China’s central bank, the People’s Bank of China (PBC), held a digital currency conference in Beijing on January 20, attended by Governor Zhou Xiaochuan and Deputy Governor Fan Yifei. Other attendees include representatives from Citibank, Deloitte, research institutions, financial institutions, and consulting agencies. After the meeting, the PBC announced that they were looking into launching their own digital currency as soon as possible.
Then on Sunday, the PBC posted the transcript of an exclusive interview Governor Zhou gave the Chinese finance magazine Caixin Weekly. “We do not have a timetable yet,” stated China’s longest-serving central bank governor.
“Digital currency will co-exist with cash for quite a long time before it finally replaces cash. The cost for cash transaction will gradually increase in the later stage […] With the transaction costs of paper money rising, people will be motivated to opt more for digital money.”
— – Zhou Xiaochuan, People’s Bank of China Governor
There are a few major advantages of digital currencies, according to the Governor. For instance, delivery and storage methods for money will change drastically, and for the better.
“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,” Zhou stated. “The security and efficiency of issuing and withdrawing digital currency will be significantly improved in the end.”
Governor Zhou explained that digital currency can utilize two types of technologies: account-based, and non-account-based, the latter referring to the type that includes a blockchain. "These two technologies can co-exist by being applied to different layers," he added.
While he did not state that the PBC will be using blockchain technology, he acknowledged that if a digital currency wants to emphasize privacy protection, “block chain technology is a good choice.”
He confirmed that digital currency should be designed in a way that can best protect people’s privacy, from the central bank’s perspective, while social security and social order are also important factors. He also made it clear that a balance is needed to protect privacy while cracking down on illegal activities.
Governor Zhou also revealed that the PBC has studied digital currency, “for a long time,” having spent “a lot of time and energy” researching the application of blockchain and related technologies, including mobile payments, trusted and controllable cloud computation, cryptographic algorithms, and secure chips.
However, in his opinion there are still challenges with blockchain technology, such as an inability to handle large transaction volumes. “We need to wait and see whether this problem can be solved in the future.” he clarified.
The need for digital currency is the same as the global need for replacing old, outdated paper money, according to the governor: “Paper money, as the last generation currency, lacks high-tech support, and it is an irresistible trend that paper money will be replaced by new products and new technologies with greater security and lower cost.” Not only will it make money in society more efficient, but it also has economic effects, which he believes China needs.
“It is necessary to establish the issuance and circulation system of digital currency, which will help build the financial infrastructure and improve the quality and efficiency of the economy.”
Anonymity was also discussed at length. According to Governor Zhou, removing the benefit of anonymity might be too large of a problem to overcome when asking people to switch from paper money to digital currency.
“Some people assume that it would be better for digital currency to be transacted anonymously in the future because the government may fail in protecting people’s privacy of wealth and the use of wealth,” Zhou said, adding “which should be definitely protected.” He affirmed that an anonymous version of digital currency is being considered.
The governor noted that the PBC wouldn’t be the first to adopt a digital currency, but made it clear that the central banks of the world would all stick to a particular set of principles for their issuance frameworks.
He went into great detail about retaining control over the issuance of new money, and how “the control over monetary sovereignty should be maintained,” while security, convenience, the balance between social order and law enforcement, efficient operation, and centralized issuance are all cornerstones that must not be tampered with.
“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.”
Governor Zhou also provided the main reason to retain control over issuance: “We think we still need to adjust the money creation mechanism and money supply.” This idea embodies the classic Keynesian argument that maintaining the proper amount of money protects the economy, a uniform tenet to central banks around the globe.
“The central bank will fully consider the current monetary policy framework, money supply and creation mechanism and monetary policy transmission channels in designing digital currency,” Zhou stated, conveying the importance of designing their digital currency around this principle.
While there is no launch date set, urgency was implied at several points during the interview. The Chinese economy will continue to slow in 2016 and the Communist Party is clearly worried. It is not really obvious why.
Although national output has doubled every seven years or so since 1980, and the economy is about six times larger than it was 20 years ago, the Chinese economy has failed to maintain this growth recently. The chinese economy will continue to slow in 2016, missing a self imposed target of 6.5% growth.
The official Chinese currency, the renminbi, has also been in decline. A strict peg to the US dollar was relaxed last year, and the PBOC has attempted to control the currencies devaluation ever since, depleting the country’s currency reserves.
China’s foreign currency reserves fell for the third month in a row in January, by US$99.5 billion, after a record plunge of US$107.9 billion in December. That marks an accumulative decline of US$420 billion over the past six months.
The Chinese stock market has also been in turmoil this year, closing down on more than one occasion following steep declines. Subsequently, Chinese investors are reportedly moving their savings out of the country.
The country’s annual cash control limit for spending outside of China is about US$50,000 per person. This prompted a trend called “Smurfing,” where people with savings would ask friends and family members to carry or transfer money. Using this method, it only takes 20 individuals to move one million dollars out of the country. During the last year, nearly $1 trillion is estimated to have moved out of the country in this way.