Why PBOC forbids other companies from creating their own cryptocurrency

The Chinese government hasn't been too kind to cryptocurrencies in the past years. First, initial coin offerings (ICO) were banned in China in September 2017. Then, following the crackdown on ICOs, exchange platforms that traded cryptocurrencies or provided facilitation services were also ordered to be closed. This made the task to purchase bitcoin almost impossible for investors in China.

However, this is not just a blanket ban, but more of a preparation for things to come. To understand the harsh attitude of the Chinese government towards cryptocurrencies, we have to look at the big picture of China's economy and financial market.

While central banks worldwide grapple with the potential rise of digital currencies and how they should be managed, China is working towards being the first country to implement its own digital currency.

By forbidding other entities in issuing their own crypto, the PBOC is securing the success of its own digital yan. Furthermore, unlike cryptocurrencies such as Bitcoin, dealing in the digital yuan won't have any presumption of anonymity, and its value will be as stable as the physical currency issued by the government.

China racing towards a cashless society

China wants to become the first nation to issue a digital currency in its push to internationalize the yuan and reduce its dependence on the global dollar payment system.

An article published in China Finance, a magazine run by the PBOC, stated that the rights to issue and control a digital currency would become a "new battlefield" of competition between governments.

As part of the project, the PBOC defines the yuan as both physical banknotes and digital currency. The idea is to establish a new payment system network in order to break the dollar monopoly.

To this end, digital yuan tests are already underway. Several trials have taken place in four cities, namely Suzhou, Shenzhen, Chengdu, and Xionggan, and at the venue for the 2022 Winter Olympics games in Beijing.

How is the digital yuan tested?

In September 2020, the PBOC has issued 10 million yuan ($1.5m) worth of digital currency and distributed it to 50.000 people in the Shenzhen area via a lottery.

The winners were rewarded with digital "red packets" worth about 200 yuan, which they could download and spend at 3000 different stores. With nearly 2 million people signing up for the contests, the operation was deemed as successful.

At the end of September, the Chinese digital currency (DCEP) allowed for $160 million in payments from more than 3 million transactions.

The DCEP payment network allows selected users to convert between cash and digital money, check their account balances, make payments, and remittances. Other experiments include government employees have receiving transport subsidies in the form of digital currency, and McDonald's in Xiong'an accepting payment with digital yuan.

When will the digital yuan become widely available?

There's still no official announcement on when the payment network will be made available to all Chinese citizens.

The Winter Olympic games of 2022 have been mentioned as a possible target more than once. Additionally, the full transformation of Shenzhen into a technological and economic hub has been set for 2025, which could also hint at another date for digital yuan adoption.

Will the public accept PBOC's digital currency?

It's difficult to make a prediction. The returns from the tests have been quite positive from the public, with people signing up in droves for the lottery.

However, China is already becoming an increasingly cashless society. Even street-food vendors and market stalls in small towns will prefer to use payment apps instead of cash.

Mobile wallets such as Alipay and WeChat Pay have already a large userbase in China, and it is unlikely people will switch to the government app overnight. However, the PBOC stated that in contrast to these payment processors, there will be no fees involved with the digital yuan.

Finally, the PBOC stated in a recent interview that the digital yuan would inevitably overlap or even replace existing cellular operators to some extent.

Will it run on blockchain?

There are two main reasons why the PBOC is not willing to run their digital currency on blockchain.

First, experts have doubts that any network could handle the sheer volume of daily transactions of China's 1.4 billion population.

Second, blockchain usually suggests decentralization and transparency, two concepts that go against the Chinese government's goal to "strike a balance" between anonymity and the need to crack down on financial crimes, according to the central bank's officials.

Conclusion

The Chinese government seems determined to come up in front of the rest of the world in the digital money race.

The digital yuan could allow the PBOC to more control bank lending and direct funding where it deems appropriate, using it as programmable money. The economic impact is still unclear and the future will tell if centralized digital currencies will help or hinder the country's economy and privacy.