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People’s Bank of China Reveals Intention to Implement Digital Currency

Reading Time: 2 minutes by on January 21, 2016 Finance, News, Regulation

The People’s Bank of China (PBOC) wants to launch their own digital currency, revealing their intention through a statement released today; this would allow the central bank to eliminate the costs associated with paper money. This statement follows recent positive sentiment from the Reserve Bank of India and calls from David Andolfatto, a U.S. Federal Reserve member, to issue their own virtual currency dubbed ‘Fedcoin’. By enhancing China’s ability to control the money supply, a virtual currency regime could brings benefits of greater economic stability.

The PBOC set up a research team in 2014 and has suggested that in making preparations for a launch, “the team … should set up a clearer strategic target for launching digital currencies, overcome the key technological barriers … and aim for an early launch of the central bank’s digital currencies…”

Increased buying interest across Chinese exchanges has been witnessed today, with BTC-CNY up almost 10% on the BTCC exchange with the price currently standing at ¥2784.13. A daily close above ¥2820.50 will see another attempt to break the psychological ¥3000 level over the medium-term.

With the rise of permissioned blockchains, this news represents a positive fundamental theme for Bitcoin, which still remains the largest decentralized network. With governments appreciating the benefits of the technology and trying to create their own versions, it indicates some sense of defeat with regards to destroying or out-competing the ecosystem. It will also encourage adoption of cryptocurrencies by more people in general, introducing them to the concept and allowing them to learn for themselves the advantages and disadvantages of a government-backed versus a decentralized currency.  Some argue that when a government which creates its own blockchain and digital currency, the situation is no different than fiat currency in many aspects. Such a move only prolongs the eventual recognition of Bitcoin’s superiority, arising from its first-mover advantage.    

With a digital currency, China could leapfrog ahead of developed nations and use the technology to make progress in the transparency of economic activities, and reduce crimes such as tax evasion and money laundering. One key advantage of bitcoin is that no counterfeit version exists (yet) so a digital currency regime could stamp out a large portion of illicit activities. For instance, counterfeit money impacts the central bank’s ability to control the money supply and use monetary policy to stabilize the economy. With a digital currency regime, these distortions could be eliminated completely.

At first, the Chinese government was hostile toward bitcoin and wary of cryptocurrencies in general. but slowly, sentiment has shifted in their favor.. Although China has not expressed a desire to use bitcoin as part of their monetary system, trying to create their own version is a step in the right direction. It also indicates that further along down the line, governments are likely  to re-evaluate the money creation process and how to manage the economy.

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