China is Already a Digital Economy, so why Introduce a Central Bank Digital Currency?
China has been trending away from cash and toward digital payments for quite some time now. In 2018, 3.8 quadrillion yuan was remitted using plastic cards, cheques, electronic transfers, and other formal methods. According to Bloomberg, September 11, 2019, in the first quarter of 2019, payments apps like AliPay and WeChat accounted for 59 trillion yuan worth of payments. Boasting strong adoption numbers, there is an obvious agenda behind China launching a digital currency.
Control Over the System
A financial system where the majority of payments are routed through the private sector takes a lot of control away from the government.
China and the United States, in particular, have a problem with giving up a significant portion of control. This explains why one is launching a state run cryptocurrency and the other is unable to accept that private institutions are able to launch money.
The ability to exercise control and be in charge of all the data and transactions is a huge plus for the state. It’s not like they didn’t have access to private sector data, but this makes the entire process easier for the government.
Former PBoC chairman, Zhou Xiaochuan, is the initiator of the digital currency project. His aim was to create a fresh, innovative system of payment for China so they would never have to adopt a standard that was governed and controlled by someone else – like Bitcoin.
As explained by BTCManager, China’s digital currency is indeed a cryptocurrency, but it isn’t decentralized. A lot of people in the space are misguided about the difference. China uses cryptographic signatures and keys, which makes it a centralized cryptocurrency.
To Blockchain or Not?
The PBoC is hesitant about launching this over a blockchain because of the throughput constraints on the system. A centralized server would be able to process far more transactions than a blockchain.
At the same time, there is no point of it being launched over a blockchain as there is no consensus that needs to be formed. The lack of network level governance means a blockchain would add no value and reduce efficiency.
With the Bank of England governor’s latest comments, China may now be trying to launch a digital yuan that becomes a sort of global money standard.