After bitcoin crackdown, China now wants centralised digital currency

As Facebook readies to launch its answer to bitcoin, China is set to introduce its own digital currency -- one that could allow the government and the central bank to see what people spend their money on, according to analysts.

Far from the libertarian ideals of cryptocurrencies, whose anonymity allows users to buy and sell without leaving a digital trail, China's mooted e-cash system will be tightly regulated, experts say, and run by the People's Bank of China, the central bank.

It "would give the PBoC greater insight into transactions throughout the country," analysts at Beijing-based research firm Trivium China said in a note.

In late September, central bank governor Yi Gang said China's new currency may be associated with existing electronic payment systems, such as the popular WeChat and AliPay phone apps, which are widespread and allow yuan transactions via bank accounts.

While he gave no timetable, Chinese media are putting their money on a November 11 launch to coincide with "Singles Day" -- a massive, annual online sales event.

Yi did not say what shape the currency would take.

"We will not predetermine the technical path," he said.

"We may consider blockchain technology or another technology that evolves from existing electronic payments." It is likely to be more akin to electronic money, stored on a physical medium, than a cryptocurrency such as bitcoin which is based on a computer network.

One thing is certain: "We will adhere to centralised management," Yi said, the polar opposite of the philosophy behind cryptocurrencies like bitcoin.

China was once a stronghold of bitcoin.

Just two years ago, the three major Chinese bitcoin trading platforms -- BTC China, OKCoin and Huobi -- accounted for more than 98 percent of world trade, according to the benchmark site bitcoinity.org.

But the sector was unregulated and transactions were invisible to the authorities -- anathema to Beijing, which shut down the trading platforms in 2017.

"You can be interested in the technology behind bitcoin and not like the way it is implemented, and want to create your own bitcoin with your desired characteristic," said Stanislas Pogorzelski, editor-in-chief of the specialist site Cryptonaute.fr.

In a country where social credit systems and facial recognition cameras are becoming widespread, a new Chinese cryptocurrency could allow the government to "more closely monitor the actions of its population," he said.

Its purpose is to "replace cash," he explained, "the last bastion of privacy." "The digital currency will allow the PBoC to collect new information that is impossible to collect when a transaction is through paper currency," said Song Houze, a research fellow at think tank MacroPolo, which specialises in the Chinese economy.

China's moves coincide with Facebook's plans to launch a cryptocurrency called Libra.

The emergence of Libra was an "alert" for Beijing, according to a former senior central bank official quoted in the Chinese press. Due to roll out next year, Libra should offer a new payment method outside traditional banking channels to buy goods or send money as easily as an instant message.

Like bitcoin, Facebook's virtual currency "represents a competition and threat" to the yuan when Beijing is anxious to stabilise its currency, said Song.

But it is not only authoritarian Beijing that is worried about the growth of cryptocurrencies.

Facebook's plan has faced heavy criticism from regulators and lawmakers in the United States and Europe, with chief executive Mark Zuckerberg expected to face questioning from Congress.

French Economy Minister Bruno Le Maire has warned that Libra poses a threat to the "monetary sovereignty" of governments and could not be authorised in Europe.

The French Senate has advocated the creation of a public cryptocurrency, under the aegis of the European Central Bank.

The controversy has seen huge financing firms like Visa, Mastercard and eBay pull out of the scheme.

Nonetheless, many analysts expect more and more transactions around the world to move online, in one form or another.

For China, a home-grown system of electronic cash controlled by the central bank offers the convenience that consumers want with the control that authorities crave.

The People's Bank of China, must "stay relevant in an age of declining usage of paper currency," said Song.

China says new digital currency to have some similarities to FB's Libra

China's proposed new digital currency would bear some similarities to Facebook's Libra coin and would be able to be used across major payment platforms such as WeChat and Alipay, a senior central bank officer said. 

Mu Changchun, deputy director of the People's Bank of China's payments department, said the development of the coin would help protect country's foreign exchange sovereignty as commercial applications of such currencies expanded. 

"Why is the central bank still doing such a digital currency today when electronic payment methods are so developed?" said Mu, according to a transcript of a lecture he gave this week that was published online.

"It is to protect our monetary sovereignty and legal currency status. We need to plan ahead for a rainy day."

He said the tokens would be as safe as central bank-issued paper notes and could be used even without an internet connection. They could also be used on Tencent's WeChat and Alibaba-backed Alipay.

 

The state-run newspaper Shanghai Securities News reported his comments on Friday. 

China's central bank set up a research team in 2014 to explore launching its own digital currency to cut the costs of circulating traditional paper money and boost policymakers' control of money supply. 

It had said little since but Mu last month announced that the digital currency was almost ready. US financial magazine Forbes, citing sources, said the currency could be ready as soon as November 11.

Some analysts say China appears to have accelerated the push to digital money after US social media giant Facebook announced plans in June to launch digital coin Libra.

Mu said China's digital currency would strike a balance between allowing anonymous payments and preventing money-laundering. It would also bear some similarities to Libra in design but would not be a direct copy, he said without elaborating.

 

Facebook's proposed cryptocurrency has sparked concerns among global regulators that it could quickly become a dominant form of digital payment and a channel for money laundering given the social network's massive cross-border reach.

Libra will be a digital currency backed by a reserve of real-world assets, including bank deposits and short-term government securities, and held by a network of custodians. Its structure is intended to foster trust and stabilise the price.

Like other cryptocurrencies, Libra transactions will be powered and recorded by a blockchain, which is a shared ledger of transactions maintained by a network of computers.

Mu said the advantage a central bank-issued digital coin had over those issued by WeChat and Alipay was that commercial platforms could in theory go bankrupt which could cause users losses. Its ability to be used without an internet connection would also allow transactions to continue in situations in which communications have broken down, such as an earthquake. 

India will be first nation to test FB's digital currency: Report

The inner workings of Facebook’s blockchain team are still shrouded in secrecy, but it’s staffing up, according to people familiar with the group. Those people said that its product, which Bloomberg earlier reported will be a type of cryptocurrency, could be announced as soon as next quarter.

Launched last May, Facebook’s blockchain unit now counts 50 employees. Facebook declined to comment on the team organisation or its plans. According to Facebook insiders, the blockchain group is developing a stablecoin, a type of digital currency pegged to the US dollar or a basket of currencies, making it less prone to swings in price. The first country that will test the currency will be India, a region that is particularly appealing for Facebook because it still has room to expand. The product could allow users to transfer money for remittances via WhatsApp through stablecoin.

‘It’s time to break up FB’

Facebook co-founder Chris Hughes has called for the break up of the social network in a piece in the New York Times."We are a nation with a tradition of reining in monopolies, no matter how well intentioned the leaders of these companies may be. Mark's power is unprecedented and un-American," he wrote on Thursday.