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Digital Finance
Zhiyi Liu
Wenxuan Hou
How Innovation Reshapes
the Capital Markets

Zhiyi Liu · Wenxuan Hou
Digital Finance
How Innovation Reshapes the Capital Markets

Zhiyi Liu
Shanghai Artificial Intelligence Social
Governance Collaborative Innovation
Center
Shanghai, China
Wenxuan Hou
School of Business
University of Edinburgh
Edinburgh, UK
ISBN 978-981-99-7304-0 ISBN 978-981-99-7305-7 (eBook)
https://doi.org/10.1007/978-981-99-7305-7
© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature
Singapore Pte Ltd. 2023
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Preface
Part 1: Defining Digital Finance
Digital finance1
is a form of financial services and transactions that relies on digital
technologies, including mobile devices, the internet, and blockchain, among others. It
providesanddeliversvariousfinancialservicesandproductsthroughdigitalchannels,
such as digital payments, digital lending, and digital investments. The rise of digital
finance can improve the inclusiveness and efficiency of financial services, reduce
transaction and operational costs, enhance transparency, and promote the innovation
of new business models and products. However, it also brings new challenges and
risks,suchascybersecurityissues,dataprivacyprotection,andregulatorycompliance
difficulties.
In order to better understand how digital finance is transforming the financial
industry, we also need to consider its impact on financial efficiency and costs.
Digital finance can improve the efficiency and reduce costs of financial services
by reducing reliance on physical infrastructure and lowering transaction expenses.
However, the rapid development of digital finance has also raised some concerns,
such as cybersecurity, data privacy, and regulatory compliance
Digital finance does not have a single definition, but researchers generally agree
that its emergence has brought new opportunities and challenges to the financial
industry. As a means of inclusive finance, digital finance helps narrow the gap in
accessing financial services, especially for those groups that are difficult to reach
by traditional financial systems. At the same time, digital finance can also improve
the efficiency of financial services, reduce transaction and operational costs, and
bring benefits to both financial institutions and consumers. However, it also brings
new risks and challenges, including cybersecurity issues, data privacy protection,
regulatory compliance, etc., which require us to take appropriate measures to manage
and respond.
1 Schueffel, P. (2016), “Taming the beast:a scientifific definition of fintech,” Journal of Innovation
Management.
v

vi Preface
Part 2: The Evolution of Digital Finance
The roots of digital finance can be traced back to the 1970s when the United States
developed the world’s first Electronic Funds Transfer (EFT) system, laying the
groundwork for the digitization of financial services.
However, the real turning point that gave birth to the diversified forms of digital
finance came from the technological revolution of the internet in the 1990s and the
popularization of mobile technology in the 2000s. These two major technological
trends fostered the birth of new forms of digital finance, such as mobile money and
online payment systems.
Clearly, the formation of digital finance is not an isolated event but rather the
result of various driving factors working together. Among them, the role of techno-
logical innovation is particularly prominent, as it has enabled the expansion of digital
channels and platforms for delivering financial services, including but not limited to
mobile payments, online lending, and peer-to-peer lending. Compared to traditional
financial services, these emerging forms of services have distinct advantages, offering
faster transaction speeds, lower costs, and greater convenience in accessibility.
Another driving force behind the development of digital finance is inclusive
finance. The goal of inclusive finance is to provide financial services to those who
were previously excluded from the formal financial system. With the growth of digital
financial service channels and platforms, achieving this goal has become increasingly
feasible.
Furthermore, consumer demand is also a significant driver of digital finance devel-
opment. Modern consumers seek faster, more convenient, and easily accessible finan-
cial services, and technological advancements enable financial institutions to meet
these demands by offering digital financial services.
Finally, regulatory reform plays a significant role in driving the development
of digital finance. With the establishment of new regulatory frameworks for digital
payments and the formulation of guiding principles for mobile banking, the advance-
ment of digital finance has received significant impetus. These regulatory reforms
provide financial institutions with a framework to offer digital financial services to
their customers.
In summary, the development of digital finance is driven by various factors,
including technological innovation, inclusive finance, consumer demand, and regula-
tory reform. These elements have collectively propelled the emergence of new forms
of digital financial services, such as mobile money, online payments, and digital
lending, fundamentally changing how people access financial services and conduct
transactions.

Preface vii
Part 3: The Importance of Digital Finance in the Modern
Economy
After gaining an understanding of the scope, development, and influencing factors
of digital finance, let’s now discuss its significance in the modern economy.
The role of digital finance in the modern economic system is increasingly promi-
nent, mainly due to its ability to achieve financial inclusion, enhance financial service
efficiency, reduce operational costs, and pave the way for new business models and
product types.
Digital finance offers possibilities for financial services to those who were previ-
ously marginalized by the formal financial system, such as low-income families,
small businesses, and rural communities. Services like payment solutions, savings
accounts, and credit facilities, which were previously inaccessible or costly, can now
be provided through digital finance. This advancement helps reduce poverty and
stimulates economic growth.
Furthermore, there exists a symbiotic relationship between inclusive finance and
digital finance. Digital finance serves as a powerful tool to drive inclusive finance,
enabling more people to access financial services. In turn, inclusive finance provides a
foundation for sustainable and equitable economic development, offering vast oppor-
tunitiesforthedevelopmentofdigitalfinance.Thissymbiosisimpliesthatwithproper
guidance and utilization, we can harness digital finance to bring greater prosperity
to a broader spectrum of people.
Moreover, digital finance offers significant advantages in terms of efficiency
improvement and cost reduction. By eliminating the need for physical infrastruc-
ture, digital finance lowers the cost of delivering financial services. This enables
consumers to more easily afford financial service fees while also enhancing the
profitability of financial institutions. Digital finance significantly reduces transac-
tion costs by simplifying financial transactions and reducing reliance on physical
infrastructure, leading to overall lower operational costs in the economy. It helps
decrease the costs associated with search and bargaining, creating more efficient and
competitive markets, and further reducing overall economic operating costs.
Lastly,digitalfinancealsofostersinnovationinnewbusinessmodelsandproducts.
It has the potential to create novel forms of financial intermediation, such as peer-to-
peer lending and crowdfunding, and drive the development of new financial products,
such as virtual currencies and digital assets. This provides new opportunities for
entrepreneurship and innovation in the financial sector.
In summary, digital finance is becoming increasingly important in the modern
economy due to its potential to enhance financial inclusion, improve efficiency, lower
costs, and enable new business models and products. These aspects are of significant
importance for economic development and maintaining financial stability.

viii Preface
Part 4: Understanding Digital Finance
from an Interdisciplinary Perspective
After understanding digital finance from an economic perspective, let’s explore its
value from other disciplinary fields. Digital finance is becoming increasingly impor-
tant in the modern economy and influencing various domains, including economics,
computer science, sociology, and philosophy, among others.
Firstly, digital finance has the potential to transform companies’ operational
methods and customer interactions, making it of significant value for research in
business schools.
Here are three examples from globally renowned companies, along with insights
from three distinguished scholars that shed light on the importance of digital finance.
Alibaba is a Chinese e-commerce giant that ventured into the digital finance sector
through its payment system Alipay. According to research by Erik Brynjolfsson and
Andrew McAfee (2014), Alipay had already become a major force in the Chinese
financial market at that time, boasting over 700 million users and holding more than
half of the market share in China’s mobile payment sector. These scholars believed
that Alipay represented a significant disruption to the traditional financial system,
democratizing access to financial services and reducing the reliance on physical
banks.
PayPal, as a global online payment system, enjoys widespread recognition in the
digital finance sector. According to Clayton Christensen (2013), PayPal disrupted
the traditional payment industry by providing faster, more convenient, and secure
online transaction methods. He believed that PayPal’s success demonstrated the
importance of disruptive innovation in the digital finance field, as companies that
offer superior customer experiences can rapidly gain market share and change the
industry landscape.
Square is a US-based financial technology company that provides payment and
financial services to businesses. According to Clayton Christensen (2013), Square
disrupted the traditional payment industry by enabling small businesses to accept
credit card payments through mobile devices. He believed that Square’s success
highlighted the importance of understanding and meeting the needs of small busi-
nesses, as traditional financial institutions often fail to provide adequate services to
them.
These examples highlight the importance of digital finance research in business
schools. The perspectives of these three prominent scholars emphasize the signif-
icance of disruptive innovation and customer-centric design in the digital finance
domain.
Research conducted in business schools not only helps us better understand the
impact and opportunities of digital finance but also provides guidance and strategic
direction for businesses and financial institutions to address the challenges posed by
the digital economy.
In addition to business schools, scholars in the field of artificial intelligence (AI)
have also begun to pay attention to digital finance and realize its significance in

Preface ix
relation to the development of AI. The application of AI in digital finance holds
the potential to fundamentally transform the financial industry, a point that has been
acknowledged by Turing Award laureates such as computer scientist Yoshua Bengio.
One of the key applications of artificial intelligence (AI) in digital finance is
risk management. According to Bengio (2020), AI can be utilized to analyze vast
amounts of financial data and identify patterns and anomalies that may indicate
potential risks. For instance, AI can be employed to detect fraudulent transactions,
predict credit risks, and identify market trends. This enhances the efficiency and
accuracy of risk management, leading to better financial outcomes. AI is also used to
automate financial processes, such as customer service and investment management.
AI-powered chatbots and virtual assistants can provide personalized financial advice
and support to customers, improving their overall experience and reducing costs
for financial institutions. Furthermore, AI can optimize investment portfolios by
analyzing market trends and making data-driven investment decisions. This can lead
to better investment performance and outcomes.
However, the use of digital finance has raised concerns about privacy and security
as financial institutions and third-party vendors have easier access to personal finan-
cial data. From the perspective of information philosophy, this has triggered impor-
tant questions about fairness, justice, and privacy. Several renowned contemporary
philosophers, including Luciano Floridi, Helen Nissenbaum, and Daniel Solove, have
expressed their opinions on these issues. Let’s take a look at the different directions
they are concerned about:
First and foremost, philosophers are deeply concerned about privacy protection.
Floridi is a leading global philosopher of information, and his research in informa-
tion ethics is extensive. He believes that digital finance is reshaping our understanding
of money, trust, and value. He emphasizes the significant potential of digital finance
in promoting inclusive finance and reducing economic inequality. However, he also
warns that digital finance brings significant moral and social challenges, including
issues related to privacy, security, and the concentration of power in a few large
digital finance companies.
Floridi’s research aids our understanding of the complex societal and ethical impli-
cations of digital finance and emphasizes the need for a robust ethical framework to
guide the development and use of digital finance technology.
According to Floridi’s (2015) perspective, digital finance must be designed as a
tool that promotes information justice and information privacy. Information justice
means that information should be distributed fairly, avoiding situations of discrimina-
tion. Information privacy, on the other hand, refers to protecting personal information
and avoiding unreasonable surveillance.
In addition, philosophers also focus on the domain of data rights.
Helen Nissenbaum is a technology philosopher and a privacy expert who empha-
sizes the importance of transparency and accountability in digital finance, particularly
concerning the collection and use of personal data.
She believes that digital finance platforms should provide clear privacy policies
and explicit data usage regulations, enabling users to understand and control the
ways in which their personal data is used. Moreover, digital finance institutions

