China’s digital currency will create a “horse race” when it is launched as commercial banks and other institutions compete to provide the best services using the new form of money, a People’s Bank of China (PBOC) official said yesterday.
China is preparing to be the first nation to roll out a digitized domestic currency, a development that is being closely watched by the world’s financial services industries, though few details are currently available.
Akin to Facebook Inc’s proposed Libra digital currency and other cryptocurrencies such as bitcoin, the Digital Currency Electronic Payment (DCEP) project would be powered partially by blockchain technology.
PBOC would adopt a two-tier approach with its project, Mu Changchun (穆長春), head of the bank’s digital currency research institute, told a forum in Hong Kong.
It would first issue the currency to commercial banks and other institutions, which would then resend it to the general public.
“During the research period, and also the issuance period, there will be a horse-race approach,” Mu said.
“The front-runner will take the whole market — who is more efficient, who can provide a better service to the public — they can survive in the future,” he said.
Mu added that the PBOC was “technology neutral,” but he anticipated that if a front-runner takes the lead, “the technology they use will be adopted by other parties.”
As the DCEP is designed to substitute existing coins and paper money, holders of the currency would not receive interest payments, which would mean there would be no implications for inflation or monetary policy, Mu said.
While the project has some similarities to Libra, it seems likely to allow Chinese regulators even closer oversight over money flows than they currently have.
The main motivation behind the project is China’s desire to protect its capital borders in the face of fears that newer global payment systems and advanced technology could facilitate illegal cash flows, market observers said.
Mu reiterated Chinese regulators’ concerns about Libra, saying that if a country had capital management policies, the cryptocurrency “was definitely a threat to the country’s currency sovereignty.
He added that any other “stable coins,” digital currencies whose value is pegged to that of other assets or currencies, would have to abide by all of Beijing’s foreign exchange rules if they were to be accepted in China.
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