China’s central bank is scaling its efforts to develop a digital equivalent of its fiat currency. According to reports, the country’s Digital Currency Research Institute is hiring cryptography and blockchain experts. The institute has also filed 40 patent applications to set up infrastructure related to disbursement of digital currency. Its latest moves come after Zhou Xiaochuan, the former governor of PBOC, said the development of a digital currency was “inevitable” in April. 

Using the 'Positive Energy' of Crypto to Better China's Economy

Thanks to the proliferation of e-commerce and messaging apps like WeChat and AliPay, digital payments are already big in China. According to recent estimates, they accounted for $12.7 trillion in payments value this year. That figure is expected to soar to $26.8 trillion by 2022. But cash still holds sway in the country. Data released by the People’s Bank of China (PBOC) earlier this year indicated that 86% of the 7.13 trillion yuan in circulation was in the form of 100 yuan notes. 

In addition to tamping down on cash usage in the country’s underground economy, a digital version of the yuan would help China achieve economic policy goals, distribute the currency more efficiently, and regulate its usage more closely. In his April statement, Xiaochuan said the bank was considering “convenience, rapidity and low costs in a retail payment system while taking into account security and protection of privacy” in its development of a digital alternative. His successor Yi Gang has said that the country is studying “how to use the positive energy of digital currency to better the real economy.” 

China is the latest country to consider developing a digital currency. Venezuela is, perhaps, the most famous example of a country developing a national cryptocurrency. Sweden, Tunisia, and the Marshall Islands have already researched or undertaken similar projects. While a national digital currency makes disbursement and regulation easier, it will have to overcome privacy challenges from consumers. The currency will also need to be refined to achieve economic policy goals. For example, adding an interest rate to a digital currency could enable central banks to use it for monetary expansion because citizens will gravitate towards it instead of making anonymous cash payments.

To that end, research director for the CBDC Yao Qian said that the institute will integrate more features in the future. “An approach that just rigidly mimics and digitalizes the fiat currency may undermine the competitive of CBDC in the long term,” he said

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