x Preface
and platforms should establish effective oversight and accountability mechanisms to
ensure the lawful and transparent use of personal data.
Daniel Solove is a privacy law expert who has conducted extensive research on
the importance of privacy in the digital age. He believes that digital finance must be
designed with the principles of promoting fairness and avoiding discrimination based
on personal information. He points out that digital finance platforms generate and
process a large amount of sensitive financial information, which poses significant
privacy risks. Solove advocates for robust security measures to prevent cyber threats
and data breaches.
Additionally, Solove emphasizes the importance of regulatory oversight to ensure
that digital finance companies are accountable for their privacy and security practices.
He calls for increased transparency in data collection and usage practices of digital
finance platforms.
From the perspective of information philosophers, digital finance raises important
questions about fairness, justice, and privacy, which also involve research in digital
jurisprudence.
Lastly, let’s discuss the impact of digital finance development from the perspective
of international political science. We will briefly explore the significance of digital
finance from an international political viewpoint and cite the views of three renowned
scholars.
Joseph Stiglitz, a globally acclaimed Nobel laureate in economics, offers profound
insights into the impact and role of digital finance. He believes that digital finance
can promote financial inclusion by providing financial services to those who are
excluded from the traditional financial system, particularly in developing countries,
where this effect is more pronounced. He also points out that the widespread adoption
and application of digital finance have the potential to promote economic growth by
increasing financial inclusion, thus contributing to poverty reduction and improving
social welfare.
However, Stiglitz also reminds us that digital finance is not a panacea, and its
development and application need to be carried out under careful regulation. The
misuse of digital finance can lead to a range of issues, including infringement of
consumerrightsandviolationsofpersonalprivacy.Therefore,Stiglitzemphasizesthe
importance of transparency and accountability, particularly in the areas of consumer
protection and data privacy.
Furthermore, Stiglitz highlights some potential issues that digital finance may
bring, such as the possibility of excessive concentration of financial power in the
hands of a few large digital finance companies, which could pose a threat to the
healthy development of financial markets. Hence, effective measures need to be
taken to address these potential negative impacts brought about by digital finance.
In conclusion, Stiglitz’s research provides valuable perspectives for understanding
the potential benefits and risks of digital finance. He emphasizes the need for a
balanced approach in developing and utilizing digital finance technology, harnessing
its advantages while effectively managing and controlling the potential risks it may
bring.

Preface xi
Dani Rodrik is a political economist who has conducted in-depth research in the
fields of globalization and economic development.
Rodrik’sviewsfirstrecognizethepotentialofdigitalfinanceinadvancingfinancial
inclusion and reducing income inequality, especially for those marginalized in the
traditional financial system. Digital finance can provide more convenient and efficient
financial services. He also highlights the disruptive nature of digital finance, which
has, to some extent, changed traditional economic activities, particularly evident in
developing countries.
However, Rodrik also points out potential issues that digital finance may bring.
He believes that with the application and widespread adoption of digital finance,
there may be new winners and losers in the global economy, with some individuals
and countries benefiting while others may lose out in the process.
Additionally, he highlights that digital finance can be used for tax evasion and
regulatory avoidance, which could threaten the legitimacy of fair democratic systems.
If not properly regulated, digital finance may exacerbate economic inequality and
even lead to financial instability.
Therefore, Rodrik emphasizes the need to establish appropriate regulatory frame-
works to promote the positive impact of digital finance while mitigating its potential
negative consequences.
Overall, Rodrik’s research helps us gain a deeper understanding of the opportuni-
ties and challenges of digital finance and underscores the importance of establishing
and improving regulatory mechanisms for digital finance.
Parag Khanna is a renowned global strategist who has conducted in-depth research
and offered unique insights into how digital finance is transforming our economic
activities and even the global economic landscape.
Khanna points out that digital finance is fundamentally changing our economic
activities. Traditional banks and financial services are being replaced by new digital
commerceandpeer-to-peerlending.Thistransformationisnotonlychangingtheway
we conduct financial transactions but also how we understand and utilize financial
services.
Khanna sees the tremendous potential of digital finance in promoting economic
development, especially in emerging markets. He emphasizes that digital finance, by
increasing access to financial services and facilitating cross-border trade, provides
a powerful impetus for economic growth and development in emerging markets.
Additionally, he believes that establishing robust digital infrastructure is crucial to
support the development of digital finance and ensure its security and stability.
However, his insights go beyond this. Khanna believes that digital finance has
the potential to reshape the global economic landscape. He points out that digital
finance could weaken the influence of traditional financial centers like New York
and London while promoting the rise of new financial centers, particularly in Asia.
This shift not only has the potential to alter the distribution of global financial power
but also brings unprecedented development opportunities for emerging markets.
Nevertheless, Khanna also warns that digital finance may bring about new forms
of economic and political instability, especially in the absence of proper regulation.

xii Preface
Therefore, he emphasizes the need for a strategic approach when developing and
utilizing digital finance technologies in the global economy.
Overall, Khanna’s research provides valuable insights into the transformative
potential of digital finance and how to strategically harness it in the global economy.
Throughthediscussionsabove,wedeeplyappreciatetheimportanceandinfluence
of digital finance in the modern global economy. The research conducted by Joseph
Stiglitz, Dani Rodrik, and Parag Khanna provides us with comprehensive frameworks
to understand and assess the impact of digital finance, enabling us to view its benefits
and risks from multiple perspectives. Stiglitz emphasizes the potential of digital
finance in promoting inclusive finance and reducing poverty, while Rodrik focuses
on the risks of inequality and the potential harm to fair democracy that it may bring.
Khanna explores how digital finance is transforming the nature of economic activities
and global economic patterns.
These perspectives remind us that the development of digital finance requires
appropriate regulation and guidance to ensure that it can contribute to social welfare
and enhance fair democracy. We hope that these viewpoints and discussions will
inspire readers to think more deeply about digital finance, foster a better under-
standing of its influence, and provide navigational guidance in our increasingly
digitized world.
Part 5: Digital Finance and Capitalism
The interaction between digital finance and capitalism constitutes a complex rela-
tionship. This article will quote the views and insights of renowned scholars such as
Karl Marx, David Harvey, and Nick Srnicek to explore the potential negative effects
brought about by the development of digital finance. This is the primary focus of our
research framework.
Marxist theory regards the core features of capitalism as labor exploitation
and capital accumulation. The capitalist class increases profits and accumulates
capital by extracting surplus value from laborers. In the perspective of Marxism,
digital finance can be understood as a modern tool that extracts surplus value
from consumers through the commodification of information and innovation of new
financial products.
In the digital finance environment, this exploitation is manifested through the
commodification of information and the creation of new financial products, through
which surplus value is extracted from consumers. Companies reliant on digital
finance can design new financial products, often sold to consumers at high prices, by
collecting and analyzing data on consumer behavior and preferences.
However,Marxpointedoutthatcapitalismhasatendencytowardcrises,stemming
from contradictions between productive forces and relations of production. In the
context of digital finance, these contradictions may be seen in the tense relationship
between financial market expansion and the real economy. While digital finance
drives the expansion of financial markets and the creation of new financial products,

Preface xiii
it may also exacerbate the decoupling of financial markets from the real economy,
potentially threatening financial stability and leading to economic crises. Therefore,
we must remain vigilant and continue monitoring the impacts of these developments.
Furthermore, Marx’s analysis emphasizes a key characteristic of capitalism: the
high concentration of wealth and power. In the backdrop of digital finance, this
concentration is evident in the phenomenon of “platform capitalism,” where a few
dominant companies control key digital infrastructure for financial transactions.
These companies wield immeasurable power, not only shaping the financial system
but also exerting far-reaching effects on the broader economy and society.
Clearly,Marx’stheoriesprovideuswithaninsightfulframeworktodeeplyanalyze
the complex relationship between digital finance and capitalism. This framework
allows us to view the commodification of information and the creation of new finan-
cial products as new forms of exploitation. It also reveals the appearance of crises
and the concentration of wealth and power as widespread trends within capitalism.
However, for such an intricate subject, further in-depth research is necessary.
For instance, we need to explore the characteristics of platform capitalism and its
impact on the socio-economic landscape. We also need to study how the creation
of new financial products and the commodification of information change consumer
behavior and how these changes, in turn, affect the development of capitalism. The
answerstothesequestionswillenableustobetterunderstandtherelationshipbetween
digital finance and capitalism and how this relationship influences our society and
economy.
David Harvey, as a renowned Marxist scholar, has conducted in-depth and exten-
sive research on the interactive relationship between digital technology and capi-
talism. His theories provide a profound perspective for understanding the connection
betweendigitalfinanceandcapitalism.Harveyrevealshowthedevelopmentofdigital
finance accelerates financialization, exacerbates social inequality, and profoundly
impacts the global economic system.
Nick Srnicek, as a political theorist and a philosopher, has deeply studied how
digital technology shapes the future of capitalism. Srnicek’s contribution lies in
his analysis of the relationship between digital finance and capitalism. He believes
that digital finance plays a crucial role in the transformation of capitalism, driving
new forms of economic activity and accumulation. Srnicek points out that digital
finance stimulates the innovation of new financial products and services, while also
expanding the financial market, giving rise to a new form of capitalism he refers to as
“platform capitalism.” In this new model, a few large digital platforms like Amazon,
Google, and Facebook control the infrastructure and data that support digital finance.
In summary, the relationship between digital finance and capitalism is indeed
complex and multifaceted. In the new digital era, Marxist theories, particularly those
concerning labor exploitation and capital accumulation, remain highly relevant. The
rise of digital finance has given rise to new forms of commodification and finan-
cialization, intensifying the dynamism of capitalism. Digital finance presents both
opportunities and risks. The emergence of new automated technologies and platform
capitalism is transforming the nature of work and production, potentially leading to
profound social and economic impacts. For example, the rise of digital platforms

xiv Preface
has fueled the gig economy, resulting in labor market fragmentation and erosion of
workers’ rights.
Shanghai, China
Edinburgh, UK
Zhiyi Liu
Wenxuan Hou

