The necessity to improve financial stability
The issuance of digital currency by the central bank can strengthen monetary policy regulation and improve financial stability. On the one hand, third-party payment institutions have not been involved in the central bank’s payment system, and it is difficult for the central bank to prepare to grasp and count the flow of funds. On the other hand, there is a certain substitution relationship between electronic money and paper money, but it is in the process of policy research and policy formulation, where these factors are rarely taken into account. The combined effect of the two factors will weaken the intensity of monetary policy regulation to a certain extent, leading to the accumulation of financial risks. For the central bank's digital currency, because it can accurately locate its circulation channels in real time, it can achieve accurate placement, real-time transmission, forward-looking guidance, and counter-cyclical regulation when currency is issued, thereby improving the effectiveness of monetary policy transmission. As far as the financial markets are concerned, the central bank’s provision of safe and ultra-liquid assets can help reduce rollover risks and excessive term switching, thus helping to enhance financial stability.
The necessity to optimize the working space of monetary policy
On the one hand, the programmability of digital currency provides imaginative space for new monetary policy tools. In traditional monetary policy theory, the liquidity trap caused by the inability of paper currency to accrue interest leads to a lower limit of nominal interest rates. When digital currency completely replaces paper currency, the theoretical negative interest rate policy restriction is lifted, the lower bound effect of the interest rate corridor would be enhanced, and the efficiency of the interest rate transmission mechanism would improve accordingly. This can achieve precise currency placement while enhancing the ability of financial services to serve the real economy.
On the other hand, under the traditional monetary policy mechanism, the central bank makes decisions in period t based on the information in period t-1, and the relevant impact can only be seen in period t+1, so there is a problem of policy delay.
The digital currency based on condition triggering makes the digital currency not only effective in the current period t, but also can control the subsequent circulation of the currency, which can reduce the time lag of monetary policy transmission, and at the same time, can achieve the goal of accurate currency placement. All the circulation and exchange information of legal digital currency can be tracked in real time, so that the currency data can be used for recording and big data analysis in a timely and complete manner.
Solve the current lag in the effectiveness of policy formulation and supervision caused by posterior statistics and estimated currency data. The issuance of legal digital currency and the application of big data analysis technology in the financial field will provide an accurate and timely data platform for monetary policy and macro-prudential supervision.
The necessity to strengthen the ability to prevent anti-terrorism, anti-money laundering, tax evasion, and other crimes
The central bank's control of money supply and circulation can combat crimes such as anti-money laundering and tax evasion, at the same time, it can also stabilize the macroeconomic operation. The currency in circulation is completely anonymous, and the central bank cannot track the details of the transaction. The central bank's digital currency can achieve accurate tracking of currencies, enabling the central bank to have a more timely and accurate grasp of currency circulation and macroeconomic operations, thus, improve the effectiveness and accuracy of policies.
The central bank's use of big data to enhance the central bank's control over the money supply and circulation is conducive to reducing money laundering, tax evasion, and other illegal and criminal activities. At the same time, compared to the high-cost tracing of electronic money and paper money in the field of anti-money laundering, the central bank's digital currency costs are lower. There are reports that the central bank’s digital currency will generate a string containing new owner information in each transaction. Even if the transaction is anonymous at the user level, the complete transfer record of a single CBDC unit can still be retrieved. Therefore, the central agency continues to track the information of each CBDC, and the user's identity can also be bound with the corresponding personal wallet, so that it completely loses its anonymity.
The necessity to improve the ways of currency transactions
In the existing research, scholars mostly believe that there are several problems in the existing paper money system. The cost of paper money issuing, printing, recycling, and storage is relatively high, at the same time, the circulation system has many levels. It is inconvenient to carry, easy to be forged, anonymity is uncontrollable, and there is a risk of being used for money laundering and other illegal and criminal activities. At present, the cost of printing, issuance, circulation, and storage of paper money and coins is very high. Moreover, there are costs for anti-counterfeiting and carrying. The central bank's issuance of digital currency can effectively reduce the cost of currency issuance and circulation.
According to the estimation, Japan currently spends about 8 trillion yen (approximately 511.3 billion yuan) in cash circulation and management every year, thus the use of digital currency can greatly improve the efficiency of social operations. In one perspective, it can reduce the cost of printing, transportation, and management of paper money. On the other hand, digital currency can greatly reduce the cost of anti-counterfeiting.
