The People’s Bank of China (PBOC) is poised to become the first major central bank to issue a digital version of its currency, the yuan, seeking to keep pace with — and control of — a rapidly digitizing economy.
However, unlike cryptocurrencies such as bitcoin, dealing in the digital yuan would not have any presumption of total anonymity, and its value would be as stable as the physical yuan, which would be sticking around, too.
Some questions remain, including the impact on commercial banks and Big Tech companies such as Ant Financial Services Group and Tencent Holdings Ltd that offer payment services.
Illustration: Constance Chou
Behind China’s rush is a desire to manage technological change on its own terms. As one PBOC official put it, currency is not only an economic issue, it is also about sovereignty.
Although not all details are out, new patents registered by the PBOC and official speeches indicate that it could work something like this: Consumers and businesses would download a digital wallet on their mobile phone and load the digital cash from their account at a commercial bank — similar to going to an ATM. They could then use it like cash to make and receive payments with anyone else who also has a digital wallet.
Most transactions in China are already electronic as the country moves increasingly toward a cashless society. Even street food sellers in small towns would rather use a mobile payment app than make actual change.
In the first quarter of this year, payment apps handled 59 trillion yuan (US$8.3 trillion) of transactions in China, up 15 percent from a year earlier, according to research firm Analysys. Ant Financial’s Alipay handled almost half of that, followed by Tencent’s WeChat Pay with one-third.
The PBOC has said that all non-cash transactions — which also includes such things as credit, debit and stored-value cards, bank transfers and checks — totaled 3.8 quadrillion yuan last year.
The trend is hardly unique to China: A central bank survey in Sweden found that only 13 percent of people last year paid for their most-recent purchase in cash, down from 39 percent in 2010.
The PBOC is making this move for important regulatory and political considerations. Having the ability to track money electronically as it changes hands would be useful in combating money laundering and other illegal activities.
The project was started by former PBOC governor Zhou Xiaochuan (周小川), who retired in March last year. He wanted to protect China from having to some day adopt a standard, like bitcoin, designed and controlled by others.
Facebook Inc’s push to introduce its own digital coin, called Libra, in 2020 might be speeding things up, as it could end up strengthening the US dollar’s dominance — and weakening China’s capital controls. As PBOC research bureau head Wang Xin (王信) said in July, release of the Libra could have “economic, financial and even international political consequences.”
The digital yuan would probably not be a “cryptocurrency,” by which we usually mean an offering such as bitcoin that uses decentralized, online ledgers known as blockchain to verify and record transactions.
Bitcoin and others, such as Ethereum, support anonymous transfers without the need for an intermediary — or a central bank — but the wild volatility in their value makes them ill-suited for use as a means of payment.
Libra would also be a cryptocurrency, but a so-called stablecoin that would be 100 percent backed by a basket of securities and real-life currencies such as the dollar, euro, pound and yen. Because those currencies do not fluctuate much, Libra’s value should be steady as well. Initially, at least, Libra would be run by private companies including Facebook, Visa and Uber.
The PBOC would, of course, back the digital yuan, making the currency the opposite of decentralized. It is also not certain that it would use blockchain, either.
China banned cryptocurrency exchanges and so-called initial coin offerings in 2017 amid a broad effort to cleanse risk from its financial system and clamp down on so-called shadow banking. They can still be traded, but through a slower, more restrictive process.
Digital currencies could also provide a way to move money out of China, potentially adding to capital outflows that would undermine the yuan’s value. Even though Libra is not out yet, Chinese officials have called for its oversight by monetary authorities.
Although the PBOC has considered using blockchain, researchers have expressed doubts about whether the technology is capable of supporting a large volume of simultaneous transactions.
China’s annual Singles’ Day shopping gala last year had payment demand peaking at 92,771 transactions per second, far above what bitcoin’s blockchain could support, according to PBOC payments department deputy director Mu Changchun (穆長春).
The bank wants to “strike a balance” between anonymity and the need to crack down on financial crimes, Mu said, but it is unclear what that means.
The PBOC has said that user information would not be completely exposed to banks, but user identities would likely be tied to individual wallets, giving authorities another window into people’s lives.
PBOC Deputy Governor Fan Yifei (范一飛) said in an article last year that banks might need to submit daily information on transactions and that there could be caps on transactions by individuals.
The digital yuan is “close to being out,” Mu said in August.
The PBOC has been looking into a digital currency since at least 2014, and it has been recruiting staff for a dedicated institute. Research and innovation regarding digital currencies was mentioned in the grand plan to make Shenzhen, the technology hub next to Hong Kong, into a world-class city by 2025.
It is difficult to say whether people would adopt a digital yuan. While the PBOC’s digital wallet is just a wallet, at least for now, Alipay and WeChat Pay are deeply embedded in a whole world of social media, e-commerce, ride-hailing, bill-paying, investments and other functions.
Da Hongfei (達鴻飛), the Shanghai-based founder of the open-source blockchain platform Neo, said he cannot see why the general public would choose the PBOC’s digital currency over something as handy as Alipay.
The digital yuan would affect banks mainly in bookkeeping. Digital cash would have to be kept separate from regular savings, because it represents money in actual circulation (known in central banking parlance as M0), not the so-called demand deposits (M1), which banks use to lend out again to companies and households.
Commercial lenders would deposit 100 percent worth of reserves at the central bank in exchange for digital currency, which it then distributes to retail users. The two-tier system also reduces the burden on the PBOC to perform due diligence, revamp IT systems and answer client requests.
As the PBOC’s digital money is designed to replace cash, it would not have a big impact on the broad money supply, and thereby its effect on monetary policy would likely be neutral.
If the digital currency is widely accepted and people are encouraged to hold more cash, bank deposits could decline, but the impact would be manageable, according to an article last year from the PBOC’s digital currency research institute.
In a more distant future, the central bank might use digital currency to help steer the economy. Patent filings made public in October last year described a currency that would require banks making loans to input details about borrowers and interest rates before funds could be transferred. That could allow the PBOC to more proactively control bank lending and direct funding where it deems appropriate.
If China had the need to turn to an unconventional monetary policy toolkit, a digitized currency would allow it to apply negative rates even for people holding digital cash.
Other central banks around the world are exploring the use of digital currencies: Uruguay has done a pilot program, called e-Peso, which was praised by the IMF; Venezuela has a controversial offering called the petro; and the Swedish Riksbank is exploring an e-krona.
Bank of England Governor Mark Carney last month called for a Libra-like reserve currency to end the US dollar’s dominance. An anonymous survey conducted early this year by the Bank for International Settlements showed that most of the global central banks are participating in theoretical and conceptual research.
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