China’s Central Bank Plans to Release Digital Currency Soon

 China’s central bank is close to releasing a digital currency.  

A senior government official told journalists that the currency, which took five years of research and development, will have a centralized two-tier structure with the People’s Bank of China at the top level and commercial banks on the second tier. While he did not provide a timeframe for the launch of its cryptocurrency, the government official indicated that it would occur “soon”.

The announcement of a digital currency comes amid ratcheting global tension about a trade war between China and the United States and volatility in currency markets resulting from the former’s devaluation of its currency.  The price of Bitcoin jumped by approximately 10% last week after China devalued the Yuan to 2010 levels.

A Centralized Structure

According to reports, blockchain, which is the underlying technology for most cryptocurrencies, will be used only partially to underpin China’s digital currency. Blockchain requires a completely decentralized setup that consists of the entire network of nodes participating in approving or rejecting a transaction.

PBOC is said to be pursuing “centralized management” of the currency. In line with existing monetary policy, the central bank also plans to control the quantity of digital currencies being circulated in the market. Presumably, this control will be achieved through the two-tiered system described above. Mu Changchun, deputy chief in the Payment and Settlement Division at PBOC, clarified the digital currency was not meant to supplement bank deposits and other investment instruments. Instead it would circulate as normal cash notes.

“This dual delivery system is suitable for our national conditions. It can use existing resources to mobilize the enthusiasm of commercial banks and smoothly improve the acceptance of digital currency,” Mu Changchun, Deputy Chief in the Payment and Settlement Division at PBOC, stated. He also cited China’s complex economy and large population as reasons to opt for a centrally-disbursed digital currency. Several commercial businesses are expected to partner with the PBOC in the cryptocurrency’s rollout.

Prominent members of China’s business community had earlier expressed support for the idea. Ren Zhengfei, CEO of Huawei, earlier told journalists that the time was ripe for China to create a digital coin.

But the Chinese coin may be some way off. The Chairman of UnionPay, a Chinese financial services organization, said the absence of a standard regulatory framework across countries coupled with the lack of clear operational processes will make it difficult to overcome issues related to CBDC.

An IMF report last December listed central banks from 15 countries investigating use of central bank-backed digital currencies for varying reasons. Included in the diverse list were Sweden (low cash usage) to the Bahamas and Uruguay (for financial inclusion).