A View from China
Expected launch of new global cryptocurrency next year raises new questions for China, analysts say
Central bank’s plan to develop a sovereign digital currency yet to make progress
Facebook’s plans to launch a cryptocurrency could usher in a new type of “currency competition” and force China to rethink how it deals with the realities of the digital world, analysts said.
In the past, Beijing has cracked down on cryptocurrencies like bitcoin, viewing them as a threat to financial stability, and has tried, with little success, to develop a “sovereign” digital currency of its own.
That is because it will be pegged to a basket of convertible currencies – so it could serve as a stable online currency – while its payments will be endorsed by Visa and Mastercard meaning it can be used for a range of online services. Also, Facebook has more than 2 billion users.
Also, its aim to make payments easier could undermine Beijing’s efforts to curb capital outflows, while its potential to become a global currency could bring uncertainty to China’s use of the yuan as an economic and policy tool, analysts said.
Wei-Tek Tsai, chief scientist at Tiande Technologies, a Chinese blockchain firm, said the planned launch of Libra heralded a new type of currency competition and the first related to digital currency.
That is because as a stablecoin – a cryptocurrency that holds a stable value – Libra will not be working against fiat currencies but as a supplement to promote their use.
“In the past, the usual practice was devaluing the fiat currency to stimulate exports. When countries begin to competitively depreciate their domestic currencies, global currency wars and exchange rate wars break out. This is old-style currency competition,” Tsai said.
“In the new currency competition, they can also use stablecoins to enter other markets, and control trading information. The characteristics of the new competition are: fast circulation, 24/7 and no Swift [financial messaging for cross-border payments].”
Facebook has not disclosed the composition of the currency basket that supports Libra, but said it has been “diversified by selecting multiple governments, rather than just one”, to reduce the likelihood of excessive fluctuations.
Jerome Powell, chairman of the US Federal Reserve, said on Wednesday that Facebook had been in contact during the development of Libra and he had high expectations for it on “safety and soundness”.
“Libra will support the dollar, as a supplement to the fiat dollar,” Tsai said. “Some people may think it’s just a US company launching a stablecoin, not a fiat currency, and this company cannot operate in China, so Libra is not important. Is it? Now that the government and central banks from the US and Europe are all in on this, even though they may disagree on their positions. It has become a national-level public debate. How could it not be significant?”
China’s central bank did not respond publicly to Facebook’s white paper announcing its plans to launch Libra last week.
But debate on the new cryptocurrency is heating up. According to a report by Thepaper.cn, Pony Ma, the founder of Chinese technology giant Tencent, was quoted as saying that the technologies behind it were “not difficult” but the key issue was whether it would receive regulatory blessings.
Wang Xing, the co-founder of app developer Meituan, said Libra was a “genius” design and that he expected it to gradually replace sovereign currencies of “weak countries”, according to a report by industry news website Odaily.
China International Capital Corp, a leading brokerage firm, published a report last week saying the launch of Libra “could challenge the existing global payment system”.
An adviser to the People’s Bank of China (PBOC), who asked not to be identified, said Beijing used to think stablecoins were unrelated, or at least insignificant, to fiat currencies but was beginning to realise the world had changed.
That is partly because of the fact that while a number of blockchain-based stable cryptocurrencies have been launched recently, none are linked to the yuan.
Earlier this month, industry news website CoinDesk said that 14 banks had funded the development of stablecoins to ease financial transactions in five fiat currencies: the US and Canadian dollars, British pound, Japanese yen and the euro. Earlier in the year, JP Morgan said it had created a US dollar-backed cryptocurrency for payments between its institutional clients.
Another problem for Beijing is that Facebook and other global social media platforms, like Instagram and WhatsApp, are blocked in China.
and related funding channels since late 2017, though had earlier promoted the technology.
The PBOC has been studying the creation of a sovereign digital currency since 2014 and established a research institute dedicated to the subject in 2017. Other central banks appear to have had a similar change of heart.
The US Federal Reserve and the European Central Bank have no plans to launch digital currencies, while the Bank of England dropped its plans last year in favour of allowing technology companies to set up accounts with it like commercial banks, the Financial Times reported.
Garrick Hileman, head of research at cryptocurrency company Blockchain and research associate at the London School of Economics, said a major reason for many central banks not moving forward with digital currencies was the financial risk.
In theory, issuing a state-backed cryptocurrency allows individuals to open an account at the central bank, an option usually open only to commercial banks. That would mean that in times of crisis, people could move their funds from local banks to the central bank, causing a run on commercial banks and increasing financial instability.
