Virtual Currencies, Digital Currencies, and Central Bank Digital Currencies (CBDCs)
In Western economic theory, any widely accepted payment tool can be considered money. Virtual currencies are electronic payment tools used only in specific social contexts (e.g., online games) to purchase goods and services. Thus, they are not classified as digital currencies.
For example, QQ Coin is a payment tool usable exclusively within Tencent’s gaming ecosystem. Outside this context, it lacks broad acceptance. Similarly, Bitcoin, despite its advanced technology, doesn’t fully qualify as a digital currency because its acceptance remains niche.
True digital currencies are digital assets universally accepted as payment tools. They can be issued by:
- Governments/Central Banks (e.g., CBDCs like China’s DCEP, currently in closed testing).
- Private Entities (e.g., Facebook’s Libra, now rebranded as Diem, designed for global transactions across its 2B+ user base).
Key Features of China’s CBDC Pilot:
- Dual-tier system: Central Bank → Commercial Banks.
- Operational framework: "One currency, two repositories, three centers."
Why Digital Currency Matters
1. Expands Monetary Policy Tools
- Negative interest rates: Digital currencies enable central banks to bypass the zero lower bound, potentially setting negative nominal rates.
- Direct stimulus: Central banks can distribute digital currency directly to citizens, bypassing inefficient financial markets during crises.
2. Enhances Monetary Transparency
Digital currencies allow central banks to:
- Set fixed price-level targets (like inflation targets) using concrete indices.
- Strengthen public trust through a credible nominal anchor.
3. Counters Cash Decline & Secures Seigniorage
- As cash usage drops (due to mobile payments), CBDCs help central banks retain seigniorage revenue.
- Ensures central banks don’t lose control over money issuance.
4. Boosts Financial Stability
- Reduces risk concentration: Allows non-bank entities to settle directly via CBDCs, reducing reliance on commercial banks.
- Safer than deposits: Offers a truly risk-free alternative to bank deposits, lowering moral hazard.
5. Promotes Financial Inclusion & Innovation
- Simplifies access: Streamlines payment account setup for new entrants.
- Empowers the unbanked: Mobile-based CBDCs can integrate excluded populations into modern finance.
FAQ
Q1: How is a CBDC different from Bitcoin?
A: CBDCs are state-backed, centralized, and designed for stability. Bitcoin is decentralized, volatile, and lacks universal acceptance.
Q2: Will digital currencies replace cash?
A: While cash may decline, CBDCs aim to complement existing systems, not eliminate cash entirely.
Q3: Is Libra (Diem) legal worldwide?
A: Its use depends on local regulations. For example, China bans private cryptocurrencies but is piloting its own CBDC.
👉 Discover how global CBDCs are reshaping finance
Q4: Can digital currencies prevent financial crises?
A: They improve crisis response (e.g., direct stimulus) but require robust policy frameworks to mitigate risks.
Author: Fan Zhiyong, Professor at Renmin University’s National Development and Strategy Institute.
Source: Beijing Daily Client
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