Contents
1 Opportunities and Challenges of Digital Financial
Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 History and Theories Influencing the Development
of Digital Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 The Key Factors Influencing the Development of Digital
Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.3 Challenges and Opportunities Brought by Digital Finance . . . . . . 9
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2 Research on Monetary Theory in Digital Finance . . . . . . . . . . . . . . . . 17
2.1 The Importance of Monetary Theory in Digital Finance . . . . . . . . 17
2.2 Traditional Monetary Theory and Its Relevance to Digital
Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2.3 The Impact of Digital Finance on Monetary Theory . . . . . . . . . . . 24
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
3 Digital Financial Innovation and Regulation . . . . . . . . . . . . . . . . . . . . . 29
3.1 Innovative Digital Financial Models . . . . . . . . . . . . . . . . . . . . . . . . . 29
3.2 Overview of Digital Financial Innovation and Regulation . . . . . . 34
3.3 The Challenges and Opportunities of Digital Financial
Innovation and Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
4 Digitalization of Commercial Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
4.1 Commercial Bank Digitalization Overview . . . . . . . . . . . . . . . . . . . 45
4.1.1 Industrial and Commercial Bank of China (ICBC)
Digital Transformation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
4.1.2 Citibank (Citigroup) Digital Transformation . . . . . . . . . . . 53
4.1.3 N26 Bank’s Digital Transformation in Europe . . . . . . . . . . 53
4.2 Digital Banking Services and Products . . . . . . . . . . . . . . . . . . . . . . 55
4.2.1 Revolut, a Digital Bank in the UK . . . . . . . . . . . . . . . . . . . . 58
4.2.2 Chime, a Digital Bank in the US . . . . . . . . . . . . . . . . . . . . . 59
xv

xvi Contents
4.2.3 Bank of China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
4.3 Challenges and Opportunities of Digital Transformation
in Commercial Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
5 Digital Wealth Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
5.1 Overview of Digital Wealth Management . . . . . . . . . . . . . . . . . . . . 65
5.1.1 Robo-Advisor Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
5.1.2 Social Investing Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
5.1.3 Automated Trading Model . . . . . . . . . . . . . . . . . . . . . . . . . . 72
5.1.4 Smart Contract Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
5.2 Digital Wealth Management Platforms and Technologies . . . . . . . 75
5.3 The Challenges and Opportunities in Digital Wealth
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
6 Central Bank Digital Currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
6.1 Overview of Central Bank Digital Currency (CBDC) . . . . . . . . . . 83
6.2 Impact on Monetary Policy and Financial Stability . . . . . . . . . . . . 91
6.3 Challenges and Opportunities for Central Bank Digital
Currencies (CBDCs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
7 Digital Finance and the International Monetary System . . . . . . . . . . . 99
7.1 Overview of Digital Finance and the International
Monetary System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
7.2 Digital Finance and Cross-Border Payments . . . . . . . . . . . . . . . . . . 105
7.3 Challenges and Opportunities of Digital Finance
and the International Monetary System . . . . . . . . . . . . . . . . . . . . . . 108
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
8 Cybersecurity and Data Privacy in Digital Finance . . . . . . . . . . . . . . . 121
8.1 Overview of Cybersecurity and Data Privacy in Digital
Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
8.1.1 Privacy-Preserving Data Sharing Methods Based
on Game Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
8.1.2 Privacy-Preserving Data Methods Based
on Federated Learning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
8.1.3 Privacy-Preserving Data Collection and Analysis
Technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
8.2 Data Protection Regulations and Data Sovereignty Issues . . . . . . 127
8.3 Challenges and Opportunities in Cybersecurity and Data
Privacy in Digital Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138

Contents xvii
9 Social and Environmental Impacts of Digital Finance . . . . . . . . . . . . . 139
9.1 Overview of the Social and Environmental Impacts
of Digital Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139
9.2 Sustainable Finance and Green Investment . . . . . . . . . . . . . . . . . . . 144
9.2.1 Policies and Regulations Driving Green Investment
Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
9.2.2 Market Size and Growth Trends of Green
Investment in Different Countries and Regions . . . . . . . . . 146
9.3 Inclusive Digital Finance: A New Paradigm for Developing
Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155
10 The Future of Digital Finance and Fintech . . . . . . . . . . . . . . . . . . . . . . . 157
10.1 Digital Finance and FinTech . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
10.2 The Impact of FinTech: A Case Study of India and China . . . . . . 161
10.3 The Economic Perspective of FinTech Development . . . . . . . . . . . 166
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171

Chapter 1
Opportunities and Challenges of Digital
Financial Development
Abstract The historical process of financial technology is complex and diverse,
tracing back to the origins of early computerized trading and evolving with the rise
of the internet, mobile payments, and blockchain technology.
1.1 History and Theories Influencing the Development
of Digital Finance
The historical process of financial technology is complex and diverse, tracing back to
the origins of early computerized trading and evolving with the rise of the internet,
mobile payments, and blockchain technology. In this article, we will analyze the
history of digital finance, dividing it into the stages of automation, the internet, and
mobile payments and blockchain technology, to better understand the development
of financial technology.
The first phase is the Automation Phase, which represents the initial stage of the
development of digital finance and has had a significant impact on the advancement
of financial technology. Starting from the 1960s, automation technology began to
be applied in the financial sector, ushering in a new era for the financial industry.
The introduction of automated systems notably enhanced the processing speed of
financial transactions and significantly improved transaction efficiency. Moreover,
automation technology enabled the implementation of more sophisticated transaction
risk controls and market analysis, providing robust technical support for the rapid
development of financial operations.
During this stage, the emergence of large-scale computers was a key technological
innovation. Large-scale computers refer to powerful machines capable of handling
substantial volumes of data and swiftly processing transactions. Financial institutions
widely adopted large-scale computers to automate many processes that were previ-
ously performed manually. Additionally, another significant technological advance-
ment was the development of new programming languages specifically designed for
financial applications, such as COBOL and FORTRAN. These languages allowed
© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023
Z. Liu and W. Hou, Digital Finance, https://doi.org/10.1007/978-981-99-7305-7_1
1

2 1 Opportunities and Challenges of Digital Financial Development
financial institutions to create customized software programs, automating specific
financial processes.
Next is the Internet Phase, which began in the 1990s with the rise and popu-
larization of the internet, marking the digitization of finance. The development of
internet technology has driven the process of online transformation in the financial
industry, providing people with more convenient financial services. The emergence
of online banks and securities companies has made the financial market more open
and transparent, enabling financial transactions to transcend national borders and
achieve globalization. During this stage, the financial industry shifted towards a
customer-centric service model, offering online trading and banking services that
cover a broader audience, reduce costs, and provide personalized services.
At the same time, the Internet Phase witnessed the rise of new online finan-
cial trading platforms. Platforms like E-TRADE and Ameritrade allowed investors
to buy and sell stocks and other securities online. Additionally, the emergence of
online banking platforms enabled customers to access their accounts and conduct
transactions anytime, anywhere. Furthermore, computer scientists developed new
financial analysis and risk management algorithms and models. For instance, the
Black–Scholes model, originally developed by two computer scientists in the 1970s,
was used for pricing options contracts. With the growth of online trading in the 1990s,
this model became widely applied.
Finally, we have the Mobile Payment Zhou and Lu (2016) and Blockchain
Technology Werbach (2018) Phase, which is characterized by the rise of mobile
payments and blockchain technology in the development of digital finance. With
the widespread adoption of mobile devices, mobile technology has been exten-
sively applied in the financial sector. Mobile applications enable functions such as
fund transfers, payments, transactions, and wealth management, greatly enhancing
user experience. At the same time, the application of blockchain technology injects
new momentum into the development of digital finance. The distributed nature of
blockchain technology improves transaction security and credibility while reducing
transaction costs. The application of these emerging technologies brings new oppor-
tunities and challenges to digital finance, driving innovation and transformation in
financial services.
This stage marks the transformation of financial services. Mobile payments are
revolutionizing the way people interact with financial institutions, while blockchain
technology is changing the way financial transactions are processed and veri-
fied. Clearly, the 21st-century phase of digital finance with mobile technology
and blockchain is a significant milestone in the history of financial technology
development.
During this period, computer scientists continue to play a critical role in the
development of digital finance. The new technologies and software programs they
develop enable financial institutions to conduct transactions and manage accounts
using mobile devices. One of the key technologies in this stage is biometric authenti-
cation, which enhances the security of mobile transactions. Biometric authentication
uses unique physical characteristics such as fingerprints, facial recognition, or voice
recognition to verify the user’s identity and prevent fraudulent activities.

1.1 History and Theories Influencing the Development of Digital Finance 3
Furthermore, the establishment of new mobile payment platforms is another
important advancement in this stage. For example, the introduction of Apple Pay
and Google Pay allows users to make payments using their mobile devices. These
platforms use Near Field Communication (NFC) technology to securely transmit
payment information between the user’s mobile device and the merchant’s payment
terminal.
In conclusion, the history of digital finance demonstrates the transformative power
of technology in the financial industry. From the early era of computerized transac-
tions to the current era of mobile payments and blockchain technology, digital finance
enables financial institutions to process transactions faster, reach a wider audience,
and provide personalized services to customers. This technology-driven transfor-
mation not only enhances the efficiency of financial institutions but also delivers
a superior service experience to consumers, indicating the greater possibilities of
future financial technology.
To understand the development of digital finance, it is important to examine the
influential theories and ideas that have shaped its progress, in addition to tracing
its technological evolution. Several key theories have impacted the development of
digital finance, among which the following are crucial:
First, Disruptive Innovation Theory. This theory explains how new technologies
can disrupt existing markets and create new ones. In the realm of digital finance World
Bank (2017), the introduction of digital technologies has disrupted the traditional
business models of financial institutions and created new opportunities for individ-
uals and businesses. Digital finance, as a disruptive innovation, has the potential to
transform the entire financial industry.
Traditional financial institutions often fail to meet the needs of individuals without
credit histories or sufficient assets. However, digital finance, through the use of
new technologies and data analysis, better understands the needs and risks of these
customers, providing personalized financial services. It adopts simple and conve-
nient solutions such as mobile payments, online lending platforms, and investment
platforms, which are not only more convenient but also generally more cost-effective
than services offered by traditional financial institutions.
Based on this theory, we can understand the development of digital finance from
the following perspectives:
(1) Disruptive Potential: Digital finance has the potential to disrupt traditional finan-
cial institutions. It does so by offering simple, inexpensive, and convenient
solutions that challenge the traditional financial institutions. For example, the
advent of mobile payment systems and online banking platforms enables people
to manage their finances more easily without the need to visit physical bank
branches.
(2) Business Model Transformation: Digital finance is transforming the traditional
business models within the financial industry. It is creating new business models,
such as peer-to-peer lending and crowdfunding, based on the principles of the
sharing economy and financial democratization. These new models provide

more direct and efficient financial services and create new opportunities for
individuals and businesses.
(3) Financial Democratization: Digital finance promotes financial democratiza-
tion by making financial services more accessible to a broader population.
It fosters the sharing of financial resources through peer-to-peer lending and
crowdfunding, providing new opportunities for people to finance and invest in
emerging enterprises and advancing financial democratization.
(4) Disintermediation: Digital finance is also disrupting the role of financial inter-
mediaries. It establishes direct connections between borrowers and lenders,
investors and issuers, and buyers and sellers, weakening the traditional role
of intermediaries like banks and investment companies. This trend towards
disintermediation makes financial transactions more efficient, transparent, and
reduces transaction costs.
Secondly, the Network Effect Theory. This theory explains how the value of a
network increases with the growing number of users. Digital finance relies heavily
on network effects, as the value of digital finance platforms increases with more
users joining the network. This creates a positive growth cycle that can lead to
the dominance of a few major companies in the market. Specifically, based on this
theory, we can understand the development of digital finance from the following
perspectives:
(1) Dominance of Major Players: Network effects cause the value of digital finance
platforms to be directly proportional to the number of users. As more users join
the platform, its value continuously increases. This leads to a few major players
dominating the market because they can leverage their large user base to gain a
greater advantage from network effects.
(2) Lock-in Effect: Digital finance platforms can create a lock-in effect by attracting
users and building user investment. Users’ time, effort, and monetary investment
in a particular platform make them less willing to switch to other platforms. This
sets up barriers for existing major players, making it difficult for new entrants
to compete with them.
(3) Viral Marketing: Digital finance platforms can utilize viral marketing strategies
to expand their networks. By using social media, word-of-mouth marketing,
and referral programs, platforms encourage users to share the platform within
their social circles. This social spread can lead to exponential network growth,
accelerating the platform’s development.
(4) Network Externality: Digital finance platforms create positive network exter-
nalities, meaning that the value of the network increases with the addition of
more users. This externality makes the platform more attractive to new users.
Platforms can create tipping points by introducing new services, features, or
incentive measures to further stimulate the influx of more users.
(5) Winner-Takes-All Market: Digital finance markets with strong network effects
often exhibit a winner-takes-all trend. A few major companies establish higher
entry barriers through investments in infrastructure, technology, and marketing,
making it difficult for small companies to compete. The characteristics of high

