New twist in cryptocurrency tale
PBOC is among some central banks that are pondering e-cash of their own, fresh regulations and standards
“In Mesopotamia at least metal currency that didn’t physically exist was used ... In a sense, this imagined form of money, used to facilitate real exchanges, was a virtual currency. So, when people tell you that today’s economy is very different to the economy of the past, citing the virtual payments made possible by digital technologies, tell them that is nothing new; that virtual money has existed ever since the economy was invented, following the agricultural revolution twelve thousand years ago and the creation of the first surplus.”
– Yanis Varoufakis, former Greek finance minister, in his book Talking to My Daughter about the Economy — A Brief History of Capitalism
Call them virtual money, digital fiat or cryptocurrencies, alternative measures of exchange value have always posed challenges to official cash.
From the first paper money that was used in China to various cryptocurrencies now vying to usher in a cashless world, almost 10 centuries have sped by.
And, wiser after the 2008 global financial crisis, central banks the world over, including the People’s Bank of China, are determined to preempt any potential trouble.
That’s not all. The PBOC is among the central banks that are considering issuing digital currencies of their own, besides exploring new regulations and standards to streamline and control the emerging field.
To understand their rationale, it is important to review the key developments of the last decade that marked the global monetary system.
The first decade post the GFC saw the emergence of e-money that, in turn, led to numerous electronic payment providers offering specialized services.
The trend reduced the use of official cash, spawned for-profit trade in virtual currencies, and spooked regulators with the specter of investment frauds and a destabilized financial system.
But now, experts are divided on whether fresh measures to rein in cryptocurrencies are already a bit late in the day, while others argue there is a strong case for more rules and regulations.
Everyone, however, agrees that digital money has enabled innovative modes of payment. New payment providers, such as AliPay and WeChat in China, have already restructured the market and changed the way people use money.
And they did so in a way that Satoshi Nakamoto, whose real identity remains unknown, could not have imagined a decade ago. Around the time the world was convulsing through the GFC, Nakamoto published an article titled Bitcoin — A Peer-to-Peer Electronic Cash System. The article introduced the concept of an electronic payment system free of any credit intermediary.
The idea caught on like wildfire. In the media, headlines screamed terms and phrases like “blockchain”, “decentralization” and “distributed ledger”.
“It changed the internet-age public’s perceptions, making people believe that everything could be decentralized, and that the currency is no exception,” said Zhang Yutong, a researcher with JD Finance.
Bitcoin’s rise in 2009, the subsequent frenzy over its trading (which was marked by unrealistic prices and obscene returns), and the potential threat they posed to conventional cash led to denouncements that digital currencies are a fraud, outright bubbles.
Now, the focus is shifting. Academics and policymakers are discussing issues ranging from the technical features of a digital currency’s design to concerns over the political economy.
In a sense, the advent of cryptocurrencies, and the attendant technological innovations, are reshaping traditional financial institutions, experts said.
A growing number of banks and other financial institutions are forming joint ventures with, or investing in, more established and large-scale third-party online platforms, some of which are associated with large technology companies such as Alibaba, Tencent, and Baidu.
A Nielsen survey indicated that third-party e-payments have much larger user penetration in China than the rest of the world.
It showed that 86 percent of respondents in China have paid for online purchases via third-party payment systems, much more than 38 percent in North America, 56 percent in Western Europe and 37 percent in Southeast Asia and the Pacific.
Zhou Xiaochuan, former governor of the PBOC, said recently that around half of the financial services in the country have been re-packaged or transformed by high technology into fintech, a sector that now includes electronic payment providers.
Some advocates say e-money can support payments without the need to designate a third-party that controls the currency or payment instruments — “decentralization”.
Since the rise of electronic payments also challenges central banks’ status as the sole issuers of Statebacked currency, discussions now center on whether the future payment model should be decentralized as distributed ledgers technology “are still needed”, said Zhou, at a forum in November. “That could be the key issue that money issuers are concerned about the most.
“The future is still uncertain. Multiple development plans for digital currencies and electronic payments are paralleled, challenging the central banks and financial regulatory bodies.”
Several days before Zhou’s speech, Christine Lagarde, managing director of the International Monetary Fund, shared her thoughts in response to a question if “central banks should issue a new digital form of money”.
She said: “A digital currency would be a liability of the state, like cash today, not of a private firm.”
It could also involve both public partnership and the private sector role in the development of digital currencies, she said.
Digital currency issuance should not encourage money-laundering and illegal or covert financing for terror activities, said both Zhou and Lagarde, who worry about the implications for financial stability, such as the risk of bank runs.
The PBOC is one of central banks that are seriously considering issuing digital currency to the public. Others include Sweden’s Riksbank and the Bank of Canada.
To keep the development of the new technology under control, the PBOC started to issue business licenses to third-party payment companies which met the regulatory requirements since 2011. So far, there are more than 300 third-party payment licensees in the country, including Tencent and Baidu.
“Regulation has tended to lag the rapid growth of the industry, despite some recent initiatives,” said Lillian Li, an analyst with Moody’s. “But regulation will ultimately strengthen online financial services by forcing small, inefficient and risky thirdparty platforms out of the market.”
The PBOC is also keen to explore, study and experiment with digital currencies. It launched a research unit in 2016 and expanded research in partnership with some companies in 2017.
China is finding a way to introduce a set of globally accepted standards, including the definition, function, categories and regulatory principles of a digital currency.
“We face some difficulties to reach unified standards, as that is not so easily accepted among countries based on their differences in understanding a digital currency’s role,” said Li Wei, director of the PBOC’s technology department.
He said China has already introduced digital currency standards in some economies involved in the Belt and Road Initiative.
Consensus was achieved among financial ministers and central bank governors in March 2018, under the G20 framework: “Crypto-assets have the potential to improve the efficiency and inclusiveness of the financial system and the economy more broadly.”
But they agreed it can also raise issues with respect to consumer and investor protection, market integrity, tax evasion, money laundering and terrorist financing.
A communique issued after their meeting said: “Crypto-assets lack the key attributes of sovereign currencies. At some point, they could have financial stability implications.”
The Financial Action Task Force, an intergovernmental body that sets standards and promotes their effective implementation in the international financial system, has submitted a report to the 2018 G20 Leaders’ Summit, asking to continue the discussion on issues such as digital identification, distributed ledger technology, and virtual assets.
In October, the FATF members recommended a new definition of “virtual assets” — a broader concept including visual currencies and crypto-assets, calling it “a digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes”.
It changed the internet-age public’s perceptions, making people believe that everything could be decentralized, and that the currency is no exception.” a researcher with JD Finance