Viewpoint | Why is the Chinese central bank eager to issue its own digital currency?

The People's Bank of China (PBOC) is poised to become the first major central bank to issue its legal currency digital version to keep up with and control the fast-growing digital economy. However, unlike cryptocurrencies such as Bitcoin, the use of digital renminbi transactions will not be completely anonymized, its value will be as stable as the physical renminbi, and the latter will continue to exist.

This has caused some problems, including how this central bank digital currency will affect commercial banks and large technology companies that already offer payment services, such as Ant Financial and Tencent.

Behind the rush of the Chinese central bank is a desire to manage technological change in its own way. As an official of the People’s Bank of China said, money is not only an economic issue but also a sovereign issue.

01. What is the plan of the People's Bank of China?

Although not all details about the central bank's digital currency have been disclosed, according to the new patent registration and official speech by the People's Bank of China, this digital currency will probably operate like this: consumers and businesses will be on mobile phones. Download a digital wallet and load their digital cash in a commercial bank account into the digital wallet. They can then pay and receive this digital currency with anyone who owns the digital wallet, just like using cash.

02. Are most of the transactions in China not already electronic?

Yes, China is increasingly becoming a cashless society. Even street food sellers in small towns prefer to use mobile payment applications instead of traditional cash change methods.

According to research firm Analysys, in the first quarter of 2019, such mobile payment applications handled RMB 59 trillion (about 8.3 trillion US dollars) in China, a year-on-year increase of 15%. Alipay's Alipay handled nearly half of the transactions, and Tencent's WeChat Pay handled nearly a third of them.

According to the People's Bank of China, all non-cash transactions (including credit cards, debit cards and stored value cards, bank transfers and checks, etc.) totaled 3.8 trillion yuan in 2018.

This trend is not unique to China: a survey by the Swedish central bank found that only 13% of people in Sweden used cash to pay for the most recent purchase in 2018, down from 39% in 2010.

03. Why does the Chinese central bank issue digital currency?

There are some important regulatory and political considerations. The ability to track funds electronically when funds are transferred will help combat money laundering and other illegal activities. The People’s Bank of China’s digital currency project was launched by Zhou Xiaochuan, the former central bank governor who retired in March 2018. He wants to protect the sovereign status of the renminbi and avoid having to adopt a currency standard (such as bitcoin) designed and controlled by others.

And Facebook plans to launch its own digital currency, Libra, in 2020, making the form even more urgent, as Libra may eventually strengthen the dollar's dominance and weaken China's capital controls. As Wang Xin, director of the Research Bureau of the People's Bank of China, said in July, Libra may have "economic, financial and even international political consequences."

04. Is the Chinese central bank digital currency a cryptocurrency?

Maybe not. When we talk about cryptocurrencies, we usually refer to a form of currency such as Bitcoin that uses a decentralized online ledger technology (ie blockchain) to verify and record transactions.

Bitcoin and Ethereum can implement anonymous transactions without the involvement of third-party intermediaries. But the high volatility of the value of cryptocurrencies such as Bitcoin makes them unsuitable as a means of payment.

Libra Stabilizer is also a cryptocurrency, 100% supported by a basket of legal tenders (such as US Dollars, Euros, British Pounds and Japanese Yen) and short-term government bonds, and the value of Libra's assets is relatively stable, so Libra's value is also It should be more stable. Libra will be operated by private companies such as Facebook, Visa, Uber and other members of the Libra Association.

The Chinese central bank's digital currency will be supported by the renminbi, making this digital currency central. This new digital currency is unlikely to use blockchain. The reason given by Mu Changchun, deputy director of the payment department of the People's Bank of China, is that “the blockchain platform cannot meet the throughput required for retail sales.”

