China’s central bank is going digital.
After assembling a research team in 2014, the People’s Bank of China has done trial runs of its prototype cryptocurrency. That’s taking it a step closer to becoming one of the first major central banks to issue digital money that can be used for anything from buying noodles to purchasing a car.
For users transacting over their smartphones or laptops, a PBOC-backed cryptocurrency probably wouldn’t seem much different to existing payment methods such as Alipay or WeChat. But for sellers, they would get digital payments directly from the buyer, lowering transaction costs as the middleman is cut out of the process.
At the same time as it builds up its own capabilities, the PBOC is increasing scrutiny of bitcoin and other private digital tenders. It doesn’t want a bitcoin bubble to blow up. And since currencies have historically been issued by the state, not private players, it doesn’t want to cede the cryptocurrency space to companies it has no control over.
Chinese people have embraced online payments for just about everything. To buy a can of Coke, thirsty commuters scan QR codes on their smartphones rather than feed coins into a vending machine. At Lunar New Year gatherings, money is exchanged via a few presses on a smartphone instead of crisp notes handed over in red envelopes.
All of that poses a challenge to the PBOC’s status as the central bank of both the digital and physical realms. So if you can’t beat them, join them.
“Getting to know more precisely how much banks lend, where the money goes and the pace of credit creation is key to curbing money laundering and making monetary policy more effective,” said Duan Xinxing, vice president of Beijing-based OKCoin Co., one of the country’s biggest bitcoin exchanges. Issuing digital currency will make it easier for the PBOC to monitor risk in the financial system and track transactions economy-wide, he said.
OKCoin is among cryptocurrency exchanges that has recently taken steps to halt bitcoin withdrawals amid efforts to clamp down on capital outflows.
In January 2016, the PBOC said it will have its own cryptocurrency “soon,” but there has still been no formal start date announced. In the meantime, there’s been strong advocacy from senior officials, including Fan Yifei, one of the PBOC’s deputy governors.
It’s not just China that’s heading away from cash. Late last year, India’s Prime Minister Narendra Modi scrapped 86 percent of notes in tender in a bid to target corruption and push the use of digital payments. Bank of Canada, Deutsche Bundesbank and the Monetary Authority of Singapore are examining digital currencies.
Printing money and combating counterfeiters is expensive for a country of 1.4 billion people, especially the costs of managing circulation and transactions. Adding digital currency to cash in circulation can improve the speed, convenience and transparency of transactions.
“Cutting costs is an obvious benefit, but the impact of shifting to blockchain-based digital money from the current payment structure goes beyond that,” said Larry Cao, director of content at the CFA Institute in Hong Kong. “There’s a potential you can pay anybody in the system, any bank, and any merchant directly. Blockchain will change the whole infrastructure. This is revolutionary.”
Blockchain is basically a digital ledger that contains the payment history of each circulation of the unit. If the PBOC’s version is widely adopted, that would challenge existing intermediaries such as banks and payment services like Alibaba affiliate Alipay and Tencent’s WeChat — two leading online payment networks.
“I won’t say banks and payment companies will disappear, but their role would definitely change,” said William Gee, a risk assurance practice partner at PwC China in Beijing. “They need to find their new role in the new payment ecosystem, and we will probably see some innovative business model in this sector.”