I don’t know if it’s tit-for-tat or coincidence, but on April 16, 2020, two major events occurred in the field of digital currency.
1. The central bank of China announces that its digital RMB is about to be implemented. Suzhou is a pilot city. Some wages will be issued in the form of digital currency. The relevant staff will complete the installation of the central bank’s digital currency (DC/EP) digital wallet. If all goes well, this will be the world’s first digital currency anchored to the currency of a sovereign country.
2. The Libra digital currency project led by the world social giant Facebook updates their previous white paper. The most important change is to provide a stable currency that anchors to a single fiat currency – the US Dollar. Libra has a high probability that it will become the pioneer of the digital USDollar. Once Libra is officially launched, it will be a financial nightmare for countries outside the US!
Two of the most powerful countries in the world today are on the same track. This will undoubtedly cause unrest in the digital currency world and be seen as one of the major financial breakthroughs of the century. Today’s currency battle is no longer just a contest of power, but also the mathematics behind the technology. Who can take the lead in completing the mapping of power to mathematics, who will gain the lead in the game?
What is the DC/EP?
China’s central bank digital currency (DC/EP) refers to the digital currency issued by the Chinese central government, which belongs to the China central bank’s liabilities, has national credit, and is equivalent to legal tender.
Its functional properties are exactly the same as banknotes, only in digital form. It has the following characteristics:
1. Substitute M0: DC/EP is a substitute for M0, that is, a substitute for cash, rather than interference with M1 (M0 + demand deposit), M2 (M1 + fixed deposit). The central bank’s digital currency DC/EP is legal tender and has legal compensation, that is, it cannot refuse to accept DC/EP. In terms of legal power, its effectiveness and safety are the highest.
2. Double-layer operation: the first layer is the PBC (People`s Bank of China, the China central bank) to the commercial bank, and the second layer is to connect the commercial bank with the common people. The commercial bank delivers a 100% reserve to the PBC, and then the PBC gives the commercial bank the same amount of DC/EP, and then the user exchanges the DC/EP with the commercial bank through cash or deposit.
3. Prevent double spending: adopt a currency model similar to UTXO structure, and technology guarantees the security of currency issuance and transactions.
A photo of the Chinese central bank’s digital currency tested by the Agricultural Bank of China circulated on the Internet. It is said that the central bank’s digital currency DC/EP will be tested in four pilot cities, Shenzhen, Xiong’an, Chengdu, and Suzhou.
From the screenshot of the Agricultural Bank digital currency wallet, the main functions displayed are basically similar to the daily payment and functions of the bank’s electronic account. There are four common functions of “scan QRcode payment”, “remittance”, “receipt payment”, “touch and pay”.
Traditional electronic payment is useless in an environment where there is no signal, and DC/EP does not require a network to pay, so it is also called “dual offline payment” for both revenue and expenditure. Under extreme conditions, such as natural disasters and earthquakes, there is no Internet, and the use of online banking and third-party institutions will be paralyzed. DC/EP’s dual offline technology will ensure that it can be used like paper money in extreme cases.
The Chinese version of the central bank’s digital currency is no longer just a phantom in the air, and it has begun testing “landing applications.”
The Settlement Network behind Digital Currency
Digital currency is only an appearance, and reconstructing the payment network is the big picture.
Behind the dollar hegemony, there is a ubiquitous currency settlement network-SWIFT, which is the technical support for US Dollar dominance.
In 1973, 239 banks from 15 countries in the United States, Canada, and Europe formally established SWIFT to build up a computer network system that settles accounts for banks around the world.
Although the headquarters is located in Brussels, two crucial data exchange centers, one in Amsterdam, Netherlands, and the other in New York, USA exist.
The current SWIFT system connects more than 10,000 financial institutions, covering more than 200 countries and regions around the world.
This is one of the core reasons why the United States has the power to “long-arm control”.
No matter where you are, your money is in the hands of the United States.
Unless you are willing to shut down the country, as long as the United States cuts off the SWIFT network, you will become a financially isolated island.
In 2014, in order to oppose Crimea’s accession to Russia, the United States imposed sanctions on three Russian banks, and the VISA and MasterCard payment systems had to stop providing payment services to the banks. They cannot violate the SWIFT system controlled by the United States. Even if Russia wants to build its own payment network, even if it solves the technical problems, most countries would not join.
