China looks set to become the first major nation to launch a digital sovereign currency: the digital yuan.
The country’s Digital Currency Electronic Payment (DCEP) project, five years in the making, will incorporate the use of blockchain technology and see the currency distributed through digital wallets.
The timing of the launch has been the subject of speculation for some months, and continues to remain unclear. But the country’s parliament has just passed a new law on cryptography, Chinese state media have reported, in a move interpreted as an important milestone on the road to the digital yuan’s launch.
The cryptography law, which will take effect on 1 January 2020, is aimed at ‘facilitating the development of the cryptography business and ensuring the security of cyberspace and information’, the official Xinhua news agency said, citing parliament. It follows a consultation that began in July.
The legislation does not explicitly refer to cryptocurrencies, financial media outlets have reported, but focuses on blockchain – a key technology used within digital currencies.
Other developments in recent days include the People’s Bank of China (PBOC) signing a partnership with Chinese telecoms giant Huawei. This has also been widely interpreted as the country accelerating its plans to launch a sovereign digital currency.
The head of the PBOC’s Digital Currency Research Institute, Mu Changchun, reportedly said in August that the digital yuan was “almost ready”. But the following month the central bank’s governor, Yi Gang, said there was no rollout timetable and that it still needed to meet requirements such as anti-money laundering (AML).
More than 50 patents filed by the PBOC, along with Mu’s comments, indicate that the PBOC plans to distribute the digital currency through commercial banks, Reuters reported, adding that one patent filed shows that the bank is exploring a tracking system that would make the currency’s movements traceable between transactions and people. Mu has said the DCEP would strike a balance between allowing anonymous payments, and “classified supervision” to prevent illegal activity such as money-laundering, Reuters said.
Industrial revolutionary Communists
Dr Johnny Hon, a prominent Hong Kong financier who is also a Chinese People’s Political Consultative Conference (CPPCC) standing committee member in the Heilongjiang Province, told Global Government Forum: “China is definitely moving ahead towards the creation of its own digital currency. It’s always important to pay attention to what China’s leaders are saying. The law on cryptography has created the necessary legal and regulatory framework – we might expect further developments shortly after it comes into force in January. The passing of the law coincided with President Xi Jinping calling, at a special meeting, for more efforts to speed up blockchain development, which he described as being vital to China’s next stage of development.”
Hon added: “In looking at how quickly a national cryptocurrency might be rolled out, once the political requirements are in place, it’s worth noting that China is moving towards a cashless society. In 2017, there were an estimated US$12.9 trillion taken in electronic payments in the first 10 months alone. Now, 10 million blockchain e-invoices have already been issued just in the city of Shenzhen, which is a national pacesetter. China’s launch of a digital currency will form part of its determination to be in the forefront of the Fourth Industrial Revolution, rather than have to play catch-up as it had to do in the past.”
China’s progress comes as governments and regulators worldwide grapple with the digital whirlwind impacting the delivery of financial services, as well as moves by large technology companies to muscle in on the payments market. High-profile examples include Facebook’s planned cryptocurrency, Libra.
Geo-political factors have been prominent in analysis of China’s plans, with experts saying the country is nervous that Libra could grow the dollar’s dominance in international payments.
Other countries that have made headlines with state-backed digital currency initiatives include the Monetary Authority of Singapore-led initiative Project Ubin; Tunisia’s e-Dinar; Dubai’s emCash; and Sweden’s e-krona project.
The PBOC opened its Digital Currency Research Institute in 2017, with research interests including blockchain.