On 21 January 2016, the People’s Bank of China (“PBOC”) issued a statement announcing its plan to launch its own digital currency (“Statement”). Although very little detail about its proposed digital currency has been disclosed and the Statement is silent on how this will work in relation to the Yuan, the PBOC has announced intentions to launch its digital currency as soon as possible.
This is the latest development in the payments industry in China, following recent changes in 2015 including the opening up of its domestic bank card clearing market, introduction of the cross-border interbank payment system and stricter controls on peer-to-peer lending and the online payments industry, respectively.
Benefits and Challenges of China’s Digital Currency
According to the Statement, benefits the PBOC’s own digital currency will bring to China’s financial services industry and the economy include cost reduction in the issuance and circulation of digital currencies as compared with paper money, efficiency and transparency of money transfers and reduction of chances of money laundering and tax evasion.
However, challenges remain with a centralised digital currency which the PBOC will need to address. Unlike decentralised cryptocurrencies such as Bitcoin, which is largely regulated by mathematics and code, China’s digital currency will be regulated and monitored by the government, which may raise issues of public accountability. The PBOC also has yet to announce whether the digital currency would be equivalent to and fully convertible to the Yuan. This will largely impact the monetary policy of China.
With the prevalence of cyber attacks and data security breaches on businesses and even governments in Asia and around the world, the PBOC will also need to provide comfort to the public regarding the security of using its proposed digital currency for payments and business transactions. As the Statement does not specify what technology the PBOC will be using for its digital currency, it remains to be seen how the PBOC will build protective mechanisms to safeguard the public’s savings, individuals’ personal data linked to an account and sensitive information regarding financial transactions of businesses and individuals.
Significance of China’s Own Digital Currency
This announcement by the PBOC has come as a surprise for the payments industry and the global community. However, it serves as a wake-up call for other governments as well as payments service providers operating in China and around the world to take digital currencies seriously.
As the PBOC moves closer to launching its own digital currency, we expect to see a new suite of regulations in the Chinese payments industry surrounding its new digital currency as well as traditional methods of banking and payments processing. We also anticipate that the Chinese government will greatly encourage businesses operating in China and those working with Chinese entities to use the PBOC’s digital currency for payment transactions. The introduction of the PBOC’s own digital currency will shake up the payments industry and how businesses are operated in China.
Legal practitioners around the world (particularly those advising payment service providers) and legal practitioners with clients operating in China or clients working with Chinese entities should look out for China’s new digital currency and new regulations, controls and market trends in the payments industry in China which may impact on how the businesses of their clients are operated on a daily basis.