Finance

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

Now it's becoming clear that China's central bank will be one of the first to issue a digital currency, it's legitimate to ask if "bityuan" will send the country's banking system over the edge. The short answer: Not just yet.

An initial version of bityuan will probably be a tame affair. Research at the People's Bank of China favors a system where the monetary authority would issue the cryptocurrency to banks, which would supply it to their customers.

That shuns a more dramatic approach in which the PBOC would take "banking out of cash," bypassing commercial lenders altogether and transacting directly with customers. That's what happens with physical cash. While cash pays no interest, it's possible for a central bank to pay interest on a national digital currency -- or that's current thinking at the Bank of England, which is also toying with the idea.

Ready for Bityuan
Given China's falling cash use, a national digital currency appears to be a sound idea
Source: Bloomberg

An interest-bearing bityuan could be problematic. The Chinese aren't exactly enamored of the interest they get on bank deposits, which leaves smaller lenders overly dependent on short-term financing.

In the little more than three years they've been around, negotiable certificates of deposit have swelled to more than $1 trillion. Now that the PBOC wants to tighten new NCD issuance, smaller banks are worried about financing their longer-term investment in other lenders' wealth-management products. By eroding the little sway they have over retail depositors, an interest-paying bityuan could trigger a liquidity crisis.

That's the last thing Beijing wants. So for now, bityuan would simply mimic the existing reserves that lenders maintain with the PBOC to settle claims on one another, but with one major difference: cryptography.

A part of single-ledger-based electronic money would give way to a distributed-ledger-based digital currency similar to bitcoin. Whereas bitcoin resembles gold, which some people mine and others use as an asset, bityuan would be the liability of the PBOC. Money-laundering, the Chinese central bank's No. 1 concern with private digital currencies, won't be a problem for bityuan.

 

A Moody Crypto
News that Chinese exchanges are suspending withdrawals caused bitcoin to swoon earlier this month before it raced to an all-time high

Once banks have it, bityuan would pop in and out of customers' digital wallets, giving lenders a chance to reclaim the payments business they've surrendered to Alibaba Group Holding Ltd., Tencent Holdings Ltd. and Baidu Inc. The trio has used its dominance of the Chinese internet to surround core mobile-wallet offerings with everything from peer-to-peer lending, to insurance and credit scoring.

Bityuan, were it to take off, could show China's banks a way to reenter the game. However, once the technology is in place, nothing would stop the PBOC from moving to a version 2.0.

The Bank of England's analysis reckons an interest-bearing national digital currency could give a permanent boost to GDP. Once the PBOC feels confident enough to reach for those benefits, China's banks should really worry.      

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net