china develop cryptocurrency path

The People’s Bank of China (PBOC) has reportedly been taking steps to develop a digital currency of its own. In 2014, China assembled a research team to study digital currencies and application scenarios by collaborating with experts from Citigroup Inc. and Deloitte LLP.

Although the team did not specify what technology the PBOC would use to issue digital currency, or how it would work in relation to the yuan, a later 2016 research paper did outline ways that a national digital currency could work:

  • The PBOC would create and transfer cryptocurrency to a commercial bank when more liquidity is needed
  • Using modified ATMs or bank tellers, the consumer would refill the digital currency that is stored in an e-wallet, mobile phone, or other device
  • For purchases, consumers would wire cryptocurrency from their personal wallet to a merchant’s account
  • Merchants would then deposit cryptocurrency payments into their respective commercial bank accounts

Chinese consumers are already well-versed in executing transactions with their mobile devices through payment services such as Alipay or WeChat. Soft drink purchases can even be made from vending machines by scanning QR codes with smartphone applications that are linked to bank accounts. For merchants or private sellers, digital payments would be sent peer-to-peer, lowering transaction costs and cutting out middlemen like banks and third party brokers.

According to Bloomberg, the PBOC has initiated trial runs of its prototype cryptocurrency, in a steady advancement towards becoming one of the first major banks to issue digital money. While this move by the central back seems encouraging to some digital currency enthusiasts, the PBOC has also increased scrutiny of bitcoin, causing two of China’s most popular exchanges (OKCoin and Huobi) to suspend bitcoin and litecoin withdrawals. This move that took place in early February 2017 was enacted by the PBOC as way to address money laundering, market manipulation, and capital flight (the transferring of Chinese money out of the country).

According to vice president of Beijing-based OKCoin, Duan Xinxing:

"Getting to know more precisely how much banks lend, where the money goes and the pace of credit creation is key to curbing money laundering and making monetary policy more effective.”

Other benefits of a digital currency include the reduction of costs associated with printing money, minting coins, and combating paper note counterfeiters. In a country of 1.4 billion people, managing and circulating physical money can get very expensive. Using digital currency to supplement the cash in circulation can improve speed and convenience, while providing unprecedented transparency of transactions.

Because of these benefits and China’s willingness to adopt new technology, a national digital currency seems like a natural transition for tech savvy consumers and businesses seeking to lower expenses.    

Larry Cao, director of content at the CFA Institute in Hong Kong, said:

"Cutting costs is an obvious benefit, but the impact of shifting to blockchain-based digital money from the current payment structure goes beyond that. There’s a potential you can pay anybody in the system, any bank, and any merchant directly. Blockchain will change the whole infrastructure. This is revolutionary."

It’s unclear exactly how a national digital currency might change the roles of PBOC and other central banks, but many experts have been speculating. William Gee, a risk assurance practice partner at PricewaterhouseCoopers China in Beijing, has said:

“I won’t say banks and payment companies will disappear, but their role would definitely change. They need to find their new role in the new payment ecosystem, and we will probably see some innovative business model in this sector.”

Benefits to Central Banks

Using blockchain technology will allow the PBOC to trace transactions and collect authentic data in real-time, which can be used to compile precise monetary indicators, such as money supply growth and consumer spending habits. This will eliminate dependence on monthly surveys of businesses and collations of spending from the statistic authority. Monetary policies could therefore be adjusted on a day-to-day or hourly basis, providing a level of precision to money management like never before.

Duan went on to say:

“The transparency of economic activities in every corner in the country will significantly improve. The Central bank will have unprecedented knowledge of how the economy runs.”

In addition to China, countries like India, Singapore, Canada, and Germany, have begun to weigh these benefits. Some are experimenting with their own prototype cryptocurrencies, such as Germany’s Deutsche Bundesbank.

Working in Tandem

Regardless of which country becomes the first to nationalize digital money, strong evidence provided to the PBOC supports the notion that a national cryptocurrency will become a part of China’s standard financial landscape, coexisting with outstanding paper tender but not replacing it entirely. It’s still too early to determine the rate and extent of this shift.

"Talking about the impact of digital money now is like trying to predict how the Internet would transform lives in the 1980s,"  Duan said. "We know it’s going to be huge. It has the potential to change the entire economic infrastructure. We’re just not sure about when and how."

Los Silva is a writer and filmmaker who has collaborated with tech and design companies. His interest in Ethereum stems from emerging creative applications that allow artists control of their work through blockchain technology.
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