1.1 History and Theories Influencing the Development of Digital Finance 5
fixed costs and low marginal costs allow these major companies to fully leverage
network effects and monopolize the market.
The third theory is the theory of platform economics. This theory explains how
digital platforms create value by connecting buyers and sellers and facilitating trans-
actions. Digital financial platforms such as mobile payment systems, peer-to-peer
lending platforms, and crowdfunding platforms create value by connecting borrowers
and lenders, investors and issuers, and buyers and sellers. Based on this theory, we
can understand the development of digital finance in the following aspects:
(1) Two-sided market: Digital financial platforms facilitate financial transactions
by connecting different user groups. This two-sided market model enables the
platform to provide a wider range of transaction opportunities for borrowers
and lenders, investors and issuers, and buyers and sellers.
(2) Multi-homing effects: Digital financial platforms exhibit multi-homing effects,
whereuserscansimultaneouslyusemultipleplatforms.Thiscreatescompetition
between platforms and reduces the bargaining power of individual platforms.
Users can choose to use multiple platforms to obtain better services and more
favorable transaction conditions.
(3) Platform competition: There is fierce competition among digital financial plat-
forms, and they attract users by offering different services, features, and incen-
tive measures. This platform competition drives innovation and efficiency
improvement, benefiting users.
(4) Platform regulation: Operating digital financial platforms involves regulatory
challenges that require balancing the interests of various stakeholders. Regula-
tory authorities should ensure the safety, reliability, and transparency of digital
financial platforms to prevent market abuse and systemic risks.
The fourth theory is the theory of the sharing economy. This theory explains
how digital platforms enable individuals to share goods and services. Digital finance
promotes the sharing economy by sharing financial resources, such as peer-to-peer
lending and crowdfunding, which creates new opportunities for individuals to obtain
financing and invest in new enterprises. Based on this theory, we can understand the
development of digital finance in the following aspects:
(1) Financial democratization: Digital finance enables a broader population to
access financial services and opportunities by sharing financial resources, such
as peer-to-peer lendingandcrowdfunding. This promotes financial democratiza-
tion, providing new opportunities for individuals and businesses that previously
had limited access to financial support.
(2) Establishing trust: The success of sharing economy platforms relies on trust
among users. Digital finance uses technologies like blockchain and smart
contracts to establish trust, providing transparency and security in financial
transactions. This trust mechanism helps strengthen cooperation and mutual
trust among users.
(3) Collaborative consumption: The sharing economy emphasizes the principle
of collaborative consumption, reducing waste, improving efficiency, and

promoting community development through resource sharing. Digital financial
platforms enable people to share financial resources, invest in new enterprises,
and support social initiatives, thereby fostering collaborative consumption and
community development.
(4) Regulatory challenges: The sharing economy faces regulatory challenges during
its operation, and digital financial platforms are no exception. To ensure
the safety, reliability, and transparency of sharing economy platforms and
prevent market abuses and systemic risks, regulatory agencies need to formulate
appropriate standards and regulatory policies.
The fifth theory is the theory of digital transformation. This theory explains how
businesses utilize digital technology to create new business models, products, and
services. Digital finance serves as a typical example of the digital transformation in
the financial industry, as it is creating new business models such as mobile banking
and robo-advisory services, as well as introducing new products like cryptocurrencies
anddigitalwallets.Basedonthistheory,wecanunderstandthedevelopmentofdigital
finance in the following aspects:
(1) Customer-centric approach: Digital transformation places customers at the core,
and businesses use digital technology and platforms to provide personalized
and convenient financial products and services that cater to customer needs
and enhance customer experience. Digital financial platforms, such as mobile
payment systems and online banking platforms, achieve this customer-centric
transformation by offering features like real-time notifications, personalized
offers, and seamless transactions.
(2) Data-driven decision-making: Digital transformation empowers businesses with
more data sources and analytical capabilities. Companies leverage data anal-
ysis and artificial intelligence technologies to make more accurate decisions.
Digital financial platforms analyze customer behavior, detect fraud, and improve
risk management through data analysis, thereby enhancing decision-making
accuracy and efficiency.
(3) Platformecosystems:Digitaltransformationdrivescollaborationandinnovation
between businesses and other stakeholders. Digital financial platforms collab-
orate with retailers, e-commerce platforms, and social media, among others, to
create platform ecosystems that result in mutual benefits and comprehensive
financial services.
(4) Agile innovation mechanisms: Digital transformation enables businesses to
rapidly develop and test new products and services. Digital financial plat-
forms adopt agile methodologies, enabling them to respond quickly to market
demands and develop innovative products and services like mobile payment
systems, digital wallets, and robo-advisory services, enhancing the speed and
effectiveness of innovation.
In conclusion, the development of digital finance is driven by the ever-changing
technological environment and supported by theories in the field of the digital
economy. The application of emerging technologies such as mobile payments,

1.2 The Key Factors Influencing the Development of Digital Finance 7
blockchain, and artificial intelligence, as well as the development of disruptive inno-
vation,platformeconomics,thesharingeconomy,anddigitaltransformationtheories,
all contribute as vital drivers and guides to the innovation and development of digital
finance.
1.2 The Key Factors Influencing the Development of Digital
Finance
Technology is the crucial driving force behind financial development, especially in
the realm of digital finance. With the continuous progress and innovation of tech-
nology, financial technology (FinTech) has become a key element driving digital
financial innovation. The innovations in financial technology encompass the appli-
cation of technologies such as mobile payments, blockchain, artificial intelligence,
and big data analytics.
Through digital transformation and the impetus of financial technology, finan-
cial institutions can offer more diverse products and services, enhance efficiency,
reduce costs, and establish collaborative ecosystems with other industries for mutual
benefits. At the same time, the rise of the digital finance industry has given birth to
new financial instruments and services. Among them, digital currencies like Bitcoin
and Ethereum present a challenge to traditional banking systems and offer people
an alternative means of payment and investment. These digital currencies, based on
blockchain technology, facilitate secure and transparent transactions in a decentral-
ized manner, providing users with greater financial autonomy and privacy protection.
Additionally, peer-to-peer lending platforms represent a significant innovation in the
digital finance industry, enabling individuals to engage in direct lending on the plat-
form without the need for traditional banks as intermediaries. This model provides
another source of financing for small businesses and individuals, lowering the barriers
and costs of obtaining funds.
By leveraging advanced technology and innovative business models, digital
finance Pew Research Center (2019) not only offers more diversified choices
but also transforms the power structure within the traditional financial system. It
provides individuals and small businesses with more opportunities and convenience,
promoting financial inclusion and sustainable economic development.
However, people are concerned about the impact of digital finance on traditional
financial institutions, as many companies are striving to keep up with technological
changes.Webelievethatthekeyfactorsinfluencingthedevelopmentofdigitalfinance
mainly include:
Firstly, mobile technology GSMA (2019). Mobile technology has always been a
crucial driving force behind the development of digital finance. It has changed the
economic model of financial services, reduced the cost of financial services, and
enabled those who previously lacked bank accounts to access financial services.

Fromtheperspectiveofinformationphilosophy,digitalfinancereliesontheability
to create, store, and transmit information. In this process, mobile technology plays a
crucial role as it enables people to access and transmit financial information anytime
and anywhere. Additionally, mobile technology is a key driver of social change.
Smartphones have created entirely new forms of social interaction, enabling people
to connect with each other in innovative ways. In the realm of digital finance, mobile
technology presents new opportunities for inclusive finance, especially in developing
countries lacking traditional banking infrastructure.
Secondly, the regulatory environment is a critical factor in the operation of digital
finance. The regulatory landscape for digital finance is complex and constantly
evolving due to its operation in a rapidly developing technological environment.
Let’s summarize and review relevant viewpoints based on regulatory policies in
important countries in the European and American markets.
In the European market, countries like the UK, Germany, and France adopt regu-
latory policies aimed at balancing innovation and consumer protection. The UK’s
Financial Conduct Authority (FCA) has established a regulatory sandbox Nana and
Peng (2018), allowing digital finance companies to test new products and services
in a controlled environment. Germany’s Federal Financial Supervisory Authority
(BaFin) implements regulations that require digital finance companies to obtain
licenses before operating in the country. The French Financial Markets Authority
(AMF) has set up a financial technology laboratory to provide regulatory compliance
guidance to digital finance companies.
In the US market, countries like the US and Canada also implement regulatory
policies aimed at balancing innovation and consumer protection. The US Consumer
Financial Protection Bureau (CFPB) develops regulations that require digital finance
companies to disclose fees and service terms to consumers. The Canadian Finan-
cial Consumer Agency (FCA) implements regulations that require digital finance
companies to provide transparent and clear information to consumers.
Thirdly, consumer behavior plays a crucial role in the development of digital
finance. Consumer behavior is often irrational, and companies that understand and
respond to such behavior are more likely to succeed in the digital finance industry.
Furthermore, trust and security are key factors that influence consumer behavior in
the digital finance domain. If digital finance applications are supported by reputable
financial institutions, have clear privacy policies, and employ advanced security
measures such as biometric authentication, consumers are more likely to trust
them. The case of the leading online payment platform, PayPal, illustrates how the
company’s focus on security and fraud prevention has helped it gain the trust of
millions of users worldwide.
Personalization and customization are another key factor influencing consumer
behavior in the digital finance domain. Consumers are more likely to use digital
financial services that offer personalized recommendations and advice based on their
individual financial goals and preferences. The case of the digital investment plat-
form, Betterment, illustrates how the company uses algorithms and data analysis
to provide personalized investment advice to its users, thereby increasing customer
satisfaction and loyalty.

