Digital currency brought the impact on the financial sector

Along with the rapid development of information technology and the widespread use of electronic payment, the global economy is developing in the direction of electronification, networking, and virtualization. Digital currency is a product of the new era based on the Internet, and the creation of digital currency has a profound impact on the development of the financial industry. The issuance of digital currency has significant advantages over paper money, which can reduce the cost of distribution, improve the utilization rate of banks’ funds, and facilitate financial supervision at the same time.

Digital currency brought the impact on the financial sector

There are many types of digital currencies. The latest statistics in 2017 show that there are already more than 700 digital currencies in the world, of which Bitcoin, the originator of digital currencies, holds the most significant proportion. Digital currencies are developing rapidly, and as the market becomes more and more open, more and more digital currencies are coming into existence, providing investors with a diverse range of investments. The demand for digital currencies is heavily fragmented. Although many different digital currencies are developing well, Bitcoin, as the first digital currency, holds more than 80% of the market share, which severely divides the market for digital currencies into the Bitcoin market and the non-Bitcoin market.

Digital currency brought the impact on the financial sector

(A) Analysis of the impact of digital currency on monetary policy toolsImpact on the legal deposit reserve


Digital currencies have great convenience in issuance, circulation, and repossession. Because digital currencies cannot generate interest income in digital wallets and commercial banks, the public does not choose to deposit digital currencies in banks to save on the opportunity cost of digital currencies. Commercial banks will promptly pay digital currencies to the central bank. Therefore, after the central bank issues the legal digital currency, the reserve quantity will tend to rise. The deposit derivation capacity will be enhanced, thus impacting the effectiveness of the legal reserve rate monetary policy.

Impact on open market operations
In the general environment of digital money, the sensitivity of open market operations will be enhanced because the money multiplier becomes more extensive, and the size of open market operations required for a certain amount of money supply regulation is reduced. In addition, with the use of digital money, the central bank’s control over money will be strengthened. Advanced information technology tools such as big data and cloud computing enable the central bank to conduct comprehensive monitoring and analysis of the money market and capital market and grasp the operation of the financial system in a real-time and dynamic manner. Open market operations will become more targeted and flexible.

Impact on rediscounting business
According to the monetary theory of the Keynesian school, the effect of monetary policy is transmitted through the interest rate. Therefore, the efficiency of the interest rate market has an important impact on the effectiveness of the monetary policy. Digital currency technology supports “peer-to-peer” payment settlement, which can improve the liquidity of market participants, effectively reduce the interest rate level of the entire financial system, and make the term structure of interest rates smoother. The interest rate transmission mechanism of monetary policy will be smoother. A monetary policy signal in the discount rate will play a more significant role in this general context.

Digital currency brought the impact on the financial sector

(B)Impact on financial stability

Digital currency is a new type of currency that has appeared for a short period and is gradually being recognized by the public. Its drastic price fluctuations and the related regulatory and legal system are not yet perfect, and there are certain risks to financial stability The violent fluctuation of digital currency prices will form market risk. The value of digital currencies is not stable enough. It often appears to rise and fall sharply, which makes it difficult for investors to build up trust in them and causes speculation, which is significant uncertainty for the stability of the financial market.

The security maintenance of digital currency trading platforms may cause operational risks. Digital currencies are traded and circulated through computers using Internet technology. In this process, they face newer risks than traditional currencies, such as hacker theft and trading platform operational risks.

The decentralized nature of digital currency leads to credit risk. Since digital currency is different from the credit currency issued by the central bank without its credit endorsement, there is uncertainty about its solvency, i.e., there is credit risk in digital currency.

Digital currency brought the impact on the financial sector


(C) New challenges brought by digital currency issuance

Threat to traditional banking. Because of bitcoin’s decentralized nature, the issuance and circulation of bitcoin do not require the use of third parties, and banks often play the role of third parties, which will inevitably form a competitive relationship with the traditional, thus affecting the development of banking business.

Forcing banks to change their profitability. The promotion of digital currency will affect the income of medium businesses of banks, and banks will need to innovate financial services and expand new business.

Digital currency brought the impact on the financial sector

Put pressure on general bank employees. The promotion of digital money will significantly save the use of human resources, computer programs will replace many positions, and the demand for jobs will be reduced. And the professional skills required of employees will be increased and updated.

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