Facebook’s announcement of its most ambitious yet powerful project yet, the Libra currency, has solicited mixed reactions from different sectors. Some echoed their praises as Libra could revolutionize and democratize money transfer. On the other hand, Libra is facing strong resistance from governments and central banks because of its potential to disrupt the global financial system.
Amid the growing discussion surrounding Facebook’s Libra, China, a global financial superpower, is reportedly giving it all for them to develop their own cryptocurrency.
The problem with Facebook’s Libra is that it is hard for governments to track who send money to whom as blockchain technologies are designed that way. Among all the things that China hate the most is losing control. That’s why People’s Bank of China (PBOC), the nation’s central bank, has committed to fast-track the development of a digital currency that Communist China can control.
China prides itself to become one of the most successful economies to rely on cashless payment systems. China’s biggest cashless system comes from Jack Ma’s Alipay and WeChat Pay. However, amidst the country’s enthusiasm with regards to cashless payments and revolutionizing financial transactions, the country is also one of the most vocal critics of cryptocurrencies.
Ever since Facebook released a white paper to announce it’s Libra venture, Chinese officials and central bank officials have aired their concerns regarding the unregulated alternative currency. They cite that cryptocurrencies, especially Libra, which promised to be backed by real currencies and government-issued certificates, would most likely bypass financial regulations and could eventually undermine fiat currencies, including China’s Yuan.
Nonetheless, the growth of cryptocurrency is “inevitable.” So China has vowed to take over the market instead. Chinese officials have since been vocal about accelerating the development of a central bank digital currency (CBDC).
In fact, China has already given the go-signal for the PBOC to start with the next steps in developing its digital currency, said Wang Xin, director of the PBOC Research Bureau, during a seminar at Peking University last week. He revealed that the central bank has been encouraging market-oriented institutions to help with the research and development of the currencies bid in the crypto market, under the approval of the State Council.
Additionally, Wang said that the the CBDC would eventually mitigate and “counterbalance” the risks posed by Libra’s possible domination of the market. “A digital currency issued by the central bank can improve the efficiency of monetary policy, and help to optimize the payment system,” he said.
Another PBOC official also reiterated that with the growth of cryptocurrencies, government and central banks need to develop their own “more than ever,” and the development stage would be very “crucial.”
This sentiment was also echoed by analysts saying that cryptocurrencies could potentially help central bank impose close-watched fiscal policies and monetary regulations as they can be monitored more easily than tangible money.
The PBOC has said its digital currency will be considered M0, a technical term used by central banks to refer to their fiat currencies like paper money and coins. They also said that this would be different than Alipay and WeChat, as both are payment systems that are based on fiat currencies rather than currency in itself.
“Simply put, the central bank digital currency broadens PBOC’s money supply and monetary policy tools,” said Lu Zhizhen, a Ph.D. student studying the politics of economic reform at the University of Texas, Austin. Given that digital currency is more traceable and predictable than cash, it could significantly improve targeted monetary policy, she explained.
“Traditionally, central banks directly control base money creation/destruction but have only indirect power over the broader, credit flow-driven monetary supply,” wrote Dovey Wan, partner at crypto-asset investment fund Primitive Ventures, in an article published on Coindesk in May. “Now, with digital fiat currency, they have the potential to bypass commercial banks and regain control of currency creation/supply end-to-end, thereby structurally centralizing their power in policymaking,” said Wan.
While it seems that PBOC’s ambitious plan to infiltrate the cryptocurrency market is still on the idea-generation phase, the potential of having their own cryptocurrency will definitely steer global financial systems to a different (may it be for the better or for the worse) direction.