China’s central bank, the People’s Bank of China (PBOC), is “racing to launch a digital currency.” In doing so it is aiming to rapidly tighten runaway domestic currency flows while also seeing off perceived challenges from other global digital payment platforms, especially Facebook’s Libra.
The PBOC could also be hoping that its new digital currency will, eventually, help the RMB usurp the global dominance of the US dollar.
The claims were made in the China Blockchain Report published this week by Forkast.News, a Hong Kong-based emerging technology-focused media and research platform.
The report argues, in some detail over 48-pages, that while it is no secret that the PBOC has been working on a digital currency for some years, the bank is close to launching what it is now formally calling a digital currency electronic payment (or DCEP) platform.
This DCEP could reportedly launch within a few months, which will mean China will be the first country in the world to have a central bank digital currency.
Angie Lau, veteran Asia finance and tech journalist and commentator, and editor-in-chief and founder of Forkast.News, says right now the “RMB superseding the USD globally is a bit of a stretch for a number of reasons, but the digital RMB isn’t necessarily about that.”
“Rather, the point of it is to provide extra liquidity for the RMB so that it’s a competitive alternative to the USD… particularly in emerging markets within China’s sphere of influence.” Only once this framework is in place, says Lau, can “a new race be run” between the dollar and the renminbi.
The domestic case for the DCEP is equally strong. Capital controls have been a long-standing pillar of China’s monetary policy and the sharp rise in digitized consumer payment systems like WeChat Pay and Alipay means the central government is struggling to maintain its strict system of currency flow checks.
In addition, the PBOC is increasingly concerned about the national economic risks associated with China’s over-leveraged commercial banking network, its opaque shadow banking network and its increasing household debt levels.
The central bank’s digital currency would allow Beijing to once again tightly control capital flow because the DCEP, unlike “pure” cryptocurrencies, will not be decentralized, and therefore not theoretically controlled by anyone. Beijing’s digital currency, unsurprisingly, will be the exact opposite and will be very much under the centralized control of the PBOC, with all the monitoring and oversight that would be expected from a currency – physical or digital – that was launched by China’s central bank.
In fact, the Forkast report argues that, given the scale of the Chinese market, the DCEP might not even be launched on a formal blockchain network. The report says the PBOC has reportedly specified that its digital currency system needs to handle 300,000 transactions per second. Leading blockchain network Ethereum, for instance, which has been used by numerous financial platforms globally, is limited to approximately 15 transactions per second.
“So,” says Forkast, “it’s likely that this system will have elements similar to blockchain technology, but will ultimately be centralized.
Integrated blockchain economy
Cryptocurrency transactions and crypto exchanges are, of course, banned in China, because of fraud and capital flight concerns, but Forkast outlines how blockchain technology is well integrated in both private enterprises and government departments across the country.
Unlike in the West where blockchain and cryptocurrencies have gained something of a libertarian image, Beijing, according to Forkast, sees blockchain as a tool for “disintermediation and finding efficiencies in industries with outdated, archaic processes.” The Chinese government, argues Forkast, has “identified blockchain technology development as an issue of national importance, along with other emerging technologies such as AI, deep learning and IoT.”
The report has a timeline of global blockchain development that stretches back to 1994, runs interviews and analysis from a range of global and China-based financial and tech commentators, from Chinese government ministers and from academics and includes city-by-city and industry-by-industry breakdowns of Chinese blockchain rollouts. It was, says Angie Lau, many months in the making.
“We talked to experts – both in and outside of China – and sat down for interviews with academics, executives, blockchain industry leaders, developers, protocols, corporates and simply asked a lot of questions… our researchers reviewed national policy guidance, and we added context with our reporting.”
Lau says the biggest surprise revealed by the report was China’s “lack of blockchain development talent.”
“For as much potential as the industry has in China, there’s not the same corp d’esprit of software engineers that are focused on blockchain as there are in other markets like India. India has an advantage with its labor force thanks to its long tradition of outsourcing digital labour.”
That is changing quickly, adds Lau, who says China has emerged “as a frontrunner in adoption of the technology…. it is one of the most important places for blockchain in the world, and it’s a market that’s often misunderstood… by those in the West. For a country of 1.4 billion, its top-down mandate in blockchain means China can pioneer unique applications of the technology quickly and broadly – accelerating the pace of mainstream adoption as only China can.”
The China Blockchain Report is, says Lau, the first in a series of similar country-level reports that will be a “response to this growing common frustration of trying to figure out blockchain and its impact, while attempting to understand it from a [local] perspective.”
The blockchain industry “can often feel like a black hole,” concludes Lau. “But these industry deep dives can help figure out what’s moving markets and paving the future for this technology… that’s what we want to illuminate.”
Also read: BoJ: ‘No demand’ for state digital currency