China's central bank stresses its central role in new sovereign digital currency
China is developing a sovereign digital currency with the primary goal of defending the state's monopoly on minting money, meaning the central bank will play a central role in the issuance and circulation of a digitised yuan, a deputy governor at the People's Bank of China (PBOC) has written.
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Allowing a central authority to monitor digital currency runs counter to the principal of decentralisation that underpins cryptocurrencies such as bitcoin, which allow anonymous transactions and shield users from changes in central bank policy.
However, Fan warned that cryptocurrencies and global stablecoins such as Libra challenge central bank authority in minting money.
China's digital currency, which is under development, aimed to prevent "the loss of money minting power in the digital era, and to ensure that currency issuance always serves overall national development and reform".
China's central bank has cracked down on trading cryptocurrencies, viewing them as a source of financial instability. At the same time, it has worked for years to develop a sovereign digital currency with a number of large state-owned banks.
It has tested its digital currency for most of the past year, while other major central banks are still discussing the technology's merits.
Tests are being conducted in major cities like Suzhou, Chengdu, Xiongan, Shenzhen, as well as in venues set to host the Winter Olympics. There is a growing list of participants from the technology, retail and banking sectors.
In addition to small-sum transactions in restaurants and ride hailing services, there are pilot programmes allowing government employees to use the digital money for meal allowances.
China's sovereign digital currency will also be used in electronic payment services, an area dominated by Ant Financial's Alipay and Tencent's WeChat Pay mobile apps. Ant Financial is affiliated with Alibaba, which owns the South China Morning Post.
It is unclear whether Chinese businesses and consumers will welcome the digital yuan, but its acceptance will be mandatory, Fan said. He did not provide a launch date.
In his article, Fan wrote the digital currency would not immediately replace all cash or demand deposits because it would "create a huge waste", without improving payment efficiency.
The PBOC would classify it as the most liquid form of money, which includes notes and coins, to reflect the widespread use of mobile app payments in China, he said.
Once launched, the digital currency will allow the PBOC to see how money is being used in real time, much faster than its current ability to monitor money flows through transactions in notes, coins and electronic payments.
However, there are growing concerns over the currency, owing to the many unanswered questions concerning its development, such as management of transaction data.
Caixin, an influential magazine in China, urged caution in an editorial this month, saying there was no need to rush the sovereign digital yuan.
China also needs to update its central bank law because cash is defined as notes and coins, the editorial said.
This article originally appeared on the South China Morning Post (SCMP).
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