05. Why not use your existing cryptocurrency?

China has banned cryptocurrency exchanges and so-called first-time token issuance (ICO) as early as 2017. The Chinese government has vigorously cleaned up the risks in the financial system and cracked down on so-called shadow banking. [Note: Shadow banking refers to free banking supervision. A credit intermediation system (including various related institutions and business activities) that may cause systemic risks and regulatory arbitrage outside the system]. The cryptocurrency can still be traded, but must pass a slower and more rigorous process.

The cryptocurrency may also provide a way to transfer funds out of China, potentially increasing capital outflows and thereby weakening the value of the renminbi. Although Libra has not yet come out, Chinese officials have called on the monetary authorities to supervise it. [Facebook sites are banned in China, but many Chinese access it through a workaround called Virtual Private Network (VPN). ]

06. Why not use blockchain?

The People's Bank of China has already considered it, but researchers are skeptical about whether blockchain technology can support a large number of simultaneous transactions. Another central bank official, Mu Changchun, said that the annual demand for China's annual Singles Day shopping in 2018 reached a peak of 92,771 per second, far higher than the level supported by the Bitcoin blockchain, so he said. The blockchain platform cannot meet the throughput required for retail."

07. What about user privacy protection?

Mu Changchun said that the bank hopes to "balance" between anonymity and combating financial crimes, but it is still unclear what this means. The People's Bank of China stated that user information will not be fully disclosed to banks. But the user's identity is likely to be tied to the personal wallet, which will provide the authorities with another window to understand people's lives. Fan Yifei, deputy governor of the People's Bank of China, hinted in an article in 2018 that banks may need to submit daily trading information, and personal transactions may have a ceiling.

08. When will the Chinese central bank's digital currency come out?

It seems to be coming out soon. In August this year, Mu Changchun said that this digital currency is "out of the box." The People's Bank of China has been studying digital currency since at least 2014 and has been recruiting staff for specialized agencies in this digital currency. At the same time, the State Council of China has issued a document stating that by 2025, Shenzhen will be a modern, international and innovative city.

09. Who will use this digital currency?

This is hard to say. The People's Bank of China's digital wallet is just a wallet, at least for now, and Alipay and WeChat payments have been deeply embedded in the world's social media, e-commerce, taxi service, bill payment, investment and other functions. Da Hongfei, founder of Neo, an open source blockchain platform based in Shanghai, said he did not understand why the public would choose the digital currency of the People's Bank of China rather than the convenience of Alipay.

10. What impact will this digital currency have on banks?

Mainly in the accounting impact. This digital currency must be separated from conventional savings because it represents the currency in actual circulation (called M0 in the central bank's statement) rather than the demand deposit (M1) that banks use to lend to businesses and households. Commercial banks will deposit 100% of the reserve into the central bank in exchange for this digital currency and then distribute it to users. This two-tier operating system eases the burden on the People's Bank of China on due diligence, reforming IT systems and responding to customer requests.

11. Will it affect the Chinese economy?

The impact on the economy may not be immediate. Since the Chinese central bank's digital currency is designed to replace cash, it will not have a significant impact on broad money supply, so its impact on monetary policy may be neutral.

According to an article in the 2018 of the People’s Bank of China Digital Money Institute, if this digital currency is widely accepted, so that people hold more of this form of cash substitution, bank deposits may decline, but the impact will be controllable. . In the more distant future, the central bank may use digital currency to help guide the economy.

12. What is the action of other central banks around the world?

Uruguay has implemented a pilot program called e-Peso, which has been praised by the International Monetary Fund (IMF); Venezuela has a controversial oil coin “Petro”; the Swedish Central Bank is developing an e-Krona; In the week, Bank of England Governor Mark Carney called for a Libra-like “synthetic hegemonic currency (SHC)” to replace the dominance of the dollar. An anonymous survey conducted by the Bank for International Settlements (BIS) in early 2019 showed that most central banks around the world are involved in theoretical and conceptual research on the central bank's digital currency.

Original: Bloomberg

Edit: Jhonny

Source: Unitimes