Reconstructing a payment system is much more important than building a digital currency. The opening of the blockchain era is also the best opportunity to recreate the liquidation system.
An opportunity is coming…
Math is trust
Why is it a good opportunity to establish a new financial system now?
In the financial and monetary system, the most difficult to establish is a trust mechanism. The intervention of the blockchain has solved this problem. Because its bottom layer is a mathematical protocol, mathematics is not deceptive.
Whether it is Bitcoin’s SHA-256, or Ethereum’s ERC20 protocol, or DC/EP’s data design, the common feature is the consensus mechanism dominated by encryption algorithms. The algorithm is the cornerstone of public chain operations and the guarantee for building credibility.
Therefore, the new financial system can easily run automatically on this “mathematical machine” that creates trust. Compared with the traditional financial system, it has the following special characteristics:
1. Disintermediation, to reduce data friction
2.Traceable source, clear accounting
3. From T + 0 to T + 1
4. Low cost, no need for manual clearing
5. Untampered, reduce human mistakes
Compared with traditional finance, if the TPS (Transactions Per Second) can be promoted quickly, the new financial system is much more perfect.
If the DC/EP open-source system does well enough on its first outing, not only will China be able to safely and quickly perform local currency issuance and transactions on this public chain, but it will be relatively easy to build a new financial system globally, which could convince more countries to come on board, creating a landmark moment?
DC/EP has a more flexible open module, which will be China’s largest ambition with the digital currency.
How is the United States planning a digital currency?
Regarding digital currency, there has always been a dilemma for the United States. On this subject, the Federal Reserve has lost ground for nearly ten years.
On the one hand, the United States is known as an innovation center, a state of freedom, and supposed to encourage and support new blockchain technology, On the other hand, because of vested interests brought by the USD hegemony, the Federal Reserve treat digital currencies as poison.
Understandably, no one wants to defeat themself. So, starting in 2009, we can see various misbehaviors on the part of the United States.
The 2012 raid on the “Silk Road” of the dark web …
In 2014, it started a pretend dialogue with digital currency companies …
This situation continued until 2018 before the United States found a way to deal with digital currencies.
In September 2018, the US government approved two stable currencies, Gemini Dollar and Paxos Standard, both pegged to the US dollar 1:1. Unlike Bitcoin, these stable currencies are based on the traditional U.S. dollar, and, as such, are controlled by the Federal Reserve.
With the hard work already done by private business, all the US government needs to do is establish rules, and countless commercial companies will endorse the digital dollar.
The U.S. government does not issue a coin, but it already has the $1.67 trillion market in its hands. This is the perfect union of power and mathematics, and a digital extension of dollar hegemony.
With a paper announcement, it is possible for the US government to reap the reward of more than a decade of hard work done by the cryptocurrency world. These leading commercial companies, through the operation of stablecoins, will bring the US Dollar to every corner of the world. The bottom-up mechanism won’t take long for an era of “digital dollars” (mathematical dollars) to take shape.
I originally thought that cryptocurrency was destined to overthrow the US dollar, but I didn’t expect it to become a bodyguard of the US dollar. Leveraging strength, following the trend, and harvesting globally, this is the plan of the traditional US dollar.
Facebook disturbed the Amerian Dream of “digital currency”
Unexpectedly for US authorities, Facebook founder Mark Zuckerberg suddenly burst onto the digital currency scene in June 2019 with his plans for a single global cryptocurrency known as Libra. Along with 26 other companies they released a whitepaper announcing the Libra Network project which stated: “The Libra Association’s mission is to enable a simple global payment system and financial infrastructure that empowers billions of people.”
This action by Facebook meant that 2.7 billion users would have access to the cryptocurrency payment system; of course, it also means that 3/4 of the Internet population may no longer be under US dollar control.
Facebook’s ambition to establish a “world currency” without borders really terrified Wall Street and the US government.
The establishment of a new world is not easy, however, this is something that Zuckerberg knows all to well as a result of often being called to the US Congress for hearings because of privacy issues Did he want to begin another chess game with US authorities, only this time the goal was the downfall of “dollar hegemony”?
