Three Concerns behind efforts of China’s Central Bank in Digital currency
Bitcoin for China: Will the Currency World map be reshaped?
A recent recruitment notice released by Printing Technology Research Institute (PTRI) People’s Bank of China, (PBOC), China’s central bank has triggered heated discussion. The notice says PTRI is expecting to hire talents who have master or doctoral degree in computer science, information security and cryptology. Especially, it states that some talents will be responsible for the structure design and development of digital currency ‘s software and hardware, the others for research of encryption technologies applied to digital currency.
The notice shows talents with computer science, information security and cryptology background are needed for digital currency development
The notice is just an epitome of how China’s government is increasingly aware of the existence of bitcoin, and now of the importance of a form of digital currency. The signal this time stands out for it’s a real action, which speaks louder than White Paper: China’s development of blockchain and its applications, published by China’s Ministry of Industry and Information Technology just in October.
There are three major concerns for PBOC’s motives in its endeavor of digital currency.
1. A strategy
China is fully clear that the competition of sovereign credit currency between US dollars and Yuan will influence the ultimate distribution of the global financial dividends. To gain financial dividends, one needs both robust currency credit and financial clearance system. However, Yuan-based clearance system can hardly replace US dollar’s one even if, the domination of the latter, if any, was to come to an end as it is hard to change the existing transaction habits unless the they are transformed. This explains why China’s Cross-Border Interbank Payment System(CIPS), which is unable to transform the existing clearance function and mode, can hardly challenges the position of Society for World Interbank Financial Telecommunication(SWIFT)
Luckily,the test of “digital currency” is underway–bitcoin. It’s based on encryption and decentralized blockchain technology have the chance to utterly transform the clearance logic now used in SWIFT. It is the only foreseeable chance that the existing global US dollar clearance system could be replaced.
It should be noted that bitcoin is just an initial test in that the current capacity and efficiency of it cannot meet the enormous needs of global trade transactions. But its stability and safety and the involvement from all parties are incredible. Therefore, the efforts of China in digital currency is strategically relevant for China’s fiat money or even China’s finance circle to rise in the world.
2. A trend
Since 2000, China’s the currency circulation(M2) has been up from 13 trillion yuan to 150 trillion yuan. But the proportion of narrow money (M0) to M2 is increasingly lower: in 2000, the proportion is 13% but now it’s only 4%. That is to say 96% of the currency are not printed but are recorded in the ledgers of financial accounts.
Evidently, the digitalization of currency is the trend. Just three years ago, hardly can people imagine that they can pay and receive money with the help of Wechat(China’s instant message app) and Alipay( payment tool by Alibaba) on their phones. The need for notes is decreasing.
The trend can be seen globally. Statistics from Swiss National Bank shows that the notes in circulation in Switzerland is down 40% since 2009. And Switzerland government is now taking digital currency into consideration and wants to phase out notes. In Denmark, its government issued several motions including one that aims at promoting a cashless society where all the shops and service industry can choose cashless transaction and retailers will have the rights to receive only credit and mobile payment. Denmark is likely to be the first cashless country.
The cashless world can be achieved by 2 ways, one is the digitalization of the current fiat money, and the other is to issue brand-new currency with a transformed system. While the former only involves minimal technical updates, the latter will fundamentally change way of supply and management of the currency, which also means the how challenging it can be.
3. A Reality
In June 2016, 4 billion worth promissory notes in Agriculture Bank of China have been stolen by its own staff in a failed attempt to use the converted money to make profits in China’s then volatile stock markets. The consequence was that huge amount of money have been evaporated. What have followed are more theft cases in China CITIC Bank, Bank of Tianjin and Qilu Bank. Then People’s Bank of China (PBOC) have set up a notes transaction platform to relinquish the use of notes in the form of paper in 2 or 3 years. But as the problem of asymmetry information hasn’t been solved, the platform is yet to be effective and efficient and the monitor system is not improved other.
In this context, China’s digital currency plan could begin with an attempt in promissory notes market as the payment involving distributed blockchain techniques can, independent from any platform, completely record the flows of all transactions without any risk of being mutated. The point is that if digital transaction is achieved, a society of digital currency will prove to be more feasible, as Industrial and Commercial Bank of China (ICBC) alone will transact more than 10 trillion worth of promissory notes. If the notes digitalization of this scale succeeds, then 50% of the efforts in building a digital currency society will be done. For any form of digital currency similar to bitcoin, being able to meet the sheer volume of transactions of notes will be an extraordinary breakthrough as the current bitcoin now cannot handle the trillion-level transactions.
In July, a resolution calls on the US government to craft a national policy for technology, with specific mentions for digital currencies and blockchain. Just in September the US House of Representatives has passed a non-binding resolution involving a national technology innovation policy that specially includes supportive voice for digital currencies and blockchain technology. Though non-binding, the measure is historically significant, which showcases the interests of Pentagon in blockchain.
The recently fast-developing Singapore has made up its mind to become the latest country to test its own digital currency, which will be used as a inter-bank payment tool within the blockchain system so as to streamline the payment procedures and lower transaction costs. The project will involve Singapore Exchanges and 8 banks.
As a matter of fact, most of the global top 10 exchanges, financial institutions and investment bank have made efforts in blockchain and digital currency. In terms of economic and social development, China is now at crucial stage where it should be bold in using breakthrough technology. if other countries promote their own digital currencies to spread to the global commercial transactions system before China does the same, China will again be the last one to gain.
This article is translated and reedited from the article of our columnist, Xiao lei.
Xiao Lei:well-known financial columnist, researcher of bitcoin, observer of bulk commodity and foreign exchange market.
The original text is available on our Chinese site :http://www.8btc.com/xl-digital-currency