Blockchain not suitable for China's digital currency: PBoC

November 08, 2019 15:41
China's President Xi Jinping has called on the country to boost the development of blockchain technology. Photo: Reuters

Chinese President Xi Jinping has called for the stepped-up development of blockchain technology in the country.

But even if the People’s Bank of China (PBoC) is considering coming up with its own digital currency, it is “neutral” towards the technology that underpins the virtual money, a PBoC official said.

In fact, if the digital currency ever materializes, it may not be powered by blockchain, also known as distributed ledger technology (DLT), because the decentralized aspects of the technology do not favor monetary policymaking, the official said.

The PBoC said it has been exploring the possibility of issuing a digital currency as an alternative to cash, and market observers expect it to be launched in the next few months, making China the first country to roll out a digitized domestic currency.

During a panel discussion at the Hong Kong FinTech Week 2019 on Wednesday, Mu Changchun, deputy director-general of the PBoC's Institute of Digital Currency, said the project initially started with the objective of safeguarding China’s currency sovereignty at a time when Bitcoin was starting to make waves in the market.

Authorities also wanted to provide "a universal payment instrument" for the nation amid a fragmented mobile payment market.

“Our prototype was actually based on pure DLT, but then we found that the DLT is not suitable for our [central bank digital currency or CBDC],” said Mu.

Although President Xi, in his recent remarks, highlighted the importance of blockchain technology to the nation, Mu cited the weaknesses of the technology, such as those pertaining to scalability, network storage capacity, interoperability, security and privacy.

He said China’s digital currency electronic payment (DCEP) seems to have little to gain from the decentralized aspects of blockchain, which is an important element of the technology underpinning cryptocurrencies like Bitcoin.

“As the central bank, we have to run a centralized system. Because we have to be in control of the whole monetary policy issues and macroeconomic potential issues, we have to keep centralized operations,” he said, “[But] for DLT, it naturally has the characteristic of decentralization.”

Mu said the central bank is “neutral” towards the technology used to power the digital currency, which will not be dependent on a sole technology platform.

He said that was likely to create a “horse race” on the use of technology when it is launched as commercial banks and other institutions would compete to provide the best services using the new form of money.

The idea behind the digital currency is to enable anyone, across and beyond the nation, who don’t have an account in the Chinese banks, to use a digital wallet and enjoy mobile payment services in China, Mu said.

Currently, Alibaba’s Alipay and Tencent’s WeChat Pay are the two major players in China's mobile payment sector, accounting for over 90 percent of the market.  China’s proposed digital currency is expected to curb their dominance.

Mu, however, said he could only see a synergy between the digital currency and the two mobile payment services, rather than competition. “We just change their payment instrument from the commercial banks’ deposit money to the central bank’s money,” he said. "We are not changing their use cases, their service will remain the same.”

Social media giant Facebook is also planning to create its own digital currency called Libra, which could compete with China's CBDC, especially in emerging markets.

Mu acknowledged that "stablecoins" like Libra would definitely present “a threat to the implementation of monetary policies and financial stability, especially for those countries with [weak] capital management and less strong sovereign currencies”.

There is also the issue of “supervisory arbitrage” as most of the members of the Libra Association, which will govern and run the Libra crypto-based payment network, are located in the United States, he said.

“All central banks should consider putting the [Libra] project under the close supervision of central banks or international supervisory organizations, at least,” Mu said.

Asked about regulating Libra if it enters China, Mu said that the nation already issued a statement back in 2017 “that all [initial coin offerings or ICOs] and crypto-assets [are] Ponzi schemes” and all ICO activities and crypto-asset exchanges are prohibited.

“Also, as Facebook cannot operate in China, I don’t think we have any supervisory issue with Libra,” he added.

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