According to a paper published in the academic journal Tsinghua Financial Review and online, the People’s Bank of China (PBoC), China’s central bank, is currently testing its own national digital currency with fake transactions between it and some of the country’s commercial banks. Since the central bank is seemingly proceeding with caution there is no set timetable for the deployment of the currency, and its plan, according to officials, is to issue it alongside the Chinese Yuan.
The issuance of a national digital currency would have ‘‘practical and far-reaching historical significance.’ According to MIT’s Technology Review, there are numerous advantages in it, as a national digital currency would lower the cost of financial transactions, further increasing the reach of financial services, to millions of unbanked people in China. Plus, it could help reduce fraud and increase transparency.
Furthermore, it could improve the central bank’s control over money in circulation and digital transactions being made, which could also help reduce corruption, as these would be traceable. Adding to all that, policymakers could have real-time economic insights, which would help them act before problems arise.
China’s isn’t the only central bank looking to develop a national digital currency. The Bank of England, the Bank of Canada, and Deutsche Bundesbank are among those who have been studying digital fiat currencies for a while, even though China seems to be ahead of the rest of the world.
Most central banks believe a national digital currency will undermine the commercial banking system due to the possibility of having an account with the central bank. China’s plan, however, is to integrate the digital currency into the existing banking system, by allowing banks to operate digital wallets for the central bank.
In an interview covered by CCN.com, PBoC governor Zhou XIaochuan revealed that the country’s digital currency is separated from bitcoin in a sense that a 51% attack – wherein a mining pool or a miner collective with 51% of the hashrate could disrupt the register – is impossible for China’s national digital currency. The currency’s anti-forgery techniques, however, were deemed “national secrets”.
Moreover, Xiaochuan revealed that a blockchain would require far too man computation and storage resources for a currency with such a large transaction volume as the Yuan. As such, PBoC’s plan is to use the distributed ledger periodically to check who owns what. Yao Qjan, deputy director of the PBoC, wrote:
The ownership of digital currency can be verified directly by the issuing bank, so as to realize peer-to-peer cash transaction[s],
As reported by CCN.com, the People’s Bank of China (PBoC) has had an interest in developing its own digital currencies for a while now, as back in early 2014, the central bank put together a specialist research team in order to discuss regulatory frameworks required or a national digital currency.
In January 2016 the bank was looking to issue its own digital currency “as soon as possible”. By November, it was looking to hire blockchain experts that could help do so after it had already set up a ‘special research team’.
During the above-mentioned interview, Zhou Xiaochuan even claimed that paper money was a “last generation currency”. In mid-December 2016 China’s central bank completed its first trial on a blockchain. The trial saw several major commercial banks as participants.
The sheer logistics of deploying the digital currency would be a tremendous challenge, let alone helping it replace coins and notes. Small countries take a few months to replace an old version of paper money for a new one, but China took about 10 years to do so. This means the national digital currency will, at first, co-exist with paper currencies.
Simon Johnson, a professor at MIT’s Sloan School of Management, believes that a digital currency under PBoC’s control has significant appeal, stating:
In a place like China, they may see an opportunity to catch up with other countries; to adopt new technology; and maybe even overtake people,”
He also noted that China is at the vanguard of transaction experimentation. Technologies such as Alipay help people transact with their mobile devices, and even Bitcoin usage in China was mentioned:
There’s a lot of innovation in the private sector with things like Alipay. And China is also the biggest user of Bitcoin, as far as we can determine.
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