China Economy

China’s central bank steps up efforts to create digital currency

The People’s Bank of China is cautious about digital money beyond its control, such as Bitcoin, and is researching benefits of its own sovereign digital currency

PUBLISHED : Thursday, 17 November, 2016, 2:47pm
UPDATED : Thursday, 17 November, 2016, 11:01pm

The People’s Bank of China (PBOC) is stepping up its research on a “sovereign digital currency” as it joins other central banks and financial institutions in exploring future forms of money.

China’s central bank banned Bitcoin, the internet currency, from being used by the country’s financial institutions in 2013, saying that Bitcoin was not a real currency and could not become a legal form of money.

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At the same time, the PBOC was keen to explore the benefits of a state-backed digital currency, based partly on Blockchain technology – a digital ledger that records transactions on a permanent database on computers around the world – along with similar efforts by the US Federal Reserve, the Bank of England and the Bank of Canada.

Established banks are also working on the future of money, too. Citigroup has been running tests on its “Citicoin” digital currency, while Goldman Sachs has filed a patent for its SETLcoin digital currency for settling transactions.

Zhou Xiaochuan, the governor of the PBOC for the past 14 years, has already demonstrated his interest in the idea of a sovereign digital currency.

In January 2016, when the PBOC was facing huge yuan depreciation and capital outflow pressures, he managed to organise a symposium with foreign experts to talk about the idea of digital currencies.

The central bank approved the creation of a special task force in 2014 to examine the idea of a sovereign digital currency, and the team is expanding further.

According to a 2017 hiring plan published by the PBOC, the central bank’s scientific research institute is recruiting six researchers to study the technological architecture of digital currencies.

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PBOC, which is part of the Chinese government, has been working hard to protect its monopoly over currency and credit creation on the mainland. It is also keeping a wary eye on any innovations in payment or settlement methods that could potentially weaken its dominance.

Yao Qian, who leads the PBOC’s research team looking into digital currency, wrote earlier that the central bank was cautious about digital currencies that were beyond its control because private-sector digital money could “affect the performance of payment systems, monetary systems and financial stability”.

“Therefore, it is logical to research and launch our sovereign digital currency as soon as possible,” Yao said in a research report.

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On Tuesday, Yao told state media that the central bank was now on its way to having its own digital currency.

“So far, the research and development of a prototype system is under way,” Yao told the official Shanghai Securities News in an interview. “But we haven’t had any specific timetable for launching China’s sovereign digital currency.”

Steven Zhang, a chief economist at Morgan Stanley Huaxin Security, said a digital currency “could help to curb illicit capital flows, tax evasion and also combat money-laundering”.

“But the PBOC is still at the stage of preparing the technology,” Zhang said.

Bitcoin, despite the absence of state recognition, is gaining popularity among Chinese investors and is seeing hefty price gains amid the continuous depreciation of the yuan.