“From Behind The Great Wall” This interesting read is a very generous contribution from one of our Asian Gold Members. An inside take!
The People’s Transition?
During the Spring Festival, hundreds of millions of Chinese people exchanged red envelopes through tools such as “WeChat” and “AliPay”, eliminating the cumbersomeness of traditional post. Although those red envelopes did not contain real cash, the ‘money’ in the red envelope corresponds to a note, a token.
The emergence of digital currency could change this situation to a tangible transactional asset. Passwords, a certificate, a wallet address etc could well be a replacement for banknotes. Digital currency is seriously upcoming in China.
The Chinese Digital Currency Research Institute
Some Chinese media reported that before the Spring Festival, the People’s Bank of China blockchain based digital paper trading platform has been tested successfully. After the Spring Festival, the Central Bank’s digital currency Research Institute will be officially listed. This means that PBC will be the first to study digital currency and real-world applications.
PBC / The Peoples Bank Of China
What needs to be clear here is that the digital currency mentioned is the legal tender issued by the Central Bank. Because of the guarantee of national credit, the nature of the digital currency of the PBC is the same as the official currency in circulation, belonging to the category of cash (M0). Specifically, it is an encrypted digit string that is validated by cryptography and consensus algorithms and can represent a specific amount. The user can store it in a bank account and get functions such as circulation, settlement and interest.
With the rise of emerging blockchain technologies, digital currency has appeared integral and parallel. In theory, digital currencies can improve transaction efficiency and save costs, prompting banks and other financial institutions to improve service levels and promote the development of such inclusive finance. The technology ideally increases security and reduces friction.
Chinese Digital Currency?
For the PBC, digital currency as legal tender could help regulators with more accurate and flexible use of policy tools to track the flow of funds, for more comprehensive monitoring and with evaluation of risk. Digital currency supports “point-to-point” payment/settlement. It can also increase the liquidity of market participants, assist with the structure of interest rates and smooth the monetary policy transmission mechanism.
In addition, digital currency “traceability” features can enhance the transparency of economic transactions. However, at the same time, a large number of users would also face the risk of disclosure. How to protect users’ information in the fight against criminal exploitation also needs to be considered.
Blockchain Adoption Hurdles
In view of the tremendous changes to existing current payment methods and the above technical advantages, many governments are considering incorporating the issue of the legal digital currency into their policy planning. However, there are still some problems with the issue of this in China. Digital currency and blockchain technology are not yet perfected. Blockchain technology takes up more resources: both the computing resources and the storage capacity to not be able to cope with the current transaction scale, effectively making the digital currency more expensive than paper money.
Blockchain technology is only one of the alternative implementations of digital money. If it continues to be applied for digital currency, it should expand to enhance network security, business processing performance and transaction consistency, generally making the whole transaction network more secure and reliable. At the same time – strengthening of information protection legislation needs to be considered, plus supervision of the enterprises related to the collection and safe storage of information needs to be monitored, both punishing illegal acquisition or the reselling of user information and protecting the legitimate rights and interests of digital money users.
In the process of advancing digital currency, it is advised to consider the principle of prudence; to set up a blockchain technology application prototype systems in certain business scenarios and then gradually verify the feasibility of larger-scale deployment.