1.3 Challenges and Opportunities Brought by Digital Finance 9
Fourthly, partnerships play a crucial role in the development of digital finance.
Successful digital finance companies often establish strategic partnerships with other
companies to expand their business scope and offer new services.
In the digital finance domain, successful partnerships enable companies to
leverage each other’s strengths and provide new services that neither company
could offer alone. Successful digital finance partnership cases include collabora-
tions between PayPal and Mastercard, as well as Ant Group and Standard Chartered
Bank. The partnership between PayPal and Mastercard allows customers to make
purchases through PayPal using Mastercard’s digital wallet, while the collaboration
between Ant Group and Standard Chartered Bank enables Ant Group to offer mobile
payment services to Standard Chartered Bank’s customers.
Fifthly, globalization. The relationship between digital finance and globalization
is complex and multidimensional. As a global industry, successful digital finance
companies are often those that can explore new markets and adapt to the challenges
of globalization. Globalization brings new opportunities to digital finance companies,
but also new challenges, especially in dealing with different regulatory frameworks
and cultural norms.
Globalization creates a more interconnected and interdependent world. In the
context of digital finance, successful companies are those that can leverage this
interconnectedness to expand their reach and offer new services to global customers.
As digital finance continues to grow and develop, globalization is likely to remain a
major driving force for the industry’s development.
In conclusion, the key factors driving the development of digital finance include
technological innovation and digital transformation, robust legal frameworks and
regulatory environments, user demands and experiences, data privacy and security,
reliable financial infrastructure and interoperability, education, and outreach. These
factors collectively drive the rapid development of digital finance and bring about
new financial tools and services. However, the digital finance industry also faces
challenges such as the risks of cyber-attacks and data breaches, as well as the impact
on traditional financial institutions. Therefore, establishing sound regulatory poli-
cies, enhancing consumer trust and security, building partnerships, and adapting to
the trend of globalization are key to driving the sustainable development of digital
finance. With ongoing technological advancements and market evolution, digital
finance will continue to play a vital role globally, providing people with more diverse,
convenient, and reliable financial services.
1.3 Challenges and Opportunities Brought by Digital
Finance
As a rapidly developing industry, digital finance is full of challenges and opportu-
nities. As of 2021, the global investment in the digital finance sector has exceeded
90 billion USD and has been continuously growing over the past few years. This

trend reflects the immense potential of the digital finance market and optimistic
expectations for future development. The growth of digital finance has brought lucra-
tive investment opportunities to investors and also driven innovation and upgrades
in financial services. However, the digital finance sector also faces several chal-
lenges. The rapid development and emergence of new technologies, business models,
and constantly changing regulatory environments pose risks and uncertainties to
investors.
A cross-disciplinary perspective on the development of digital finance can cover
multiple fields, such as finance, computer science, data science, economics, law, etc.
From the viewpoints of these different disciplines, the development of digital finance
faces the following challenges:
Firstly, technological innovation Anderson and Moore (2006)challenges are
crucial issues in the digital finance sector. Although technological advancements
bring tremendous opportunities to digital finance, the introduction and application of
new technologies also face a series of challenges. These include security issues, such
as network security and data privacy protection, as well as requirements for stability
and reliability. Digital finance companies need to invest significant resources and
efforts to address these technological challenges and ensure the security and stability
of their systems.
Secondly, financial regulatory Zohar (2015) challenges are another significant
issue in the digital finance sector. Due to the rapid development of digital finance,
regulatory mechanisms and policies need to be timely updated and improved.
Some activities in the digital finance sector may pose risks, such as data privacy
breaches, cyber-attacks, fraud, etc. Therefore, establishing sound regulatory frame-
works, strengthening compliance, and protecting the interests of investors and users
are essential tasks in the development of digital finance.
Additionally, data governance Rubinstein (2013) challenges are another aspect
that the digital finance sector faces. Digital finance relies on technologies such as
big data and artificial intelligence, which also bring issues related to data privacy
and data security. Digital finance companies need to ensure proper governance and
management of data, safeguarding the security and privacy of user data while fully
utilizing the value of data for business innovation and targeted marketing.
Finally, talent development challenges are a significant issue in the digital finance
sector. Digital finance requires comprehensive talents with knowledge and skills in
various aspects, such as finance, technology, data, etc. However, such comprehensive
talents are currently relatively scarce, and the industry needs to cultivate and attract
more professionals to meet the demands of industry development. This involves
exploration and innovation in higher education, training, talent introduction policies,
etc., to improve the supply and quality of talents in the digital finance field.
Furthermore, from a macro perspective, digital finance faces challenges related
to consumer trust, regulatory frameworks, and cross-border operations.
Firstly, consumer trust is a crucial factor in the development of digital finance.
Consumer trust and confidence in digital financial services are influenced by risk
perception and fair treatment, among other factors. Digital finance companies need to
invest in security measures and effective communication strategies to build consumer

trust and confidence. Transparent fee and pricing policies, as well as clear and concise
information disclosure, can increase consumers’ trust in digital financial services.
Secondly, digital finance faces complex regulatory frameworks. Different coun-
tries and regions have varying regulatory policies, presenting challenges for digital
financecompaniesoperatingacrossborders.Digitalfinancecompaniesneedtounder-
stand the regulatory environment in each market and develop effective compliance
strategies. Close cooperation with regulatory authorities is essential to ensuring the
safety, reliability, and protection of consumers’ interests in digital financial services.
Additionally, cross-border operations bring regulatory framework issues in
different jurisdictions. Digital finance companies must comply with constraints from
different laws and regulatory frameworks, especially concerning data protection and
privacy. Transparent data collection and sharing practices and compliance with rele-
vant laws and regulations are crucial aspects that digital finance companies must
prioritize.
Furthermore, another challenge that digital finance faces is addressing issues
related to financial knowledge and education, including lack of awareness and
understanding, security concerns, limited access, and complexity.
Digital financial tools and services can often be too complex for individuals with
limited financial knowledge or experience, making it difficult for them to under-
stand how to use these tools and services effectively. Digital finance companies need
to design user-friendly interfaces, provide simplified and easy-to-understand opera-
tional processes to ensure that ordinary users can fully utilize the functionality and
advantages of digital finance.
Certainly, despite these challenges, digital finance also brings forth many
opportunities.
Firstly, the application of artificial intelligence (AI) in the digital finance sector can
provide personalized financial advice and services. By analyzing vast amounts of data
and individual characteristics, AI can offer customized financial recommendations
and solutions based on users’ needs and preferences. Such personalized services
contribute to increased customer satisfaction and loyalty, providing digital finance
companies with a competitive advantage.
Secondly, AI can enhance fraud detection and risk management. By analyzing
user behavior patterns and transaction data, AI can identify abnormal and suspicious
activities, promptly detecting and preventing fraudulent behavior. This helps protect
users’ financial security and enhances the reputation and reliability of digital finance
companies.
Additionally, blockchain Gang (2018) technology also holds potential for appli-
cation in the digital finance sector. The decentralized, tamper-resistant, and traceable
nature of blockchain can improve the security and transparency of transactions.
Through blockchain technology, digital finance companies can offer more secure,
efficient, and cost-effective transaction and settlement services.
Overall, the development of digital finance, with the application of new technolo-
gies like AI and blockchain, is expected to enhance transaction efficiency, improve
risk management and fraud prevention, and provide consumers with more cost-
effective and personalized financial services. For digital finance companies, investing

in technological innovation and research and development is essential to maintain
competitiveness and seize these opportunities.
As an AI professional, I am eager to explore its profound impact on the digital
finance field from a unique perspective. Artificial Intelligence is no longer a foreign
term in the tech world; its power, especially in the FinTech domain, is shaping a
brand-new future. Here are some of my thoughts on how AI technology influences
digital finance.
Firstly,weneedtorecognizethedevelopmentoflarge-scalegeneralmodels,which
has become a significant advancement in AI and has also triggered transformative
changes in digital finance. These powerful models can handle massive financial data
and, with their insight, identify patterns and trends hidden within the data, making
accurate predictions about future market conditions.
Taking econometric models as an example, they employ complex statistical tech-
niques to analyze economic data and forecast future economic trends. These models
have made remarkable achievements in analyzing relationships between economic
variables such as interest rates, inflation rates, and stock prices. They provide us with
a deeper understanding of the rules governing economic operations.
Another noteworthy large-scale model is time-series models. They utilize sophis-
ticated statistical techniques to analyze time-series data, such as stock prices or
exchange rates, and predict future trends. These models have played a crucial role
in the financial sector by providing in-depth analyses of financial data and enabling
highly accurate market trend predictions.
Furthermore, we should explore the impact of AI technology on risk management
in digital finance. AI models have the ability to analyze customer data in real-time
and identify potential risks, such as fraud or credit defaults. This capability not only
helps financial institutions make more precise decisions but also effectively reduces
the risk of financial losses.
In recent years, computer scientists and finance experts have collaborated to
develop a range of AI-based financial risk management tools and technologies.
These tools harness the power of algorithms to analyze vast amounts of financial
data, thereby identifying patterns and trends that may indicate potential risks. One
noteworthy application area is fraud detection. AI algorithms can analyze financial
transaction data in real-time and identify abnormal patterns or situations that may
indicate fraudulent activities. Over time, these algorithms can continuously learn and
adapt, making them more efficient in responding to emerging types of fraud.
Another critical application area is credit risk assessment. AI algorithms can
analyze individuals’ financial history, credit scores, and other relevant data to assess
their creditworthiness and potential default risks. This helps financial institutions
make wiser lending decisions, thereby reducing the risk of loan defaults.
Furthermore, AI plays a crucial role in market risk management. It can analyze
marketdataandidentifypotentialrisksassociatedwithspecificinvestmentsorportfo-
lios. AI algorithms can also be used to optimize investment portfolios by identifying
and selecting investments with lower correlations to reduce risk. In this age of infor-
mation explosion, the application of AI technology in risk management demonstrates

its immense potential and value, bringing revolutionary changes to risk management
in the digital finance field.
Lastly, AI technology has numerous applications in customer service in the digital
finance domain. AI models can provide personalized recommendations and services
based on customers’ individual preferences and financial history. This not only
enhances customer satisfaction and loyalty but also generates more revenue and
profits for financial institutions.
Of particular significance is the advent of Artificial Intelligence technologies
represented by Generative Pre-trained Transformers (GPT) models. This technology
marks a new era of generative AI and has a tremendous impact on our understanding
of digital finance.
Regarding GPT technology, we can conduct an in-depth analysis from the
following perspectives:
Intelligent Customer Service: In the digital finance industry, there is a huge
demand for customer service, and human resources costs can be high. Using GPT
models for intelligent customer service can provide financial institutions with 24/7
onlinesupport,reducingcustomerservicecosts,andincreasingcustomersatisfaction.
Sentiment Analysis: GPT models can be used to analyze large amounts of text
data, such as user comments and social media content in the digital finance industry.
Through sentiment analysis, financial institutions can better understand user needs
and emotional states, thereby improving marketing and service effectiveness.
Investment Decision-making: Investment decisions require analysis of a large
amount of economic and financial data. GPT models can help financial institutions
achieve semantic understanding and natural language descriptions of financial data,
improving the accuracy and efficiency of investment decision-making.
Risk Control: In the digital finance domain, risk control involves identifying and
classifying a large number of risk events. GPT models can assist financial institu-
tions in automatically classifying and identifying risk events, thereby improving the
efficiency and accuracy of risk control.
Text Generation: In digital finance, there is a need for natural language genera-
tion of contracts, reports, announcements, and other text information. GPT models
can help financial institutions automatically generate text information, improving
efficiency and accuracy.
The opportunities brought about by the digital finance field are diverse and
can have many positive impacts on financial service providers and consumers. For
example:
Financial Inclusion: Digital finance helps bring financial services to those who are
not accessible by traditional financial systems, especially in remote areas and low-
income groups. This helps improve financial inclusion, promote economic growth,
and development.
Improved Access: Digital finance makes financial services more accessible,
allowing more people to conveniently and efficiently use banking, insurance, and
investment products.

