Ever since Facebook announced its audacious entry into the world of cryptocurrency with details of its Libra project last month, the world hasn’t stopped talking about it. In China, it has generated much fervor as tech leaders chime in with their opinions and local media draw comparisons with homegrown digital payment systems such as WeChat Pay, QQ Coin, and Alipay.
While Beijing sees opportunities in digital currency, it also fears losing control. The way bitcoin and Libra are designed makes it hard for governments to see who’s paying whom, or to limit cross-border payments. At the same time, official policy documents have referred to digital currency as “inevitable.” Thus the People’s Bank of China (PBOC), the nation’s central bank, has vowed to create a currency it can manage—likely one that will be linked to real identities.
Overall, the Libra project has received a mixed response. Some expect it to revolutionize payments, while others, including a host of international regulators and central banks, fear the move will wreak havoc on the global financial system.
Although China prides itself on being the poster child for cashless societies, the country has also rallied against cryptocurrency activities over the past two years. Since Facebook’s release of the Libra white paper, Chinese central bank officials, industry leaders, and academics have expressed concerns that Libra may challenge the global monetary system and rules—and may even undermine the monetary sovereignty of fiat currencies, including the Chinese yuan.
All about control
Chinese authorities have spoken out about accelerating the development of a central bank digital currency (CBDC).
The country has greenlit the next stage of the PBOC digital currency program, said Wang Xin, director of the PBOC Research Bureau, during a seminar at Peking University last week.
He revealed that the central bank has called on market-oriented institutions to jointly research and develop a digital token, under the approval of the State Council.
Wang also noted that hastening the launch of a CBDC could serve as a “counterbalance” to risks and challenges that Libra will pose. “A digital currency issued by the central bank can improve the efficiency of monetary policy, and help to optimize the payment system,” he said.
Yao Qian, who oversees research at the PBOC, reiterated at an event in Beijing that the digital economy needs central bank-issued digital currency more than ever, and that its research and its issuance are crucial.
Mu Changchun, deputy director of the central bank’s payments department, also voiced his concerns that crypto-assets such as Libra will not be sustainable without the support and oversight of central banks.
What is still unclear is whether the government officials’ recent responses to Facebook’s Libra project are merely reactionary or that they have in fact made significant strides since the ambitious plan for digital currency was first mooted in 2014. However, some indications suggest that the central bank is on the move to create a digital currency that could eventually replace the Chinese yuan.
Experts have argued that digital fiat currencies could give the central banks more monetary policy control and that its activities could be more easily monitored than payment methods such as cash.
The PBOC has said its digital currency will be considered M0, using a technical term that refers to money issued directly by the central bank, such as paper money and coins. This would be different from Alipay and WeChat Pay, which are payment services based on fiat currency issued by the central bank.
“Simply put, the central bank digital currency broadens PBOC’s money supply and monetary policy tools,” said Lu Zhizhen, a Ph.D. student studying the politics of economic reform at the University of Texas, Austin. Given that digital currency is more traceable and predictable than cash, it could significantly improve targeted monetary policy, he explained.
For example, it is currently difficult to track whether the central bank’s liquidity release has the intended impact in terms of supporting small and micro enterprises but it will be much easier to see how the money is used with CBDC. Illegal activities like money laundering would also be easier to fight. However, this level of tracking and monitoring—enabled by blockchain technology—could mean less privacy for users, Lu noted.
Another distinction between CBDCs and virtual currency is that the latter can only circulate in limited situations, Lu added.
“Traditionally, central banks directly control base money creation/destruction but have only indirect power over the broader, credit flow-driven monetary supply,” wrote Dovey Wan, partner at crypto-asset investment fund Primitive Ventures, in an article published on Coindesk in May. “Now, with digital fiat currency, they have the potential to bypass commercial banks and regain control of currency creation/supply end-to-end, thereby structurally centralizing their power in policymaking,” said Wan.
While it seems that the PBOC’s grand plan for digital currency still hangs in the air, the central bank has taken some steps that may suggest where they’re heading.
In early April, the PBOC appointed Wang Xin, who had been the chief of the bank’s Currency Gold and Silver Bureau, as the new head of its research bureau, which was a noteworthy development relating to the central bank’s commitment to hasten digital currency research, Lu told TechNode.
Although Chinese officials have remained tight-lipped, saying that all aspects of the digital currency remain under discussion, Wang has previously said it could become a new monetary policy tool or an investment asset that carries an interest rate as well as a reference tool for bank interest rates on deposits.
The government has also filed dozens of patents related to the digital currency, indicating not only that some major work has taken place but also pointing to what they have in mind.
