China’s central bank digital currency still has a long way to go

Foreign media quoted Xinhua News Agency as saying that the digital currency research team of the People's Bank of China will actively absorb important results and practical experience of digital currency research at home and abroad, and strive to launch the digital currency issued by the central bank as soon as possible. The People's Bank of China announced this news at a digital currency seminar held in Beijing.

According to the report, in 2014, the People's Bank of China set up a special team to study the possibility of issuing digital currency, especially studying the lessons learned at home and abroad. Two years later, the team has made progress in "technology, legal issues and the impact on the financial system."

According to the report, Charlie Custer wrote for Asia Technology Network that China still has a long way to go before it can actually issue digital currency. In addition, he doubts that the idea will be implemented in China. "Chinese consumers have always been very conservative about their savings, and it may be difficult for them to accept a lot of money into a new and abstract digital currency, even if the People's Bank of China comes forward."

So why would China issue its own digital currency? The People’s Bank of China cites a number of practical benefits: digital currency is cheaper to issue (because it reduces the need for paper money), makes transactions and financial operations more convenient, and helps reduce money laundering and tax evasion.

Yet the logic behind the move may be simpler. China’s attitude toward foreign cyber innovation has long been “if you can’t beat them, copy them.” China could sidestep aspects of Western technology it dislikes with something homegrown—with Chinese twists, of course. Creating a new, official Chinese digital currency could allow Beijing to finally say goodbye to its complicated relationship with the current dominant digital currency, Bitcoin.

Bitcoin was at its peak in China in late 2013, with the value of the currency appreciating to over $1,200. In October, Bitcoin suddenly became popular when Chinese Internet giant Baidu agreed to accept Bitcoin as a payment method for its auxiliary services. Initially, the Chinese government seemed to have confidence in Bitcoin, but there were always lingering concerns because Beijing had little control over regulating and tracking Bitcoin transactions.

In December 2013, Beijing began regulating Bitcoin, prohibiting Chinese banks and financial institutions from treating Bitcoin as currency. The central bank cited concerns about possible money laundering and impact on financial stability as the reason for this measure. The People's Bank of China also asked third-party payment processing companies to stop accepting Bitcoin and told major Chinese Bitcoin exchanges to stop accepting RMB deposits.

Now, China has announced that it will launch its own digital currency to replace Bitcoin. Caster believes that the digital currency that China will eventually issue will be very different from Bitcoin. It will be specially made for the Chinese government to track transactions and will be under the protection of the People's Bank of China. In fact, the People's Bank of China believes that digital currency will enhance its ability to control China's currency.

Beijing hopes issuing its own officially authorized digital currency will help reduce some of the potential downsides, the report said. IMF Managing Director Christine Lagarde said at a panel at the World Economic Forum in Davos yesterday that digital currencies could be beneficial in some ways, but could also be used to finance criminal or terrorist organizations.

Question 3

Why do we need digital currency when we have electronic payment?

After the central bank proposed to launch digital currency as soon as possible, some commentators believed that electronic settlement is already very convenient now, so why bother to spend time on digital currency.

In this regard, Xiao Bo, deputy general manager of Huarong Securities Wealth Management Center, said that before digital currency brings about major changes, electronic payment is still relatively close to the so-called digital currency. The money used in transactions comes in through bank accounts and is subject to the control of the scale of currency issuance by the central bank.

However, Huang Zhen further pointed out that the digital currency promoted by the central bank is likely to change the currency issuance technology. The current electronic payment only transfers the value of paper money to the Internet, while in the future digital currency may establish an account book on the blockchain that will not be tampered with, while electronic payment is only a one-way accounting.

【Term explanation】

Blockchain refers to a technical solution for collectively maintaining a reliable database in a decentralized and trustless manner. Blockchain technology is the technology that supports Bitcoin and was also mentioned in this seminar.

Question 4

Why can it reduce tax evasion?

At this seminar, the research concluded that issuing digital currency can reduce illegal and criminal activities such as money laundering and tax evasion.

In Xiao Bo's view, currently decentralized financial institutions all have many internal account books, and with the application of blockchain technology in the future, a national unified account book will be established so that every penny and every transaction can be traced. Tax evasion and money laundering will be within the scope of supervision, and it may even be possible to achieve automatic tax deductions on card machines.

Currently, card payment is becoming a habit. Xiao Bo said that after the promotion of digital currency in the future, from the perspective of social credit accumulation, enterprises and consumers will tend to use digital currency and card payment, because electronic transactions have data traces, which can be used to accumulate the credit of enterprises and individuals, which will become the basis for obtaining financial services such as banks.

Question 5

There will be no paper money in the future

Although the future of Bitcoin as an unofficial currency is unclear, the central bank's promotion of digital currency is seen as a breakthrough in the official currency issuance and circulation mechanism. So, will paper money become history in the future?

In Huang Zhen’s view, there may be no paper money in the future, and the entire financial industry will be digitized. This is a major trend.

It is not easy to realize digital currency. Industry insiders revealed that if digital currency is to become a carrier of value exchange, it must ensure its security and convenience, and there are still many technical problems to be solved. And it will take a long time for digital currency to replace paper currency in issuance and circulation.

However, in the short and medium term, paper money will still exist. Xiao Bo believes that there will still be scattered paper money. Even in the United States where electronic transactions are highly developed, small payments such as taxi consumption are still made in cash.