China Building Up Momentum for Global Digital Currency Framework
China’s emerging role in the digital currency regulation space as well as its need to work with others is gradually taking shape with series of recent events adding up to make Asia’s top economy’s participation in the development of a global framework more established.
Aside from the Chinese Premiere’s call over the weekend for his country to “proactively participate in creating the international regulatory framework on digital currency and digital tax”, the People’s Bank of China Governor, Yi Gang, reportedly stated at the ongoing Hong Kong Fintech Week that several legal aspects of the circulating digital currency and electronic payment (DC/EP) are yet to be figured out.
Xi Jinping’s call comes along with his stressed need for China to take advantage of the current momentum to accelerate the digitalization of various fields including the economy, society and government in a statement titled Issues on National Medium and Long-Term Social and Economic Strategies. It could be said to follow the US Attorney General’s recent release of its “Cryptocurrency: An Enforcement Framework”, an 83-page document detailing a roadmap for policing the cryptocurrency landscape giving its emerging threat overview, law and future strategies and how to handle it.
Gang’s observation, on the other hand, is supposedly pointing at the cross-border function of the digital yuan since there haven’t been clear rules in place yet on how the flow of the digital version of China’s currency will be checked across borders. The bank governor indicate their desire to work with relevant global financial bodies such as the Bank for International Settlements and the Financial Stability Board to develop needed rules.
China’s perceived leading role in piloting their central bank digital currency may be behind the push. It is certainly a factor considered by Canada-based Global Risk Institute as it suggests in an article last week that the wider adoption of digital currencies like China’s digital yuan – for their ease of exchange – may shift global trade currency.
Only about 2% of World Reserves is denominated in China’s yuan currently when compared to the greater than 80% of global trade and 61% of the World Reserves denominated in the US dollar, according to the Institute. However, since China closely manages the yuan’s exchange rate against the dollar, it adds that a digital version of the yuan could trade similar to a dollar-linked stablecoin which could make it easily accessible and far-reaching particularly as, it notes, China has made agreements with Australia, Japan, Thailand, Russia, and Vietnam “to allow for direct currency trade, instead of converting to the US Dollar.”
The Institute also point out that the adoption of digital money, in all forms, which has been “accelerating at warp speed” – with the total aggregate stablecoins in circulation touching $20 bln as at Q3 2020 and projected to grow to $140 bln by Q4 2023 – needs an agreement on the regulation of global stablecoins at an international level to avoid the vulnerabilities caused by the application of all existing regulations on such stablecoins for their potential to be less efficient and transparent and more confusing.
Failure to craft the agreement will cause the inequality among all global regulatory bodies – from the standpoint of powers, tools, and resources to regulate which has created a disconnection between individual country regulators from a resource or a philosophy viewpoint and currently leading to regulatory arbitrage – to continue, it concludes.
Another contributing edge is China’s being “in the driver’s seat” of blockchain development as adopters look for solutions to connect different chains, according to Fudan University professor, Michael Sung. Speaking at the TechNode Emerge 2020 conference last week, Sung says China is leading the role because it is going to drive a key challenge for the emerging technology: interoperability (or cross-chain integration) since it “can mandate that everyone do the same thing.”