by Joseph Young
Zhou Xiaochuan, the governor of the People’s Bank of China (PBOC), has been in charge of the monetary policy of the nation’s central bank since 2002. For nearly a decade and half, Zhou has successfully pushed China’s financial system reform forward, calling for the renminbi, or the Chinese yuan, to become an international reserve currency.
The efforts of Zhou and his support for the prosperity of the Chinese yuan and the Central Bank is truly indubitable. However, he explains that the government’s censorship, regulations and financial policies will not decelerate the growth of digital currencies such as bitcoin. Zhou’s exact words were, “It is therefore inevitable that cash will be replaced by new products and new technologies that have greater security and lower costs.”
On January 20, the PBOC officially held a digital currency seminar in Beijing. The conference-style event, with the participation of cryptocurrency experts from multi-national bank Citibank and global financial services firm Deloitte, focused on exploring the overall framework of digital currencies. Government officials including Zhou and PBOC vice president Fan Yifei attended the event, engaging in discussions led by respected educational institutions and major financial establishments.
During the seminar, the majority of attendees stated that the development of information technology, cloud computing and payment mechanisms such as the blockchain technology brought new opportunities and challenges that have to be dealt by the Central Bank. Some experts including Zhou emphasized that considering the exponential growth of digital currencies like bitcoin, blockchain-based cryptocurrencies will soon challenge major financial establishments and ultimately, lead people to challenge the existence of financial intermediaries like the PBOC.
Recognizing the potential of digital currencies and their threat towards existing financial systems, bankers and financial leaders in the seminar agreed that the People’s Bank of China must set up and utilize a special research team to explore the true power of digital currencies and their operational framework, to possibly launch the PBOC’s own digital currency.
In a recent interview with a major Chinese business magazine, Caixin, Zhou stated that the PBOC has since been studying digital currencies extensively and has been considering the possibility of digital currencies eventually replacing cash in the near future.
“Cash, which is the current version of currency, is low-tech,” explained Zhou. “The rapid development of the internet and global payment systems make it necessary to issue and circulate digital currency, which would improve financial infrastructure and economic quality and efficiency.”
However, the major issue of implementing and pushing digital currency to become a potential replacement of cash lies behind its anonymity. Cash by nature is anonymous, and cash is the only truly anonymous form of money in circulation today. This is the precise reason why bankers have begun to demand the elimination of high-value currency notes such as the US$100 bill. Because of its anonymity, cash is the highly preferred payment mechanism amongst fraudsters, money launderers, corrupt government officials and terrorists purchasing illegal goods including drugs and weapons.
Global Financial Integrity, a non-profit Washington DC-based research and advisory organization, estimates that illicit financial flows from developing countries have totalled US$1.1 trillion, increasing 2.5 times since 2004.
With concerns rising due to the explosive increase in the number of fraudulent transactions and illicit financial flows, financial experts and the Central Bank of China are debating whether to maintain the same level of anonymity for digital currency as they did for cash.
However, Zhou argued that cash is only anonymous because of the lack of financial infrastructure to trace the origin of cash. While he understands that many individuals call for complete anonymity for digital currencies, the PBOC is aiming for a controlled and regulated digital currency.
“From the PBOC’s perspective, digital currencies should protect people’s privacy, but they should also not disrupt social security and social order. Digital currencies need to have tracking tools that allow the investigation of criminal activities. A balance needs to be struck between protecting people’s privacy and cracking down on illegalities,” explained Zhou.
Regardless of the anonymity debate, both Zhou and the PBOC agree that the advantage of a bank-backed digital currency could be the government’s ability to crack down on illegal activities. Thus, Zhou and the PBOC is implying that if the Central Bank decides to deploy its own digital currency, it will be controlled and centralized to some extent, and will greatly differ from existing digital currencies like bitcoin.
Still, the PBOC realizes that convenience, security, privacy, and compliance with current monetary policies are crucial in the development of a digital currency.
“The first is convenience and security,” stated Zhou. “Second, as mentioned earlier, a balance needs to be struck between protecting privacy and maintaining social order and cracking down on illegal activities. In particular, the digital currency should offer tools to fight money laundering and the financing of terrorism. Third, the digital currency should facilitate the enactment of monetary policy. Fourth, the digital currency should not impact monetary sovereignty; it should be possible to convert the currency, but there should also be controls on its convertibility.”
As of now, the Chinese government and the PBOC seem to recognize the potential and capability of digital currencies like Bitcoin to disrupt the finance industry. After all, the PBOC’s governor himself believes that digital currencies will inevitably replace cash.