With Facebook announcing Libra, some central banks have felt the pressure to start exploring the possibility of having a sovereign digital fiat. China especially has felt the need to ramp up its research and development of what it calls DC/EP (Digital currency/electronic payments). China started developing digital currency pretty early on; it’s been in the works for at least five years.
At TechNode’s September meetup in Shanghai this Wednesday, we were joined by experts Alex Sirakov, senior associate at KapronAsia, Yin Hang, co-founder and developer at pLibra.io, and Richard Wang, partner at DraperDragon Fund, to discuss the People’s Bank of China’s (PBOC) race against the mammoth of Menlo Park.
Bottom line: Facebook’s Libra painted a world with global currency in the digital era, it aims to address real-world market problems, but naysayers fear that it will disrupt the financial system and threaten monetary sovereignty. While many other countries are starting to look into it, China may be a step ahead.
- Facebook says its planning to launch Libra in 2020, while China claims to have its DC/EP in testing in preparation for launch. But don’t hold your breath—experts believe both will take years.”
- Though the central bank has hinted that DC/EP bears some similarities to Libra, they seem to address a different set of problems. Libra is about creating a global digital currency for all, while the Chinese central bank is looking at a sovereign digital currency.
Grand plan: Some experts argue 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 central bank has said the DC/EP would aid the internationalization of the yuan and protect its foreign exchange sovereignty. Sirakov of Kapronasia said during the panel that the interesting question is whether the currency will be truly global and will follow the footprint of the belt and road initiative. For the Chinese consumers who already live in a society where physical money is nearly phased out, he said, the DC/EP won’t make much of a difference.
- It is also about gaining back control from third-party payments behemoths Alipay and WeChat Pay, said Wang of DraperDragon Fund. Wang said the Chinese central bank is aware that they are losing some control that they held because of these payment companies. “There are a lot of cash reserves in the private market and they can’t control that,” said Wang. The government has been tightening regulatory control over the payment industry for some time. For example, authorities implemented a new policy requiring non-bank payment companies to place their customers’ deposits in centralized interest-free accounts, preventing the companies from making handsome interest returns from their customers’ money.
What we know: Although the Chinese government has been vocal about the development of DC/EP specific details regarding its approach and the implementation are still limited. What they’ve said so far:
- DC/EP is a digital currency that aims to one day replace M0, 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.
- It is also intended to serve as a payments system—the “EP” in DC/EP. The PBOC says this will not threaten incumbents Alipay and WeChat Pay. The digital money could even be used across the major payment platforms, according to Mu.
- It will include mechanisms to verify the real-name identity of users as well as measures to prevent money laundering, terrorism financing, and tax evasion.
- It will be centralized. The DC/EP will adopt a two-tier structure with the central bank on top and commercial banks below.
- It is intended to support bank-to-bank transfers, settlements, cross-border transactions, among other things.
- Mu Changchun, then deputy chief of the PBOC payment and settlement department, said the logic behind DC/EP’s design bears many similarities to Libra. However, Mu emphasized that the digital currency is not a Libra clone.
Two sides? Digital currencies could be another step toward splitting the internet in two. As of now, it seems like neither Facebook nor China are likely to embrace each other’s currencies.
- Facebook has reportedly chosen the basket of real-world currencies to which Libra will be pegged to. The US dollar will account for half, with the rest a mix of Euro, yen, pound, and Singaporean dollar. Notably absent in the currency basket is the yuan, the legal currency of the second-largest economy in the world.
- Facebook has a headstart on users currently has a userbase of more than two billion worldwide and around 20% of its users are in Southeast Asia, an emerging region quickly becoming a new battlefield for Chinese and US businesses.
- Wang said that China will have a headstart implementing payments with Alipay and WeChatPay paving the way. But Libra is not going to be in China, no way, he said.
- We may have to get used to juggling two currencies—one for our Netflix account, the other for hoverboards from Shenzhen.
China ramping up the development of DC/EP: a brief timeline
Prior to Libra, the central bank has been tight-lipped about the development of its digital currency, but its attitude changed after Facebook proposed the idea of having a global digital currency system named Libra. Central bank officials have been very vocal about the development of DC/EP and not shy away from addressing its rival project Libra.
- 2014: PBOC approved the creation of a special task force to examine the idea of a sovereign digital currency, the first major central bank to do so.
- January 2016: When the central bank was facing a yuan depreciation and capital outflow pressures, a symposium with foreign experts was organized to discuss on the topic of digital currencies.
- 2017: A recruiting plan published by the PBOC showed that the central bank’s scientific research institute was hiring researchers to study digital currencies.
- October 2018: reports suggested that the PBOC was seeking cryptographers for the project.
- June 2019: 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.
- August: Mu announced that the digital currency is “nearly ready.” Bluff or not, China’s grand plan for digital currency is quickly gaining international attention.
A widely-circulated article published by Forbes end-August speculated that the launch of the digital currency could happen in time for Singles Day shopping festival that falls in November every year and the Chinese commercial banks and payment companies like Alibaba and Tencent would be among the first institutions to receive DC/EP for distribution. Although the central bank refuted both assertions.
China’s cabinet released a new guideline for the future development of the Shenzhen Special Economic zone included the research and promotion of virtual money and the country’s digital fiat currency.
September: PBOC appointed Mu the new head of digital currency research. It was not the first appointment of top-level official related to the central bank’s commitment to hasten digital currency research. 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.
PBOC official said it has begun “closed-loop testing,” simulating payment scenarios and involving some commercial and non-government institutions.
What to expect: Facebook has said that they aim to launch Libra in 2020, but experts think that it might not happen so soon.
- The Euro area has been struggling with universalizing a common currency for so long there is a lot of friction, said Sirakov.
- In China, he said, you have one market with billion-plus consumers who are already digitized.
- But PBOC’s digital currency plan is still in the early phase of development than speculation. There is no timetable for the launch of China’s digital fiat currency, Yi Gang, governor of the People’s Bank of China (PBOC), said Tuesday at a press conference, citing the need for more research and evaluation.
- Libra is trying to solve a real market problem, said Sirakov, but the intention of the Chinese government is not really clear yet. It might still be more of a PR effort, he said.