The Federal Reserve’s Counter Attack
Hayek’s “Denationalization of Money” may have become a reality if the Silicon Valley tech giants would have been able to stick to their guns. However, the US government began to pressurize Zuckerburg and his associates with the following tactics:
1. Using legal means to suppress stablecoins outside the “US dollar system”.
2. Offering to incorporate stablecoins into the financial system and become part of a digital USD.
3. Establishing a mechanism to control cryptocurrencies in the existing financial system.
4. Cultivating competitors to balance Libra.
5. Issuing a national digital currency of the United States without Libra and in competition to it.
The alliance between Silicon Valley and Wall Street
After a year of tossing and turning, Zuckerburg abandoned his public chain vision and the great ideal of White Paper 1.0. On the evening of April 16, 2020, the Libra project updated the white paper. In the 2.0 version of the white paper, four key changes were made:
1. In addition to providing a currency that anchors a basket of fiats, a stablecoin that anchors a single fiat currency will also be provided.
2. Improve the security of the Libra payment system through a strong compliance framework.
3. Abandon the transition plan to the public chain system, while maintaining its main economic characteristics.
4. Establish strong protection measures for Libra’s asset reserves.
Although it is very euphemistic, Libra has strategically withdrawn and formed an alliance with the US dollar and become an important member of the digital USD. Under the protection of US national power, it has expanded its digital territory, but this time Libra is no longer a global coin. The Libra coin is just the digital dollar corresponding to the traditional US dollar.
It’s sad to see that the idealist turned into a digital dollar thug. The Silicon Valley giant being tamed by Wall Street.
Once the alliance between Libra and Digital Dollar is formed, a new pattern will likely take shape. In the traditional era, countries can govern traditional dollars through territories, and prevent them from entering through financial control. However, once digital dollars have been decentralized, national barriers cannot exist, and the decentralization of mathematics can more easily penetrate into any country.
Once the two are aligned, other countries should be more vigilant.
Digital dollar’s power logic
The Federal Reserve will now consider the new world of finance. How should the power logic of digital dollars be established? This is the mode they are familiar with. From a historical perspective, sort out the relationship between “gold-power-currency”.
After the establishment of the Bretton Woods monetary system in 1944, the monetary system of the entire world was: Gold is the underlying asset reserve, US national strength or “power” is the intermediate link, and the US dollar is the external manifestation.
This seems to be a very stable monetary system.
After the disintegration of the Bretton Woods system in 1972, the world thought that the US dollar would end, but what we did not expect was that the resulting monetary system was: ”Power-Money”
In the end, the US dollar directly anchors “power”, which is the national strength of the United States and is no longer linked to gold. Such a monetary system has run to the present.
In 2018, the logic of the mathematical dollar (stable currency) is: “Fiat Dollar-Power-Digital Dollar”. The fiat dollar is equivalent to the gold in the Bretton Woods system. The US national strength, that “power” is the intermediate link, and “digital dollar” is the external form of expression.
Further development is: ”Power-Digital Dollar”
That means once the belief in stablecoins is established, not many people care about the “fiat dollar reserve” behind stablecoins, and the market starts to use “digital dollars” directly. The arrival of this day is also the arrival of the era of the unification of the digital dollar.
The digital dollar of the future will be competing with thousands of companies, such as Facebook-like companies, corresponding to the world’s best assets, more convincing than the national strength of the United States. By that time, rather than saying that “digital dollars” were assets based on “fiat dollars”, it would be better to say that “fiat dollars” are parasites of “digital dollars”.
This two form mechanism, once the mapping is completed, the dollar system is almost invincible.
This is the power logic of digital dollars.
Math competition in currencies
In the field of digital currency, national power is not the only thing to rely on. Its bottom layer is mathematics, which is trust. The digitization of currencies requires both technology and strength.
On April 16, 2020, power, mathematics, and currency are establishing a new triangular relationship. On this day, the US dollar is no longer the original US dollar, and the RMB is not the original RMB. Everything seemed accidental and not sudden.
The US dollar-led fiat world financial crisis continues, and there should be more benign competitors. The voluntary upgrade of the RMB this time demonstrates the technological vision of China’s financial sector.
In the era of digital currency, whoever completes the mapping of power to mathematics faster will be the future of money.