A senior official at the People’s Bank of China (PBoC) recently confirmed that the state was “close to” releasing an official cryptocurrency, after five years of rigorous research. While no timelines have yet been confirmed, speculations include that the currency may be revealed in time for “Singles Day”, China’s busiest shopping day of the year. This news came soon after the release of Facebook’s whitepaper regarding Libra, a new cryptocurrency expected to surpass the bitcoin in popularity and use.
In the past, the PBoC has strongly opposed bitcoin and financial institutions have been prohibited from holding the cryptocurrency since 2013. Regarding Libra, a senior official at China’s State Administration of Foreign Exchange, explained that “Facebook’s Libra could have a major impact on China’s foreign exchange management and cross-border capital flows, as well as affecting the RMB’s internationalization.”
In contrast to a typical cryptocurrency however, China’s state backed digital currency will be supported by a two-tiered system, with PBoC at the first tier and commercial banks at the second. Commercial banks will be required to deposit 100 per cent reserve to the central bank, ensuring there is no over representation of the currency and the PBoC retains complete control over the supply of money. These commercial banks will then be responsible for distribution to individuals and businesses.
The digital currency is expected to help improve financial inclusion, with users being able to download digital wallets to their smartphones, and exchange yuan for the digital currency. This will help increase access to a wider audience, with half of China’s population owning smartphones. While anonymity will be maintained at the user level, it is expected that the state bank will have complete visibility of transaction data, allowing the flow of money to be tracked by identity. This can help the state bank measure the velocity of currency and improve its monetary policy, along with increased surveillance of businesses and individuals; ultimately helping to prevent money laundering, fraud, and tax evasion.
State backed digital currencies have recently gained serious traction in the international markets. Referring to the same, Christine Lagarde, Managing Director of IMF, recently stated, “The case is based on new and evolving requirements for money, as well as essential public policy objectives. My message is that while the case for digital currency is not universal, we should investigate it further, seriously, carefully, and creatively.”
Currently, a number of other countries have already initiated their own state backed digital currencies or have finalized the details and are close to release. These include the Marshall Islands’ “SOV”, Senegal’s “eCFA”, and Tunisia’s “eDinar” amongst others. Canada, Thailand, Uruguay and Israel are among some of the countries currently in the research phase, and are seriously considering some form of state backed digital tender. There are still others, including Germany, Switzerland, Japan, and the United Kingdom that have already rejected the possibility of a centralized digital currency due to the high level of risk involved. Rather than making bitcoin an accepted legal tender, most countries seem to prefer launching their own digital currency that can replace paper-based currency and remain in the state bank’s control
State backed digital currencies, while may not be able to replace bitcoin, are a huge step forward in the evolution of money. While many questions regarding the actual mechanics behind these currencies and how successful they will be are yet to be answered, improved financial inclusion, internationalization of currency, and greater control over money supply are among the key benefits expected.