing QR codes to achieve interoperability between e-CNY and existing payment platforms like Alipay and WeChat Pay.
Cross-Border Applications and Internationalization
The potential for e-CNY to facilitate cross-border payments and support RMB internationalization has attracted significant attention. Research suggests that while digital solutions show promise for payments between strong currencies, exchanges between the RMB and less stable currencies involve complex issues including exchange rate mechanisms, foreign exchange management, and balance of payments considerations that cannot be solved through technology alone.
China's participation in the multi-CBDC bridge (mBridge) project has prompted comparisons of different technical solutions for cross-border CBDC payments. The corridor network solution appears better suited for countries with fixed or managed exchange rates like China, while other technical approaches might better serve developed economies with floating exchange rates heavily dependent on the US dollar system.
Pilot projects have generated substantial transaction volume, potentially advancing RMB internationalization. However, challenges remain in meeting diverse international payment needs, managing exchange rate risks, ensuring liquidity, and implementing effective legal and regulatory frameworks.
Relevant Chinese Literature
While policy documents from the People's Bank of China have outlined the design and rationale for e-CNY, academic research on the topic is still emerging. Some studies have analyzed e-CNY's potential impacts using theoretical frameworks, while others have examined specific design features based on patent applications.
Recent research has begun applying New Monetarist frameworks with microeconomic foundations to study China's CBDC system. These studies suggest that the two-tier operating structure may minimize impacts on financial disintermediation while providing a new "direct" monetary policy tool through CBDC interest rates.
Other research has modeled China's interest rate corridor system with CBDCs, examining how interest-bearing digital currency might function within China's monetary policy framework and provide insights for improving the interest rate corridor mechanism.
Conclusion and Future Research Directions
Key Findings from Existing Literature
Current research offers diverse perspectives on digital currencies, with many questions still unresolved. Several key findings emerge from the literature:
First, cryptocurrencies like Bitcoin struggle to fulfill traditional货币 functions and cannot replace fiat currencies as international money. Their lack of intrinsic value, price volatility driven by investor sentiment rather than fundamentals, and significant association with illegal activities limit their utility as genuine currencies.
Second, stablecoins backed by sovereign currencies show more promise as payment instruments due to their relative stability. However, their potential to challenge existing monetary systems necessitates careful regulatory attention, particularly regarding their role in connecting traditional and crypto asset markets.
Third, the question of whether to issue CBDCs involves weighing the benefits of replacing declining cash usage and improving payment efficiency against potential new risks and monitoring challenges. Design choices should reflect national circumstances and policy priorities.
Fourth, CBDC impacts on financial systems depend critically on design features, financial structures, and competitive conditions. Effects on financial intermediation, privacy, monetary policy effectiveness, and financial stability vary across different institutional contexts and policy frameworks.
Future Research Directions for e-CNY
As CBDC development continues, several important research directions emerge, particularly for China's e-CNY:
First, optimal design features for enhancing user adoption need further study. Research could identify functions not currently offered by mobile payment platforms that would increase e-CNY's utility while maintaining appropriate privacy protections.
Second, analysis of e-CNY's potential in cross-border transactions should explore both technical implementation challenges and broader economic implications. Research could examine its role in trade, tourism, and existing RMB offshore markets and swap arrangements.
Third, the impacts of the two-tier operating structure on payment industry dynamics and data markets warrant investigation. Research could examine how to maintain system efficiency and stability while leveraging the innovation potential of authorized institutions.
Fourth, e-CNY's effects on monetary policy transmission and financial stability require careful study. Research could explore how CBDC usage might affect money multipliers, policy effectiveness, and the potential for implementing more targeted monetary policies.
Fifth, future pilot programs exploring programmable features, smart contracts, and expansion into wholesale applications will provide valuable opportunities for research on CBDC impacts on macroeconomic performance, corporate investment, and social welfare.
Frequently Asked Questions
What are the main types of digital currencies?
Digital currencies primarily fall into two categories: private digital currencies and central bank digital currencies (CBDCs). Private digital currencies include cryptocurrencies like Bitcoin and stablecoins like Tether, while CBDCs are digital forms of sovereign currency issued by central banks.
How do CBDCs differ from cryptocurrencies?
CBDCs are issued by central banks and represent direct liabilities of the central bank, making them equivalent to digital cash with legal tender status. Cryptocurrencies are typically decentralized assets not backed by any government or central authority, with values determined by market forces rather than sovereign guarantee.
What are the potential benefits of CBDCs?
CBDCs may offer several benefits including improved payment efficiency, enhanced financial inclusion, reduced cash handling costs, better monetary policy transmission, and increased resilience in payment systems. They may also help counter the growth of private digital currencies that might challenge sovereign monetary systems.
What challenges do CBDCs present?
CBDCs pose several challenges including potential financial disintermediation, privacy concerns, cybersecurity risks, operational resilience requirements, and possible effects on monetary policy implementation. Different design choices can mitigate or exacerbate these challenges.
How is China's e-CNY different from other CBDCs?
China's e-CNY features a two-tier operating structure where the central bank issues the digital currency but commercial banks and other authorized institutions distribute it to the public. It is primarily focused on retail payments and is designed to coexist with rather than replace existing payment platforms.
Can digital currencies improve cross-border payments?
Digital currencies have the potential to improve cross-border payments by reducing intermediation layers, decreasing settlement times, and lowering transaction costs. However, they also present challenges related to regulatory alignment, exchange rate management, and international coordination that require careful consideration.