According to public information on the State Intellectual Property Office website, the central bank’s Digital Currency Research Lab filed over 53 patents between June 2017 and March 2018. They cover applications relating to a system that allows interbank settlement and clearance using digital currency, a digital wallet that allows users to track their transaction histories, as well as a system for digital currency-based fundraising.
The PBOC began paying close attention to the potential impact of cryptocurrency early on; they started exploring the possibility of creating a sovereign digital currency in 2014, one of the first central banks to do so. Officials said last year that the development of a national digital currency is “technologically inevitable.” In terms of actually bringing it to reality, however, the central bank appears to have been dragging its feet.
“The progress of the digital currency project has been slow because it could potentially replace fiat currency. There are a lot of factors to consider—not only the security aspects but also the implementation of a real-name verification system and anti-money laundering measures,” said Yang Jinyan, general manager at Huobi Labs, an incubator for blockchain projects under the global digital asset service provider Huobi Group.
Reactions from officials in the past week also indicate a softening of attitudes toward the sector, according to Yang, adding that they now appear more eager and open toward private sector collaboration.
Mindao Yang, the founder of dForce, a stablecoin and monetary protocol decentralized finance platform, highlighted two key challenges for the central bank’s digital currency ambitions. The institution must mitigate the risk of privacy abuse, given that the project would further centralize personal information collection. Such digital currencies allow central banks to extend credit directly to individuals and businesses, which would cut off all financial intermediaries. “Central bank digital currencies are technically ready; however, they will face strong political and social pushback,” he said.
Like other stablecoins, Facebook’s Libra would be based on decentralized technology and move easily across borders; such digital currencies can pose significant threats to sovereign currencies facing difficult situations, such as times when inflation is high or when financial systems fail, Yang added.
On top of fears that Libra could disrupt the existing financial system, Chinese officials might also be feeling uneasy about the possible challenges it could pose to the dominance of mobile payments.
Unlike China’s big two mobile payment platforms, which are tied to the yuan, Libra will be pegged to a basket of currencies. This means it will have a much wider international reach than WeChat Pay and Alipay, which are mostly used only in China. Blockchain technology allows the free flow of money across borders at low cost. Libra would also be able to tap into Facebook’s massive pool of 2.7 billion users.
“A country may attempt to keep Libra out, but technically it will be nearly impossible,” said Yang Jinyan of Huobi Labs.
Though it is legal in China to own cryptocurrencies such as bitcoin, regulatory authorities have been trying to limit the presence of cryptocurrency in the country by banning exchange and wallet services. ICOs (initial coin offerings) are also deemed illegal in the country.
“Libra will create more competition for fiat currencies and sovereign digital currencies,” Yang said. “The one that will become dominant and relevant in the age of digital assets will likely be the one that has a sizeable pool of users and rich usage scenarios.” For example, cryptocurrency trading is often undertaken using stablecoins like Tether (USDT) and USD Coin (USDC), which are pegged to the value of the dollar.
Current regulations in China may be holding back the overall development of digital currency. Relatively speaking, the US has a clearer and more mature regulatory framework for digital assets, including specific rules on their release and circulation, as well as anti-money laundering and Know Your Customer (KYC) measures, Yang said.
Companies in the US encounter fewer hurdles when releasing a stablecoin, while clear regulations have yet to surface in China.
In late 2017, the country instituted a sweeping ban on cryptocurrency activities, including trading, wallets, and ICOs. However, Yang believes that the authorities could accelerate work in this area through pilot projects, regulatory sandbox activity, or other approaches.
“Cryptos are here to stay. Regulators need to better understand the technology and come up with more adaptive and compatible frameworks. Most regulators don’t realize the technical impossibility of forcing crypto into the current regulatory framework,” Mindao Yang told TechNode.
Aside from the push for the development of digital currency, there has also been a noticeable shift in attitude. Recognizing that developing new technologies will require help, the Chinese central bank has shown more willingness to work with the private sector on the digital currency project.
Last week, Wang remarked that the institution should figure out how to work with smaller financial institutions and large banks, while strengthening collaboration with tech giants during the next stage of the project.
Many experts regard Facebook’s Libra as the most ambitious monetary project to date that would employ blockchain. For Chinese companies in this space, the proposed Libra project has served to heighten the conversation about cryptocurrency.
“While global adoption of blockchain among enterprises is accelerating—particularly in China—Facebook’s Libra was a boon for the industry in terms of amplifying global awareness,” said Da Hongfei, the co-founder of blockchain company NEO and an icon in China’s blockchain space.
“As we enter a new era of blockchain adoption, we view the PBOC’s reaction to Libra as a positive signal that regulators are embracing blockchain technology,” Da added.
Clarification: A comment by Lu Zhizhen was edited to clarify context.