It seems thoughts about an official “ChinaCoin” are more substantial than some people have ever imagined. The Governor of the People’s Bank of China (PBOC) Zhou Xiaochuan gave a lengthy interview to Beijing-based media group Caixin recently, and following last month’s revelation that the PBOC wants its own cryptocurrency, the topic of the blockchain came up a lot.
Governor Xiaochuan said that “it is an irresistible trend that paper money will be replaced by new products and new technologies.” The PBOC recognizes that people want a cryptocurrency that offers anonymity, however: “From the central bank’s perspective, a digital currency should be designed in a way that can best protect people’s privacy, but we also need to pay attention to social security and social order. A balance needs to be struck between protecting privacy and cracking down on illegal activities. Different preferences between these two motives will lead to different technological orientations.”
Regarding the bitcoin principal of private issuance, the PBOC governor thinks that its “control over monetary sovereignty should be maintained. Digital currency can be converted freely but its convertibility will also be controlled. We think, therefore, as a legal tender, digital currency must be issued by the central bank. The issuance, circulation and transaction of digital currency will follow the same management principles of traditional currency.”
Due to the massive size of the Chinese economy and population, Xiaochuan believes it will take about ten years for a digital currency to fully replace cash in China but he has plans how to gradually phase out paper money. Costs for cash transactions will increase, as for example banks will start charging fees for counting physical coins. “With the transaction costs of paper money rising, people will be motivated to opt more for digital money. But digital currency and cash will coexist for a long time.”
The governor explains that the Chinese digital currency will still be based on a “central bank-commercial banks binary system.” Only the delivery and storage methods will change: “money will be delivered electronically instead of physically, and money will be stored in cloud computation space instead of the central bank’s treasuries and commercial banks’ vaults.”
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The PBOC has spent a lot of time and energy researching the application of block chain technology. However, the governor says “so far block chains have consumed too many resources, including both computation and storage resources, and cannot handle the current transaction volume. We need to wait and see whether this problem can be solved in the future.”
Simon Dixon, CEO of Hong Kong headquartered BnkToTheFuture and Fund Manager of Bitcoin Capital, spoke with Finance Magnates about the significance of the PBOC governor’s remarks. Dixon comments: “The implications of PBOC issuing their own digital currency are actually a lot greater than it may seem. This is actually the most radical shift in monetary policy and banking reform that we have seen since the creation of central banks. The major difference is not the fact that the currency is digital, banks have been issuing digital money for decades now when they issue loans as they simply add new digital money to your online banking balance upon acceptance of a loan.
The real major change is who is issuing the digital money. Today cash is issued by central banks and digital money in your bank is issued by the bank when they issue loans and backed by debt. When PBOC launch their own digital currency this new money will completely bypass the banks and introduces a third form of money – central bank created digital money. This central bank issued digital money does not require banks to issue a loan for it to exist as bank digital money does today and does not even require a bank at all. This is actually radical banking reform. We now have people created digital currencies like Bitcoin and it looks like we will have central bank issued digital currency – both bypass banks and completely disrupt their business model.”
Two weeks ago, soon after the news first came out that the PBOC is positively examining the technology, Dixon issued this video discussing the subject: