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Former CSRC Chief Says Digital Stocks Are Set to Follow CBDCs

While most of the world is still focused on getting central ban digital currencies off the ground, some of the most influential voices in China are already thinking about what the next step in the blockchainification of the country will be. Aside from the intensive efforts being done in China on the release of a digital yuan that would be issued by the People’s Bank of China, few other countries have come close to the release of their own digital national currencies. 

Now that a digital yuan is getting closer to entering the Chinese economy, more and more people have begun exploring other uses for the blockchain that would facilitate it. 

Xiao Gang, the former chief of the China Securities Regulatory Commission (CSRC), believes that the advent of central bank digital currencies will pave the way for digital stocks and eventually lead to complete migration of the stock market on the blockchain. 

In his latest book, “Reforming the Chinese Capital Market,” Xiao argues that the challenges the digital capital market is currently facing could be solved with blockchain technology. 

“The digital capital market is new and will face challenges in global competition, digital currency development, mixed technology, financial industry, internal and external supervision, consumer rights protection, and organizational reforms.”

Aside from carefully facilitating the establishment of a new regulatory framework, capital securities companies in China will need to focus heavily on digitalization. Xiao noted that the R&D expenditure of Chinese securities companies was less than 12 billion yuan in 2017—which is several times lower than the investments made by securities companies in the U.S. This is also seen in the distribution of workforce in Chinese securities companies—IT personnel makes up just over 3% of the total employees in Chinese securities companies. In Goldman Sachs, on the other hand, 10,000 out of its 36,000 employees work in IT. 

Further developing the digital capital market will not only expand the application of central bank digital currencies but also lay an important foundation for issuing various other digital assets. 

“The coordinated development of the two will be the main driving force and an important symbol of the development of digital finance,” he wrote in the book. 

The development of digital finance in China will inevitably have a significant effect on the stock market as well. Xiao said that the very nature of digital currencies means that they can “naturally” be accompanied by stocks. This, he explained, will blur the line between stocks and currencies, which will have a profound impact on the capital market.

While he believes that this impact will ultimately be positive, Xiao noted that there will be major challenges ahead. The first and possibly the biggest issue the industry will have to face is how to create a bridge between central bank digital currencies and the digital capital market. After that, the industry will face the problem of how to compile all of the corresponding smart contracts necessary to issue digital stocks. Creating a smooth interface that would allow people to use digital assets, either traditional cryptocurrencies or CBDCs, to trade and settle digital stocks will also be one of the problems that will need solving in the future. 

Nonetheless, the digital capital market that we will see will support the development of inclusive finance, something Xiao believes will be essential in the future. 

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