China Financial Risk & Stability Report: Cryptocurrencies Have Not Yet Threatened Financial Stability
“In essence, bitcoin is not the real currency and it does not have the qualification to become an international reserve asset. Besides, bitcoin futures can hardly be a real risk management tool ,” states the China Financial Risk and Stability Report 2018 jointly published by the National Institute for Finance and Development and CBN Research Institute on July 29.
The six-chapter report is written by 6 Chinese economists, and former International Monetary Fund deputy managing director Zhu Min together with Li Yang, Chairman of Council at the National Institute for Finance and Development serve as the advisers for the report. It’s noteworthy that the report highlights the significance of digital currency in upholding China’s financial stability. The chapter of digital currency is written by Yao Qian, vice director general of Chinese central bank’s technology department and director of institute of digital money.
The report notes that at present, bitcoin and its siblings all pursue seigniorage and see high volatility, low efficiency and expensive trading fees, which make them difficult to perform the real money’s functions such as pricing ,trading and storing value.
The report points out that bitcoin does not have the qualification to become an international reserve asset both in terms of security and liquidity. Bitcoin, unlike gold, is difficult to hedge against currency risks caused by systemic risks such as wars, and is unable to be linked to credit currency value and to national bonds through balance sheets. When it comes to liquidity, 14 million bitcoins already exist, but only 960,000 bitcoins are traded actively, which means less than 20 billion worth of bitcoins are in circulation. The problems with bitcoin transactions, such as high transaction fees and taking a long time to complete a transactions, limit bitcoin’s liquidity.
“Given that cryptocurrencies has a relatively small trading scale and its connection with the existing financial system is very limited, they have not yet posed a threat to the financial stability. But currently, financial regulators adopt measures to restrict financial institutions from being involved in crypto transactions.”The report says.
Meanwhile, the research of the Central Bank Digital Currency(CBDC) attracts wide interests from central banks across the world. The report says that the ideal CBDC should have new features that outperform the existing private digital currencies and the electronic currency. The basic attributes of the CBDC include availability, anonymity, transfer mechanism, interest-bearing, and caps on holdings.
The report signals that Chinese government continues to support the development of central bank digital currency, while steps up their efforts to prevent cryptocurrencies from harming the country’s financial stability.