In a groundbreaking move towards digitization, China’s central bank is preparing to launch its own digital currency. This initiative bears the potential of crowning the People’s Bank of China (PBoC) as one of the first major central banks to deploy digital currency for anything from buying noodles to purchasing a car.
This proactive move was initiated in 2014 when the PBoC brought a research team together to delve into the potential of prototype cryptocurrency, conducting trial runs that brought the bank a step closer to its digital aspirations.
Presenting potential benefits over existing payment methods such as Alipay or WeChat, a PBoC-backed cryptocurrency would allow sellers to receive digital payments directly from the buyer. By eliminating middlemen, this method could lower transaction costs significantly.
Parallel to developing its digital capabilities, the PBoC has heightened its scrutiny of Bitcoin and other private digital currencies. Cognizant of the risk of a Bitcoin bubble and the historical monopoly of state-issued currencies, the bank aims to maintain control in the burgeoning realm of cryptocurrencies.
The Chinese population has wholeheartedly embraced online payments for everything from habitual to significant transactions. Whether it’s purchasing a cold can of Coke from a vending machine or exchanging money at Lunar New Year gatherings, QR codes and a few taps on a smartphone have replaced physical money and the conventional red envelopes.
With China’s integration of digital payments, the PBoC faces an urgent challenge to retain its status as the central monetary authority across both digital and physical domains. So, in line with the time-tested saying – if you can’t beat them, join them.
The introduction of digital currencies can significantly improve the bank’s understanding of lending trends, credit creation and fund allocation – key elements in curbing money laundering and enhancing the effectiveness of monetary policy, as expressed by Duan Xinxing, Vice President of Beijing-based OKCoin Co., one of China’s largest bitcoin exchanges.
By issuing digital currency, the PBoC aims to facilitate better monitoring of financial system risks and track economy-wide transactions. OKCoin, among other cryptocurrency exchanges, has recently taken measures to halt Bitcoin withdrawals in response to efforts to crack down on capital outflows.
In January 2016, the PBoC optimistically declared that its own cryptocurrency was soon to be launched. However, no formal start date has been announced yet. Despite this delay, senior officials, including Deputy Governor Fan Yifei, continue to strongly advocate for the initiative.
The transition to a cashless economy isn’t exclusive to China. Late last year, Indian Prime Minister Narendra Modi abolished a staggering 86 percent of notes in circulation in a bid to combat corruption and promote digital transactions. Similarly, the Bank of Canada, Deutsche Bundesbank and the Monetary Authority of Singapore have also begun examining digital currencies.
Printing currency for a population of 1.4 billion doesn’t come cheap, especially considering the associated costs of managing circulation and combating counterfeit. The addition of digital currency to cash circulation can significantly enhance transaction speed, convenience, and transparency.
“This is revolutionary,” says Larry Cao, director of content at the CFA Institute in Hong Kong. “Blockchain will change the whole infrastructure. It has the potential to facilitate direct payments to anyone in the system, any bank and any merchant.”
Blockchain, a digital ledger containing the payment history of each unit, could challenge existing intermediaries such as banks and leading online payment networks Alipay and WeChat, both of which are affiliates of Alibaba and Tencent, respectively. While these institutions are unlikely to vanish, their roles are expected to transform significantly, necessitating innovative business models in this emerging sector, according to William Gee, a risk assurance practice partner at PwC China in Beijing.
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