Digital Currency and Monetary System
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Hiromi Yamaoka
Abstract
In order to design an ideal financial infrastructure, we must preserve the benefits of modern monetary system while effectively utilizing innovative technologies. The current system, with its two-tiered structure of a central bank and commercial banks, supports market-based financial intermediation and elastic supply of money. This is underpinned by the fractional reserve system, banks’ credit creation, banking regulation and deposit insurance. Given that retail Central Bank Digital Currencies (CBDCs) and stablecoins could impact the functions of this modern monetary system, discussions around them often overlap with the “narrow banking” debates of the 20th century. Based on these considerations, tokenized deposits have been developed to maintain the advantages of the two-tiered monetary system while integrating blockchain and distributed ledger technology. Since both digital currencies and digital assets are forms of “digital tokens” that adopt common technologies, it is crucial to establish seamlessly-connected platforms for comprehensively handling transactions of both digital currencies and digital assets.
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