Cost Savings: Digital finance helps reduce costs for financial service providers,
enabling them to offer lower fees to customers and higher profit margins for financial
institutions.
Enhanced Customer Experience: Digital finance provides better customer expe-
riences through personalized and user-friendly services, increasing customer loyalty
and satisfaction.
Financial Innovation: Digital finance drives innovation in the financial industry,
creating new products and services, such as peer-to-peer lending, crowdfunding, and
mobile payments. The application of artificial intelligence technology allows finan-
cial institutions to develop new products and services that meet customer demands
and improve overall performance.
In this analysis, we will focus on the relevant theories related to innovation in the
digital finance domain, mainly including the following aspects:
Financial Innovation Theory: This theory focuses on the innovation of financial
products, services, and business models, especially in combination with the char-
acteristics of digital technology, to explore how to promote the innovative develop-
ment of digital finance. This includes innovations such as digital currencies based
on blockchain technology, P2P online lending, and robo-advisors.
Financial Technology (FinTech) Theory: FinTech theory focuses on the applica-
tion of technologies such as artificial intelligence, big data, cloud computing, and
blockchain in the financial domain. By combining these technologies with financial
business, it can drive the development of digital finance, improve financial service
efficiency, and enhance user experience.
Financial Regulatory Theory: This theory focuses on the goals, institutions, regu-
lations, and other aspects of financial regulation, emphasizing that the innovation
in the digital finance domain requires close collaboration with regulatory authori-
ties. By formulating appropriate regulatory policies and systems for digital financial
businesses, it can promote the healthy development of digital finance.
Digital Economy Theory: Digital economy theory focuses on aspects such as
digital technology, digital platforms, and digital markets, viewing digital finance
as an important component of the digital economy. It explores how to integrate
digital economy theory with the digital finance domain to promote innovation and
development in the digital finance field.
From an economic perspective, the relationship between digital finance and
innovation can be further analyzed from the following aspects:
Theory of Information Asymmetry: The development of digital finance helps to
eliminate information asymmetry, improve market transaction efficiency, promote
market competition, and maximize social welfare. By utilizing technologies like big
data and artificial intelligence, financial institutions can better acquire and analyze
information, reducing information gaps between buyers and sellers.
Innovation-Driven Theory: Innovations and technological advancements in the
digital finance domain can bring new growth points and momentum to the economy,
driving high-quality economic development. The application of financial technology,
blockchain, and other technologies can stimulate financial industry innovations,
providing more possibilities for socio-economic development.

References 15
Financial Deepening Theory: The development of digital finance can expand
financial services and market depth, providing more financing channels and invest-
ment opportunities for the socio-economy, further promoting economic growth.
For example, digital finance can offer more financing channels for small and
medium-sized enterprises and expand the scope of financial institution business.
Digital Economy Theory: Digital finance is an integral part of the digital economy,
and the application of digital technologies will bring more innovation and transfor-
mation to financial services. Digital finance can provide individuals and businesses
with more convenient and personalized financial services, promoting the emergence
of new markets and business models.
References
Anderson, R., & Moore, T. (2006). The economics of information security. Science, 314(5799)
Di Gang. Innovative Application of Blockchain Technology in Digital Bill Scenarios [J]. Chinese
Financier, 2018 (05)
GSMA. (2019). State of the Industry Report on Mobile Money. GSMA Mobile Money Programme.
Meng Nana, Lin Peng. Research on the Adaptability of Regulatory Sandbox Mechanism and Finan-
cial Technology Innovation in China: From the Perspective of Inclusive Regulation [J]. Southern
Finance, 2018 (01)
Pew Research Center. (2019). Mobile Connectivity in Emerging Economies
Rubinstein, I. S. (2013). Big data: The end of privacy or a new beginning?. International Data
Privacy Law, 3(2)
Werbach, K. (2018). The Blockchain and the New Architecture of Trust. MIT Press
World Bank. (2017). The Global Findex Database 2017: Measuring Financial Inclusion and the
Fintech Revolution. World Bank Publications.
Zhou, T., & Lu, Y. (2016). A Comparative Study of Mobile Payment Procedures. Journal of
Electronic Commerce Research, 17(2)
Zohar, A. (2015). Bitcoin: under the hood. Communications of the ACM, 58(9)

Chapter 2
Research on Monetary Theory in Digital
Finance
2.1 The Importance of Monetary Theory in Digital Finance
Monetary theory, as a core element of digital finance, provides us with a powerful
framework to understand the role of money in the economic system and the impact
of monetary policy on the financial markets. From an economic perspective, mone-
tary theory plays a crucial role in analyzing the close relationship between money
and economic activities. At a functional level, monetary theory offers a comprehen-
sive theoretical structure for analyzing the impact of monetary policy on inflation,
employment, and economic growth.
In this chapter, we will review and summarize the research approaches of scholars
to construct a rigorous theoretical framework for the readers. Through this frame-
work, we can gain a deeper and more systematic understanding of the essence of
monetary theory in digital finance and better grasp its role in real economic activities.
Firstly, we will explore how digital currencies affect inflation.
First, digital currencies can influence inflation by adjusting the money supply
Bordo and Levin (2017). For example, some central banks are considering using
digital currencies as a policy tool to directly issue digital currencies to the public to
adjust the money supply and control inflation rates. Additionally, digital currencies
may alter the transmission mechanism of monetary policy, thus affecting the efficacy
of monetary policy.
Secondly, digital currencies have the potential to enhance the transparency and
predictability of monetary policy Meaning et al. (2018). For instance, the blockchain
technology behind digital currencies can increase the transparency of transactions,
enabling regulatory authorities to more easily monitor the money supply and inflation
rates. Moreover, digital currencies can improve the predictability of monetary policy
because their issuance and management can be more transparent and standardized.
Lastly, digital currencies could weaken the effectiveness of central bank’s mone-
tary policy. For instance, digital currencies may lead to capital outflows, making it
challenging for central banks to implement their monetary policies. Furthermore,
17

18 2 Research on Monetary Theory in Digital Finance
digital currencies may render monetary policies ineffective since the issuance and
circulation of digital currencies are beyond the control of central banks, making it
difficult to control the money supply and inflation rates.
Secondly, let’s discuss how digital currencies impact the job market.
First, digital currencies are likely to have a positive impact on employment.
They can stimulate innovation and entrepreneurial activities, thereby creating
more job opportunities. For example, digital currencies can lower payment costs,
promote cross-border payments, and boost e-commerce, leading to increased job
opportunities.
However, digital currencies may also have negative effects on employment. For
instance, the emergence of digital currencies might lead to a reduction in the size of
traditional banks and financial institutions, thus affecting job opportunities.
Lastly, the impact of digital currencies on employment could be complex. Some
studies suggest that the development of digital currencies could trigger a profound
transformation of the financial system, which in turn affects the organizational
structure and employment patterns within the financial industry. For example,
the emergence of digital currencies may drive financial institutions towards more
decentralized and distributed organizational forms, thereby altering employment
patterns.
Thirdly, let’s explore how digital currencies affect economic growth.
First, the emergence of digital currencies provides new financing channels for
the capital market. Their technological features make capital market financing more
convenient and efficient. The fast transaction speed and low transaction fees facili-
tate faster and more cost-effective financing, improving the efficiency of corporate
financing and thus driving economic growth.
Second, the emergence of digital currencies can reduce the costs and time involved
in payments and settlements Tapscott and Tapscott (2016). Compared to traditional
payment and settlement methods that rely on banks and other financial institu-
tions, digital currencies enable intermediary-free and decentralized payment and
settlement.
Finally, the emergence of digital currencies promotes innovative Swan (2015)
developments within the financial industry, further driving economic growth. For
instance, the integration of digital currencies with smart contracts enables more
complex financial products and services. Digital currencies can also be applied in
fields such as the Internet of Things (IoT) and big data, creating more business
opportunities.
Indeed, we can observe that the relationship between monetary policy and digital
currencies mainly manifests in the following aspects:
Firstly,theissuanceandmanagementofdigitalcurrenciesdonotrelyontraditional
central banks Mersch (2017). This makes it challenging for central banks to control
the quantity and value of digital currencies, thereby affecting their monetary policies.
For example, an excessive supply of digital currencies may lead to inflation and
economic instability.
Secondly, the emergence of digital currencies complicates the implementation of
monetary policy. Traditional monetary policies primarily rely on adjusting interest

2.1 The Importance of Monetary Theory in Digital Finance 19
rates and money supply to control economic growth and inflation. However, the
advent of digital currencies introduces additional complexities in implementing
monetary policies. For instance, digital currencies may affect factors like interest
rates and money supply, thereby influencing the effectiveness of monetary policies.
Finally, the emergence of digital currencies enhances the transparency and open-
nessofmonetarypolicy.Theblockchaintechnologyusedindigitalcurrenciesensures
transparent and public transaction records, thereby making the implementation of
monetary policy more transparent and open. This can help central banks better
monitor economic and market conditions, leading to more effective monetary policy
implementation.
So, in what aspects does digital currency impact policies? We have summarized
some representative viewpoints:
Firstly, digital currencies bring new challenges to the regulation of digital finance.
Digital currencies threaten traditional monetary systems as they can bypass central
banks and traditional financial institutions. Additionally, research indicates that the
lack of regulation in the Initial Coin Offering (ICO) market results in fraudulent
activities and mispricing of assets Zetzsche et al. (2017). Therefore, policymakers
should establish new regulatory frameworks to protect investors and enhance market
efficiency.
Secondly, the potential of digital currencies as a monetary system is often over-
looked. Scholars call for attention to the potential of digital currencies as a more
efficient and decentralized monetary system. However, they also point out challenges
in using digital currencies as a medium of exchange, such as volatility in value and
lack of widespread adoption.
Expanding and considering the relationship between monetary policy and digital
currencies, with references to classical monetary theory analysis, we can draw the
following conclusions:
Firstly, monetary policy can influence the demand for digital currencies, thereby
impacting their value. According to the quantity theory of money, an increase in the
money supply leads to rising prices. Similarly, for digital currencies, an increase in
the money supply may increase demand and, consequently, raise their value. Hence,
an expansionary monetary policy may boost demand for digital currencies, while a
contractionary policy may decrease it.
Secondly, monetary policy also affects the stability of digital currencies. Digital
currencies are subject to significant price fluctuations and are influenced by market
volatility. Changes in monetary policy can impact the stability of digital currencies.
For example, an interest rate hike by the central bank may reduce demand for digital
currencies, leading to a decrease in their value. Conversely, a rate cut may increase
demand and boost their value.
Lastly, monetary policy can shape the regulatory environment for digital curren-
cies. The regulatory framework for digital currencies is still evolving, and monetary
policy can play a vital role in developing these regulations. Central banks can enact
regulations that restrict the use of digital currencies or provide incentives to promote
their adoption. These measures may include limiting digital currency transactions or
offering incentives to encourage their use.

