Central Banks Should Lead on Digital Currency, PBOC’s Fan Says

  • Fan says digital currency shows promise, PBOC should supervise
  • PBOC Vice Governor Fan Yifei comments in Bloomberg View column

People’s Bank of China Vice Governor Fan Yifei said the monetary authority is pushing to supervise private digital currencies and develop its own digital money.

The PBOC should also consider how to maintain financial stability, innovation, and proper supervision on the issuance and circulation of its legal digital tender, Fan, who leads the central bank’s cryptocurrency research, wrote in a Bloomberg View guest column Friday. Sensible rules and macroprudential controls should guide that development, Fan said.

"With internet access increasing and encryption technology improving, the conditions are ripe for digital currencies, which can reduce operating costs, increase efficiency and enable a wide range of new applications," Fan wrote.

Fan’s commentary on the the fast-changing world of digital currency suggests policy makers in Beijing want to take the lead in researching and developing digital currencies. PBOC Governor Zhou Xiaochuan said earlier this year digital currency will co-exist with cash for quite a long time before it eventually replaces cash.

Transaction Costs

U.S. financial regulators are still wrestling with digital currencies, as are other financial and monetary authorities for the world’s major economies. U.S. Comptroller of the Currency Thomas Curry, who’s weighing a new innovation office to look into emerging technology, said last year that virtual currencies could mean cheaper ways to settle transactions if the regulators could ensure they conform to money-laundering laws.

Federal Reserve Governor Lael Brainard argued in an April speech that digital transaction technology still needs to mature, concluding that regulators should be “prepared to make the necessary regulatory adjustments if their safety and integrity is proven.”

As global central banks become increasingly interested in the new financial technology, experts capable of exploring the topic may be scarce. The Bank of England’s effort to stay on top of digital money has hit a bump as it struggles to find people to lead its research after failing to find someone to lead work on a potential virtual central-bank currency.

‘Safe and Effective’

Fan said the PBOC attaches great importance to the development of digital currency and has already created a research institution to improve issuance and circulation, accelerate the development of prototypes, and evaluate the technology requirements for such a currency. The central bank is "open to any safe and effective technologies," he said.

The new technology still has fundamental defects such as unstable value, weak credibility, lack of wide acceptance and the risky "potential for negative externalities," Fan said, but digital legal tender issued by central banks could help resolve many of those problems.

China doesn’t have a timetable for the launch of digital currency, Zhou said in a February interview with Caixin Weekly. He said the PBOC’s major goal of issuing digital currency is to replace physical cash to cut the cost of issuing and circulating traditional paper money.

The PBOC’s digital currency research team "has made in-depth studies on digital currency related technologies such as mobile payment, trusted and controllable cloud computation, cryptographic algorithm and secure chip," Zhou said. The central bank will cooperate with the financial industry and technology community to continue the research on a technical framework for issuing and circulating digital currency, he said.

— With assistance by Heng Xie, Yinan Zhao, and Jesse Hamilton

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