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30th September 2019

China's central bank ready to launch digital currency

The People’s Bank of China (PBOC) is gearing up to launch its own digital currency in a bid to protect its foreign exchange sovereignty and make the Chinese yuan more versatile.

Although China banned cryptocurrency exchanges in 2017 to tackle shadow banking and ensure the stability of its financial system, its central bank has been researching digital currency since 2014. China is increasingly becoming a cashless society. In 2018 alone, non-cash transactions (including credit, debit and stored-value cards, bank transfers and checks) totalled 3.8 quadrillion yuan, according to the PBOC. Now it is one step closer to being the first major central bank to issue a digital version of its currency, using a two-tier system under which both the PBOC and commercial banks could be legitimate issuers.

Unlike cryptocurrencies, the PBOC’s offering will not rely on blockchain technology and the premise of anonymity - using the digital wallet will be more comparable to using an ATM. However, there will be certain similar features, from multi-signature authentication to private keys. End users will download a digital wallet on their smartphone and charge it from their bank account. They can then make and receive payments from other digital wallets. In theory, a transaction between two digital wallets won’t even require a wifi connection - users need only place two phones in physical contact.

The PBOC will most likely have access to this transactional data, as they manage the process end-to-end. The bank has previously said that user information won’t be completely exposed but the digital currency is also being touted as a strategic tool that could help authorities track monetary supply much more efficiently.

As this digital currency is designed to replace paper money, it isn’t expected to have much of an impact on monetary policy. According to the PBOC, rolling out the digital currency will help avoid concentration of risk and financial disintermediation.

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