Indeed,besidesinfluencingmonetarypolicy,wecanobservethatdigitalcurrencies
also exert impacts on the monetary system in other ways:
Firstly, digital currencies have the potential to disrupt traditional monetary
systems. They can provide a more efficient and decentralized monetary system,
reducing transaction costs and promoting inclusive finance. Additionally, digital
financecanlowerfinancialtransactioncostsandenhancefinancialliteracy.Toaddress
these impacts, policymakers need to establish new regulatory frameworks to support
the development of digital finance and ensure its benefits reach the entire society.
Secondly, regulating digital finance presents a challenge. Digital currencies pose
a threat to traditional monetary systems as they can bypass central banks and tradi-
tional financial institutions. Therefore, policymakers need to develop new regulatory
frameworks to address the risks and opportunities brought about by digital curren-
cies. Additionally, regulatory agencies need to engage in international cooperation
to establish consistent regulatory standards.
Lastly, Central Bank Digital Currencies (CBDCs) have the potential to impact
monetary policy. CBDCs have the potential to provide a more efficient and secure
payment system, but they also pose risks to financial stability and privacy. Thus,
central banks need to carefully consider the design and implementation of CBDCs
to ensure they do not disrupt monetary policy or financial stability.
Next, let us understand the impact of digital currencies from an economic perspec-
tive. Based on classical monetary theory, we can further extend our analysis with the
following three points:
Firstly, the Quantity Theory of Money suggests that an increase in the money
supply leads to a rise in the price level. However, digital currencies may disrupt this
relationship by providing a fixed money supply that central banks cannot manipulate.
This could lead to higher price stability and a more predictable monetary system,
resulting in positive effects on the economy.
Secondly, the Monetary Policy Transmission Theory indicates that changes in the
money supply and interest rates impact the real economy through channels such as
investment, consumption, and exports. Digital currencies may disrupt these channels
by offering more direct means of transactions for individuals and businesses without
intermediaries. Such innovations could enhance economic efficiency and establish a
more direct link between monetary policy and economic outcomes.
Thirdly, the Optimal Currency Area Theory suggests that a single currency should
be shared by a group of countries with similar economic characteristics to maxi-
mize efficiency and stability. However, digital currencies may disrupt this theory by
providing a currency that is not tied to any specific country or region. This could
foster greater global integration and a more interconnected global economy, leading
to broader economic benefits.
In addition to that, we also see that the impact of Central Bank Digital Currencies
(CBDCs) is a hot topic in the financial field. Clearly, the introduction of CBDCs can
affect the transmission mechanism of monetary policy by changing how monetary
policy influences the economy. According to the Monetary Policy Transmission
Theory, changes in the money supply and interest rates affect the real economy
through channels such as investment, consumption, and exports.

2.1 The Importance of Monetary Theory in Digital Finance 21
With the introduction of CBDCs, central banks may have more direct control
over the money supply and interest rates, thus forming a more effective transmission
mechanism. By referencing classical financial theories, we can expand our thinking
in three aspects:
Firstly, the Seigniorage Theory points out that central banks profit by issuing
currency at a cost below its face value. However, with the introduction of CBDCs,
central banks may lose this revenue source as CBDCs do not incur printing costs
like traditional currencies. This could affect the central bank’s ability to implement
monetary policy and lead to changes in how monetary policy is financed.
Secondly, the Quantity Theory of Money suggests that an increase in the money
supply leads to a rise in the price level. With the introduction of CBDCs, central banks
may have more direct control over the money supply, leading to a more predictable
and stable monetary system. The launch of CBDCs also has the potential to improve
the efficiency of monetary policy by reducing the time lag between policy changes
and their impact on the economy.
Thirdly, the Currency Substitution Theory indicates that individuals and busi-
nesses may choose to use foreign currency instead of their domestic currency if they
have more confidence in the stability of the foreign currency. With the introduction of
CBDCs, individuals and businesses may be more inclined to use their own country’s
CBDC since it will be supported by the central bank and may be more stable than
traditional currencies.
Finally, let’s examine the thoughts of some renowned economists in this field. In
this section, we will quote the viewpoints of several Nobel laureates in economics
to see how their theories help us understand digital finance.
Milton Friedman: Friedman was a renowned American economist, a professor
of economics at the University of Chicago, and a prominent figure in the second
generation of the Chicago School of Economics. He was awarded the Nobel Prize in
Economics in 1976 for his contributions to consumption analysis, monetary supply
theory, history, and the complexity of stabilization policy. He is considered one of
the most important and influential economists of the twentieth century.
In his monetary theory works, Friedman emphasized the importance of stable
prices and the role of monetary policy in achieving this goal. In the context of digital
finance, stable prices are crucial for the operation of cryptocurrencies and other
digital assets. Therefore, monetary policy must adapt to the unique characteristics of
digital finance to ensure price stability. Friedman highlighted the role of the money
supply in determining inflation and the importance of central banks in controlling the
money supply in his monetary theory works. However, the rise of cryptocurrencies
and digital assets challenges the traditional view of money as a physical exchange
medium.
Paul Krugman: Krugman is an American economist and a columnist for The New
York Times. He was a professor in the economics department at Princeton University
and is a representative of the New Keynesian economics. In 2008, Krugman was
awarded the Nobel Prize in Economics for his analysis of trade patterns and location
of economic activity.

Krugman’s work in international trade and globalization is relevant to digital
finance as it has led to the establishment of a global financial system. In this system,
digital finance plays an increasingly important role in facilitating cross-border trans-
actions and reducing transaction costs. However, risks associated with digital finance,
such as cybersecurity and financial stability, must be addressed through international
cooperation and coordination.
Joseph Stiglitz: Stiglitz is a Nobel laureate in Economics (2001) and a recip-
ient of the John Bates Clark Medal (1979). He has previously served as the Chief
Economist and Senior Vice President of the World Bank. Stiglitz made significant
contributions in the field of information economics and is an important member of
the New Keynesian economics.
His work in information economics emphasizes the importance of transparency
and information sharing in digital finance. He believes that as digital finance becomes
increasingly complex, obtaining reliable and accurate information is crucial for
making wise decisions. Therefore, policymakers must ensure that digital finance
is transparent and open to all stakeholders. Stiglitz’s work highlights the necessity
of transparency and information sharing in digital finance to ensure the efficient
functioning of financial markets.
By analyzing these comprehensive and diverse perspectives, we can gain a
broader understanding of various aspects of digital finance and have a more accurate
understanding of its development trends and potential impacts.
2.2 Traditional Monetary Theory and Its Relevance
to Digital Finance
After understanding the importance of monetary theory in digital finance, we return
to the considerations of traditional monetary theory to expand upon the points
mentioned earlier and help us form a framework for understanding digital finance. In
fact, traditional monetary theory focuses on controlling the money supply to stabi-
lize prices and promote economic growth and has been the basis of monetary policy
for decades. However, the rise of digital finance challenges the traditional views of
money and the role of central banks in the monetary system.
In financial capitalism, financial institutions profit by creating and managing
assets, and the fluctuations in financial markets have a significant impact on the entire
economy. Therefore, the supply and value of money are influenced not only by the
regulation of central banks but also by the actions of financial institutions and the
market. Commercial banks and investment banks increase the money supply through
lending and financing, and the volatility of hedge funds and the stock market also
affect the value of money.
The emergence of digital finance further changes the dynamics of money supply
and value. Digital finance, based on the internet and blockchain technology, creates
new financial instruments and technologies, such as digital currencies, blockchain,

2.2 Traditional Monetary Theory and Its Relevance to Digital Finance 23
and smart contracts. These tools and technologies make the issuance and manage-
ment of money no longer dependent on central banks but are achieved through decen-
tralized mechanisms. For example, the issuance and management of certain digital
currencies are collectively decided and supervised by participants in the blockchain
network. This makes the supply and value of digital currencies influenced by different
factors and mechanisms, not just central bank regulation.
Therefore, digital finance presents a challenge to traditional monetary theory,
requiring us to rethink the nature of money, the supply–demand relationship, and
the mechanisms of value formation. It also prompts researchers and policymakers
to reassess the applicability of monetary policy and contemplate how to maintain
financial stability and economic development goals in the digital finance era.
Next, we will cite the views of several renowned economists and financial experts
on the traditional monetary theory and its relevance to digital finance, aiming to
analyze the relationship between digital finance and traditional monetary theory.
Robert Mundell, the Nobel laureate in Economics in 1999 and known as the
“Father of the Euro,” laid the foundation for the Optimum Currency Area theory. His
perspective is closely related to digital finance, emphasizing that the emergence of
digital currencies has led to the establishment of a global financial system but has
also brought challenges in global digital financial regulation.
Mundell believes that the traditional monetary theory still applies to the field of
digital finance. He points out that monetary policy’s management of money supply
and interest rates has significant implications for the economy and financial markets,
including digital finance. He emphasizes that policymakers need to focus on mone-
tary stability and avoid excessive inflation that could undermine the value of digital
currencies.
Mundell is concerned about the challenges faced in using digital currencies
as exchange mediums. He calls for policymakers to establish new regulatory
frameworks to address these challenges and ensure the stability of digital currencies.
Furthermore, Mundell discusses the potential of digital currencies in promoting
economic growth Schär (2020). He believes that digital currencies can reduce trans-
action costs and facilitate inclusive finance, thus stimulating economic activities. He
recommends that policymakers encourage the development of digital finance while
ensuring monetary and financial stability.
Ben Bernanke: Ben Bernanke is an American economist and former chairman of
the Federal Reserve Board. He was awarded the Nobel Prize in Economics in 2022.
In his works on monetary policy, Bernanke emphasizes the importance of central
banks in promoting financial stability and ensuring economic growth. He highlights
that central banks need to adapt to the unique characteristics of digital finance to
ensure their effectiveness in the monetary system. His main points are as follows:
Firstly, Clear Definition of Digital Currencies: Bernanke believes that traditional
monetary theories can still be applied to digital currencies, but policymakers need to
establish a clear definition of what constitutes a digital currency.
Secondly, Potential Benefits of Digital Currencies: Bernanke points out that digital
currencies can provide financial services to individuals and businesses who are

excluded from the traditional financial system, such as those without access to bank
accounts or with limited banking services.
Thirdly, Regulatory Challenges of Digital Currencies: Bernanke highlights that
digital currencies can be used for illegal activities, such as money laundering and
financing terrorism, posing risks to financial stability and consumer protection.
In addition to the aforementioned economists who have conducted in-depth
research on this topic, many scholars have also published different research findings.
For example, economists Robert Kaufman and Önür İnėş, believe that traditional
monetary theory is still relevant to digital finance. They argue that despite digital
currencies operating outside the traditional banking system, they still adhere to the
same economic principles as the traditional financial system, such as supply and
demand dynamics and the impact of macroeconomic factors on currency value.
However, there are also viewpoints suggesting that digital finance requires a
reevaluation of traditional monetary theory. Economists David Yermack and Michael
Casey, in an article published in the “International Finance Analysis Review,” argue
that digital finance necessitates a rethinking of traditional monetary theory. They
point out that digital currencies challenge traditional assumptions about the role
of central banks, the nature of money, and the relationship between currency and
nation-states.
Clearly, these divergent viewpoints indicate that economists have different inter-
pretations of the relationship between traditional monetary theory and digital finance.
Some believe that digital finance fundamentally disrupts traditional monetary theory,
while others believe that traditional economic principles still apply in the current
financial environment. Additionally, some economists propose reexamining tradi-
tional monetary theory to better understand the unique characteristics and impacts
of digital finance. Our perspective is that while digital finance poses challenges to
traditional monetary theory, we can still draw upon its underlying logic and frame-
work. During this process, we need to reevaluate the role of digital finance to gain a
deeper understanding of the effects it generates.
2.3 The Impact of Digital Finance on Monetary Theory
In the preceding discussion, we explored the challenges faced by traditional monetary
theory in the advent of digital finance. This revolution has reshaped our understanding
of the concept of currency and the role played by central banks in the monetary
system. So, how will digital finance continue to impact monetary theory in the long
term?
Financial capitalism, as an economic system based on the operation of financial
capital, encounters the emergence of a novel concept in the financial domain—
digitalfinance.Rootedinblockchaintechnology,digitalfinanceencompassesvarious
aspects, including digital currencies, cryptographic assets, and smart contracts. The
development of digital finance has had profound effects on monetary theory.

