News that a Beijing-backed digital currency is in the offing comes as no shock to the market, according to Daniel Scott, CEO at CoinCorner.
“China has historically had a volatile relationship with Bitcoin, over the years they have banned then unbanned then banned and so on. It's been on their radar for years, so creating their own digital currency is no surprise and a very likely the next step in their financial evolution,” he says.
Mu Changchun, deputy director of the People’s Bank of China (PBOC)’s payments department, told a forum in Heilongjiang province this week that the bank is “almost ready” to issue a sovereign digital currency, according to Reuters.
The central bank has previously taken a hard line on cryptocurrency. It issued a notice in December 2013 prohibiting financial institutions from dealing in Bitcoin to “protect the status of the renminbi”. Weeks later it ordered all third-party payment processors to halt transactions in digital currency.
In 2014, the PBOC set up a research team charged with exploring the potential for issuing digital currency. According to data from China’s State Intellectual Property Office, seen by CoinDesk, the Digital Currency Research Lab has submitted more than 52 patent applications.
In July former PBOC governor Zhou Xiaochuan said in a speech that China should respond to the launch of Facebook-backed cryptocurrency Libra by releasing its own competitor.
Mu said the new currency would rely on both the central bank and financial institutions to be legitimate issuers. He added it would not be completely reliant on blockchain technology, which would not be able to hold up to the transaction volumes in China.
“As to be expected this system will be centralised, meaning there will be rules in place for the underlying banks, similar to any current financial system in place such as SWIFT,” said Scott. “As long as it is developed well, there should be no issues for its intended use.
“It would surprise me if there is any technology that relates to a blockchain-based system at all, it would not make sense to use 'blockchain' in a centralised system that you are pulling away from 'blockchain' due to transaction volume limitations. Technically you would just use a database. The 'blockchain' mention is just a buzz word to help promote this as new and ground-breaking.”
Senegal, Tunisia, Venezuela and the Marshall Islands have all launched digital currencies in recent times.
For Michael Harris, director of financial crime compliance and reputational risk at LexisNexis Risk Solutions, more jurisdictions can be expected to launch digital currencies. “As cryptocurrencies are increasingly dragged out of the twilight and into the mainstream, more countries are likely to launch their own versions that enable them to maintain better control of their financial markets.”
“Concerns around virtual currencies being exploited by financial criminals remain,” added Harris. “As such, regulation, good governance and a degree of control is required to safeguard the economy. It is expected that China will embrace all these principles - given the size and reach of the Chinese economy, it’s essential for the stability of global currencies that it does.”