The digital Yuan is coming soon, according to a senior official at China’s central bank.
The People’s Bank of China (PBOC) Deputy Director Mu Changchun said the bank’s “digital currency can now be said to be ready” at the China Finance 40 Forum in Yichun this weekend, according to Shanghai Securities News.
While no specific time frame was announced, Mu released several significant details, including that the official Chinese cryptocurrency will not be built on a traditional blockchain, and that it will not be issued directly to the people. Instead the digital Yuan will use a two-tier system, with the PBOC issuing it directly to banks and other institutions who will in turn make it available to the general public.
Facebook up the urgency
Facebook’s surprise announcement that it intended to create a new global digital currency on a blockchain lit a fire under China’s efforts to create its own sovereign digital currency, the South China Morning Post reported in July.
That story quoted a former PBOC governor, Zhou Xiaochuan, warning that if Facebook’s Libra remains closely associated with the dollar—how much of the “basket of currencies” backing the stablecoin will be U.S. dollars is unclear—”it could further ingrain the US dollar hegemony,” as the dominant international reserve currency.
Zhou predicted the PBOC’s two-tiered system last month. He suggested that the digital Yuan would adopt a system similar to Hong Kong, where three commercial banks—Bank of China (Hong Kong), HSBC, and Standard Chartered— issue their own banknotes backed by U.S. dollar reserves.
Zhou also suggested that the digital Yuan could be issued by unspecified “commercial entities.” The South China Morning Post speculated that these could include Alibaba and Tencent, which have huge existing digital payment networks in Alipay and WeChat Pay.
Digital Yuan’s two levels
Mu’s explanation of the two-tiered system begin with the vast size of the country, where the digital Yuan would be used as a substitute for paper and coin currency.
Noting that the “economic development, resource endowment, population education, and acceptance of smart terminals are not the same” throughout China, Mu said using banks and other companies would free the PBOC from facing the Herculean task of “improving accessibility and increasing public willingness to use,” a digital Yuan alone
It would also spread the risks while giving the PBOC access to the “resources, talents and technological advantages of commercial organizations, [as well as] promote innovation, and compete for excellence.”
It can use existing resources to mobilize the enthusiasm of commercial banks and smoothly improve the acceptance of digital currency.”
In addition, Mu’s comments made clear that the Chinese cryptocurrency project was having the same scaling issues other cryptocurrency developers have struggled with. Building the digital Yuan on a traditional blockchain would not work in a country with as many small retailers as China, Mu said, citing a pure-blockchain prototype tested by the central bank. If widely adopted, there would simply be too many simultaneous transactions for a Bitcoin-style architecture to handle, he added.
Mu also suggested that the two-tier platform would prevent the digital Yuan from cutting existing middlemen out of the financial system. In this, the Chinese project diverges from one of the main stated goals of both Facebook and other blockchain-based digital payment platforms like Circle and Ripple: financial disintermediation, or cutting out middlemen that drive up the cost of financial transactions and cross-border payments.
Knocking out middlemen like SWIFT is also a major goal of agencies like the United Nations. The international body is pushing digital currencies as a method of international financial settlement in order to cut the high prices poor migrant workers pay to send money home.
Control is key
Unstated but implicit in Mu’s comments is that a two-tiered digital currency system would not lessen the state’s control of China’s economy. The PBOC digital currency would remain a central bank currency “guaranteed by the central bank’s credit,” he said. It would not affect the way existing monetary policy is implemented, or “have a negative impact on the real economy.”
Nor would it impact existing “anti-money laundering” (AML) or “countering the financial of terrorism” (CFT) regulations, asserted Mu.
Finally, Mu also contended that “commercial institutions will pay the full amount and 100% of the reserve to the People’s Bank of China.”