2.3 The Impact of Digital Finance on Monetary Theory 25
This chapter takes financial capitalism as a starting point to investigate how digital
finance influences monetary theory, with the aim of outlining future development
trends in this field.
First, let’s examine the wave of monetization brought about by digital finance.
Monetization Menger (1892), a transformation in modern economic systems, has
increasingly emphasized the role of currency in economic life, gradually replacing
the barter system of exchange.
The development of digital finance has sparked a wave of monetization, acceler-
ating the transformation of the role of currency in modern economic systems. The rise
of digital finance technologies has acted as a catalyst for the process of monetization,
enhancing the significance and liquidity of currency in economic life.
Digital finance has facilitated the popularization and use of digital currencies.
With the advancement of digital finance technologies, digital currencies have become
one of the mainstream payment tools, significantly improving payment efficiency.
Digital currencies, characterized by convenience, security, and efficiency, have made
currency circulation more convenient and rapid. People can make instant payments
through methods like mobile phones and e-wallets, no longer relying on traditional
physical currency exchange, thereby expediting economic activities.
Digital finance has driven the digitization of assets Tapscott and Tapscott (2016).
Through the development of blockchain technology and digital assets, assets in the
financial market can be digitized, forming a market for digital assets. This enables
various types of assets such as stocks, bonds, commodities, etc., to be traded and
circulated in digital form, expanding the scale and liquidity of assets. The rise of
digital assets has also spurred innovation and development in the financial market,
enhancing the influence of currency in the financial market.
Next, let’s examine the challenges that digital finance poses to monetary theory
stability.
In traditional monetary theory, central banks manage the money supply and main-
tain stable currency value through monetary policies. However, the decentralized
nature of digital finance means that currency issuance and management are no longer
solely controlled by central banks, but are determined by market participants and
technological protocols together.
Firstly,digitalfinance’srelianceonblockchaintechnologyanddecentralizedcryp-
tocurrencies means they are not subject to control by specific institutions or govern-
ments. This decentralization implies that the determination of currency supply and
value is dispersed among a wide range of participants, rather than centralized in
a central bank. This decentralization may lead to currency supply and value being
influenced by market fluctuations and speculative behavior, causing instability and
volatility.
Secondly, cryptocurrencies in digital finance face technological and security chal-
lenges. The issuance and transactions of cryptocurrencies rely on blockchain tech-
nology, which itself has potential security vulnerabilities and technical flaws. Tech-
nical malfunctions, network attacks, or market manipulation could lead to significant
fluctuations in the value of cryptocurrencies, introducing uncertainty to currency
stability.

Thirdly, digital finance encounters challenges in regulation and compliance. In
the traditional monetary system, central banks have the responsibility to regulate
and supervise financial markets to ensure the stable operation of currency. However,
the decentralized nature of digital finance makes regulation and compliance more
complex. The lack of a unified regulatory framework and regulatory authorities may
lead to market disorder and risks, further challenging the stability of monetary theory.
Next, let’s explore the financial globalization process driven by digital finance.
Financial globalization is an ongoing process where financial capital transcends
borders, creating a global financial market. The rise of digital finance acts as a
powerful driver, accelerating the pace of financial globalization and bridging the
global distance of currencies. It provides a pathway for financial capital to flow
freely across borders, reaching every corner of the global market.
Through digital payments and blockchain technology, cross-border payments and
transfers have become easy and efficient, creating a seamlessly connected global
economic system. International trade and capital flows are no longer restricted
by cumbersome procedures and expensive fees but are rapidly propelling global
economic development.
Digital finance has also brought unprecedented opportunities for investors.
Regardless of their location, investors can easily access opportunities for cross-
border investments, directing capital into projects and assets in various countries.
This globalized investment portfolio not only offers individuals and businesses more
choices but also promotes global capital flows and optimized resource allocation.
Enterprises have undergone revolutionary changes due to digital finance. Through
digital trading platforms and blockchain technology, they can more easily obtain
financing support on a global scale, driving corporate internationalization and glob-
alization. The global financial market fostered by digital finance provides a broader
stage for enterprises, enabling their voice and value to spread worldwide.
The globalization trend brought about by digital finance may challenge traditional
monetary theory’s interpretation of currency circulation and value. This calls for a
need to reevaluate and revise monetary theory to better understand and adapt to the
impact of digital finance on the global financial landscape.
We strive to build a comprehensive and in-depth theoretical framework and
perspectives for our readers regarding the relationship between digital finance and
monetary theory. Additionally, we aim to shed light on the key issues arising from
the development of digital finance, enhancing readers’ understanding of its future
prospects. We encourage readers to stand on the shoulders of giants and continue
advancing research and development in the field of digital finance and monetary
theory. We firmly believe that this will enable us to better navigate the uncertainties
of the future economic landscape and provide theoretical support for building a more
robust and innovative financial system.

References 27
References
Bordo, M. D., & Levin, A. T. (2017). Central bank digital currency and the future of monetary
policy. National Bureau of Economic Research.
Meaning, J., Dyson, B., Barker, J., & Clayton, E. (2018). Broadening narrow money: Monetary
policy with a central bank digital currency. International Journal of Central Banking, 14(1)
Menger, K. (1892). On the Origin of Money. Economic Journal, 2
Mersch,Y.(2017).Digitalbasemoney:anassessmentfromtheECB’sperspective.EuropeanCentral
Bank.
Schär, F. (2020). Decentralized Finance: On blockchain- and smart contract-based financial markets.
Federal Reserve Bank of St. Louis Review, 102(1)
Swan, M. (2015). Blockchain: Blueprint for a new economy. O’Reilly Media, Inc.
Tapscott, D., & Tapscott, A. (2016). Blockchain revolution: how the technology behind bitcoin is
changing money, business, and the world. Penguin.
Zetzsche, D. A., Buckley, R. P., Arner, D. W., & Föhr, L. (2017). The ICO gold rush: It’s a scam, it’s
a bubble, it’s a super challenge for regulators. University of Luxembourg Law Working Paper
No. 2017–011.

Chapter 3
Digital Financial Innovation
and Regulation
3.1 Innovative Digital Financial Models
In recent years, digital finance has emerged as a significant trend in the financial
industry Zohar (2015a). This innovative domain encompasses a wide range of prac-
tices, including Bitcoin mining, supply chain finance, algorithmic trading, and more.
The objectives of these innovative models are to enhance the efficiency and security
of the financial system while driving the globalization and accessibility of finan-
cial services. However, the influence of digital finance extends far beyond these
well-known areas; it also leads to a series of other innovative forms, such as virtual
banking, digital securities, and smart contracts.
Virtual banking Chiu and Koeppl (2017) is a novel banking service model based
on internet and mobile technology. Leveraging digital processes and automation, it
offers customers more convenient, flexible, and cost-effective banking services. On
the other hand, digital securities are an innovative way of issuing and trading securi-
ties using blockchain technology. They enable asset digitization, equity decentraliza-
tion, and anonymous trading, promoting the globalization and innovation of capital
markets. Smart contracts, built on blockchain technology, are an automated form of
contract execution. They offer features like automatic execution, decentralization,
and security, driving the automation and intelligence of financial services.
This section will delve into these innovative digital financial models to provide a
comprehensive understanding of the field of digital finance.
Bitcoin mining, as a unique method of generating digital currency, has garnered
widespread attention due to its economic and environmental impacts. Researchers
have found that while Bitcoin mining has a noticeable impact on energy consumption
and carbon dioxide emissions, it is relatively lighter on the environment compared to
traditional banking systems. Additionally, Bitcoin mining represents an innovative
form of digital finance, utilizing distributed ledger technology to ensure transac-
tion security and anonymity while promoting the widespread adoption of digital
currencies.
29

30 3 Digital Financial Innovation and Regulation
Supply chain finance is another innovative model emerging in the realm of digital
finance. Scholars have extensively examined the application of distributed ledger
technology in supply chain finance and found that it enables automation, trust-
lessness, and decentralization in the supply chain financial processes, significantly
reducing costs and risks. By employing blockchain technology, supply chain finance
can achieve more efficient and secure capital flow and settlement, driving the develop-
ment and popularization of this field. In other words, the main advantage of supply
chain finance innovation lies in providing more diversified and flexible financing
options for small and medium-sized enterprises.
Algorithmic trading, as another innovative form in the field of digital finance, has
drawn the attention of scholars. Research has shown that the impact of algorithmic
trading on market quality depends on market liquidity and investors’ trading strate-
gies. In high liquidity markets, algorithmic trading contributes to improved market
efficiency and cost-effectiveness of trading. However, in low liquidity markets, algo-
rithmic trading may lead to market imbalances and instability. Furthermore, algo-
rithmic trading can utilize technologies such as data mining and machine learning to
provide investors with more precise trading strategies and decision support.
In recent years, innovative digital finance has gradually become a significant
driving force in the development of the financial industry. Let’s explore the main
types of current digital finance innovations:
Firstly, let’s take a look at Decentralized Finance (DeFi).
Decentralized Finance (DeFi) refers to financial services built on decentralized
blockchain networks, such as Ethereum. It disrupts traditional financial markets by
providing innovative financial services based on decentralized blockchain networks.
DeFi is an emerging financial model that utilizes blockchain and smart contract
technology, allowing users to engage in financial transactions and various financial
activities on decentralized platforms.
Innovative financial services within DeFi include decentralized lending, decen-
tralized exchanges, stablecoins, liquidity mining, and more. These services offer
faster, cheaper, and more accessible financial products and services without relying
on traditional financial institutions. Users can participate in lending and borrowing
through smart contracts and engage in liquidity provision and trading, enabling more
efficient capital utilization and transaction execution.
DeFi’s development also contributes to financial democratization by offering
financial services opportunities to those excluded by traditional financial systems.
Due to its decentralized nature, DeFi platforms are open to individuals and businesses
worldwide, regardless of their background, geographical location, or financial status.
This fosters equal access to financial services for a broader audience, promoting
financial inclusivity and accessibility.
Next, let’s explore Non-Fungible Tokens (NFTs).
Non-Fungible Tokens (NFTs) are a new and innovative digital financial model. NFTs
represent unique digital assets that are verified on a blockchain network, allowing
them to be bought, sold, and traded like physical assets.

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