China May Adopt a “Hong Kong Style” Cryptocurrency, Instead of Libra, Per Ex-Central Bank Governor
- Libra’s whitepaper was recently released in June 2019.
- In response, the People’s Bank of China may end up releasing their own bank-backed digital currency.
After the release of the whitepaper for Facebook’s Libra cryptocurrency, governments around the world have brought up concerns. Some have already stated that they will not allow Libra to be used within their economy, while others simply want clarity on the regulations already in place.
In a statement from the former governor of the People’s Bank of China (PBoC), it appears that commercial entities may be taking the role of issuing digital currencies. Zhou Xiaochuan stepped down as the head of PBoC after 15 years in 2018.
In the South China Morning Post, Xiaochuan commented that it is possible for China to use the Hong Kong monetary system to learn about digital currency issues, ultimately paving the way to issue their own. He revealed that the government is still working to respond to the newly proposed Libra cryptocurrency, leading them to considering their own digital currency instead. Continuing to be the key backer behind the digital currency initiative, Xiaochuan stated that there is a lot for policymakers to take from the Facebook and Hong Kong models for digital assets.
At a symposium organized by the State Administration of Foreign Exchange in Beijing, a transcribed version of Xiaochuan’s speech stated, “Notes can be issued by the central bank or commercial entities.” However, he did not explain what kind of “commercial entities” could be best for China.
There are already three banks in Hong Kong – Bank of China, HSBC, and Standard Chartered – that have already issued their own banknotes in their own names, holding the USD in reserves as backing. With this model, the Hong Kong Monetary Authority has been able to maintain a 7.8:1 ratio between the Hong Kong dollar and the US dollar. If China chooses to adopt the same model, they would end up avoiding major fluctuations that cryptocurrency faced in the early days.
Senior analyst Chen Dafei of Orient Securities commented that he noticed the reference that Xiaochuan made to the commercial entities, noting that he took it to mean that tech firms could ultimately be able to participate in digital currency issuance. However, the process by which this would be implemented was not clear.
Tech firms Alibaba and Tencent already have a solid payment network in China, using Alipay and WeChat Pay. It is worth noting that Alibaba owns the South China Morning Post, which has been referenced in this article.
While Dafei believes that the new path could involve tech firms, chief scientist Wei-Tek Tsai of Tiande Technologies was not in agreement. Instead, he argued that the only entities capable of issuing digital currencies are commercial banks and central banks. During the speech, Xiaochuan stated, “One problem [in the early development] was that people had been too eager to make quick money to turn cryptocurrencies into items for speculation instead of a means of trade.”
As Xiaochuan sees it, there is still plenty to learn from the whitepaper released regarding Libra last month, considering that the new asset will be linked to a collection of major currencies. Furthermore, the cryptocurrency is going to be based on a Swiss nonprofit consortium. So far, this consortium is a collaborative network of over two dozen companies, including Visa, Mastercard, PayPal, eBay, and Uber.
When digital currencies first entered the market, the PBoC had not criminalized the use of cryptocurrencies at all, even Bitcoin. However, when speculation and major price changes started happening, China chose to completely ban both trading and initial coin offerings. Recently, the central bank of China has been a little more progressive, studying the creation of their own “sovereign” digital currency, and they have even developed a dedicated institute for this effort. Unfortunately, progress has been slow paced.
With the idea of Libra entering the market as a globally used cryptocurrency, controversy started as China considered the best way to respond.
So far, the comments made by Xiaochuan have been the most comprehensive statements on what could happen next. Xiaochuan believes that Libra is paving the way for a “strong international currency,” which would shake up the economic system. Cross-border payments would be challenged, and the sovereign currencies without a stable value would be on treacherous ground. Xiaochuan stated,
“Libra has introduced a concept that will impact the traditional cross-border business and payment system.” Even with remote risks, Xiaochuan believes that the best move for Beijing will be to “make good preparations and make the Chinese yuan a stronger currency.”
Instead of seeing Libra’s progress as a challenge, Xiaochuan sees it as an opportunity for developing countries to strengthen their own payment structures.
Presently, the central bank’s research chief, Wang Xin, has already announced the approval of a collaboration between market institutions for the purpose of researching and creating a central bank digital currency. Still, a big concern in Beijing is that the launch of such a digital currency could further embed the US dollar hegemony. Xin stated,
“If the digital currency is closely associated with the US dollar, it could create a scenario under which sovereign currencies would coexist with US dollar-centric digital currencies.”