The Impact of Digital Currency on the Financial System: Universal Decentralized Digital Currency, Is It Possible?

Abstract

With the continuous development of computer and blockchain technology, digital currency has gradually replaced some functions of legal tender. This paper investigated the impact and the feasibility of digital currency on the financial market. Combining the money demand theory of Karl Heinrich Marx and Milton Friedman respectively, we discussed the impact of electronic and cryptocurrencies on the amount of money in circulation. Then, through further empirical analysis, we conclude that in China, digital currency has a substitution effect on current deposits in the long term. Furthermore, the welfare effect level of different countries adopting different policies on digital currency is analyzed by using the local equilibrium model of tariff effect in small countries, and the policy choice of maximizing the total welfare level is discussed based on game theory. Finally, we put forward some suggestions on establishing the global financial supervision system.