China clears path to new digital currency

Unlike other cryptocurrencies, Beijing’s would increase central control of the financial system

Chinese bank notes could one day be a thing of the past
(Image credit: Frederic J. Brown/AFP/GettyImages)

China has moved a step closer to launching its own digital currency, after its parliament passed a new law on cryptography.

The country’s central bank first looked into launching its own digital currency back in 2014, in a bid to cut the costs of circulating traditional paper money and boost policymakers’ control of money supply.

Since then, the emergence of global cryptocurrencies such as Bitcoin and most-recently Facebook’s Libre have led Beijing to accelerate its plans.

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On Saturday, the official Xinhua news agency reported that China’s parliament had passed a new cryptography law, which will take effect on 1 January 2020, intended to facilitate “the development of the cryptography business and ensuring the security of cyberspace and information”.

Facebook’s proposed cryptocurrency, backed by a reserve of real-world assets, including bank deposits and short-term government securities, “has sparked concerns among global regulators that it could quickly become a dominant form of digital payment and a channel for money laundering given the social network’s massive cross-border reach”, Reuters reports.

While China blocks Facebook’s platforms within its borders, “for Beijing, Libra has provided another urgent motive for digitising the currency” says The New York Times. “Chinese leaders see in Libra the potential start of a new world financial system, one that could bulldoze the traditional authority of governments and central banks - China’s included.”

Unlike other cryptocurrencies that enthusiasts have championed as tools of emancipation from big banks and governments, “a state-issued e-currency would help China’s government know more - much, much more - about how its citizens spend their money, giving it sweeping new powers to fight crime and manage the economy while also raising privacy concerns”, the paper adds.

There could be geopolitical fallout too, says CNBC. A new “cryptocurrency would add to a long list of existing tensions between the global superpowers... especially if Libra hits a brick wall with US regulators”.

One reason for Chinese interest in cryptocurrencies is their potential to reduce dependence on the US dollar as the global reserve currency.

“Just as the European Union bypassed the United States on data protection, China is poised for the great leap forward on cryptocurrency” says Roslyn Layton in Forbes. “This time the US is playing checkers while the Chinese are playing 3D chess” she adds.

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