Zhou Xiaochuan, the former governor of the People’s Bank of China (PBoC), has revealed China’s plan to roll out its digital currency. According to Zhou, China’s approach will be two pronged with a domestic retail system and an international payment system. He hinted that for now, the country is prioritizing the domestic retail system implementation for use locally in day to day transactions.
Zhou, who is now the president of the Chinese Finance Association, was speaking at the Caixin Hengqin Forum in Zhuhai when he explained the country’s approach to the deployment of the national digital currency.
There are two goals for international digital currencies. The first one, which is also what China envisions is to develop digital payment and its use for retail system in the country, while the other goal is to cross-border payment for international financial institutions.
Zhou added that the two goals are based on the different requirement of each system thus requiring different technical designs and approaches to implementation. He hinted that the country will follow through its plan for a digital Yuan and transformation of its payment systems. Accordingly, the domestic retail system will be the initial step that will be closely monitored by authorities to examine its impact on the economy. The performance and impact of the digital currency in the retail setting will then be used by the PBoC to inform the decision of rolling out the second phase that is international payments.
While speaking at the forum, Zhou explained the reason for the cautionary approach adopted by China in digital currency system implementation. He stated that China is a difficult environment for testing a new digital currency due to its large size. Accordingly, a nation with a smaller population would be more ideal as the cycle for currency circulation is shorter. Under such environment it would be easier to identify problems and correct them before things get out of hand.
In case there is something wrong, it will be easier to steer the boat into a different direction.
However China does not have the luxury of a small population needed for such experimentation with a new digital payment system. Therefore, the potential huge risk is the price they have to pay to become the leading nation in digital currency implementation globally. Mable Jiang, a partner at Nirvana Capital, a Beijing-based venture capital firm, agrees with these assertions saying
I think this is an important signal that China would start pushing retail use of DECP hard in some economies that fit Zhou’s description about smaller population and good internet infrastructure.
However, this is not expected to be a deterrent for PBoC as the nation is dedicated to exploring blockchain technology opportunities and continues to pursue global financial leadership. For now, a digital Yuan seems to be a step towards that direction.