A systematic framework to understand central bank digital currency

Abstract

The ongoing research and development of digital fiat currency (DFC) have triggered attention of policy makers, regulators and the industrial and academic communities. But there is not yet a clear idea and blueprint of what DFC looks like. This paper establishes a systematic framework to analyze the essence and connotation of DFC from four dimensions: currency value, technical aspects, means of implementation and application scenarios. It is argued that DFC is a credit-based currency in terms of value, a crypto-currency from a technical perspective, an algorithm-based currency in terms of implementation and a smart currency in application scenarios. Compared with existing private digital currencies and electronic currencies, DFC will be equipped with brand new and higher qualities. The goal of Chinese DFC is to contribute to more stable value, more secure data, more powerful regulation, stronger empowerment of individuals in payment activities and smarter application. Chinese DFC should have qualities that enable it to provide better service for the public, to offer effective tools for macroeconomic control and to lay a solid foundation for RegTech development.