(Yicai Global) Dec. 1 -- China has tightened up regulation over the digital currency market, but it does not mean that it “will hand its status as the global digital currency center to other countries,” said Yang Kaisheng, a special advisor at China Banking Regulatory Commission (CBRC) and former president of the Industrial and Commercial Bank of China [SHA:601398] (ICBC), in an interview with Yicai Global. If the government adopted a “laissez-faire” approach now, it would go overboard with market regulation in the end, affecting innovations and advances in the cryptocurrency technology, he argued.
China put a ban on initial coin offerings (ICO) and bitcoin exchanges in September. The move led to a major reshuffle of the global cryptocurrency market. The price rallied after hitting a trough of USD3,200, and rebounded to over USD10,000 on Nov. 27.
However, the strong rally does not mean that the bitcoin market is fully developed or the digital token itself has been successfully established, Yang stressed. A currency is meant to make exchanges of goods and services easier, and benefit economic activities as a whole. It follows that the sharp price rise is perhaps the main problem with bitcoin.
Even if we ignore the theoretical and legal controversies about digital tokens, at least, we all realize that a price rally does not necessarily mean that the cryptocurrency has become a mature currency. On the contrary, the development of cryptocurrencies is still at a very early stage, and what we should do now is to keep the development in check through theoretical and practical studies, with the objective of ensuring smooth economic and financial operations and social stability, he opined.
The priority is to find out why some tokens have become regulation circumvention tools. For example, ICO was invented obviously to get around security market regulations. The revved-up ICO market led to an upsurge in frauds and other economic crimes. Furthermore, cross-border payments using bitcoin has a direct impact on foreign exchange regulation. Relative to legal tender, bitcoin and other digital tokens are frequently used as the medium of exchange between criminals in the “deep web.” Why? How can we prevent money launderers and even terrorists from using them in financing and payment transactions? People should be alerted to these visible “gray rhinos,” rather than turn a blind eye to them, he warned.
China’s financial regulators started studies on cryptocurrencies several years ago. A group of experts gave a report on the development of the digital currency market at a cryptocurrency seminar hosted by the People’s Bank of China (PBOC), the central bank, early last year. The bank also set up a digital currency research institute, bringing together specialists to carry out relevant studies. China is trying to establish itself as a global leader in the cryptocurrency market, and the CBRC has been closely monitoring the latest market trends, Yang elaborated.
The aim of existing regulatory measures is not to deny the value of cryptocurrencies or the technology outright, but rather the goal is to cure the financial market of the dislocation caused by ICOs and ward off systemic risks. It actually indicates that the China’s regulators have acquired a thorough understanding of the digital currency market. Relaxing regulation for the sake of a short-term market boom will inevitably result in a buildup of risks and even a systemic crisis. If we adopted a “laissez-faire” approach now, we would have to go overboard with market regulation in the end, to the detriment of cryptocurrency innovation and technology development. There have been cases of mishandling of similar situations in the past, and the lessons must be learnt, he emphasized.
Yang anticipates that China may take the lead in issuing the first ‘digital sovereign money.’ It should be issued by the PBOC employing some special digital technologies, and serve as an alternative to paper currency, or rather a new electronic payment medium. Needless to say, he stressed, the legitimate digital money must have the highest standard of security, and the issuer needs to strike a balance between security and privacy protection.
A digital sovereign money offers several benefits. Firstly, it will significantly reduce the cost of payment across the world. With paper currencies, the total cost of payment globally currently stands at USD75 trillion, and some 85 percent of consumers use paper money in payment transactions, data show.
The cost of paper currencies including printing, issuance, transportation and disposal accounts for 2 percent of the global gross domestic product (GDP), which is roughly equivalent to the national GDP of Canada. So, issuing digital currencies will lead to substantial savings. However, some people argued that cryptocurrency issuance, payment and clearing would also entail enormous costs, and this problem can only be solved through technology development.
Secondly, different countries have different considerations when introducing digital legal tender. Most developing nations hope to use cryptocurrencies to make financial services more inclusive. The World Bank estimates that about two billion people rely exclusively on cash payment due to the absence of certain basic financial services, and most of them are in developing countries.
On the other hand, for central banks of developed economies such as the Bank of England, the Federal Reserve and the European Central Bank, the value of cryptocurrencies primarily lies in their ability to optimize their monetary policies and transmission mechanisms. The effectiveness of monetary policy transmission mechanisms in western countries has been seriously questioned following the global financial crisis. The monetary authorities want to enhance the public understanding of monetary policies and systems, and tackle negative interest rate-related issues by making the transmission mechanism more transparent and effective. People in some countries -- Sweden, for example, are opposed to cash payment, and the central banks have a pressing need to introduce national digital currencies.
China’s central bank will likely adopt the wholesale model for issuing the digital legal tender -- that is, the bank may offer the currency to public via commercial banks, predicts CBRC advisor Yang. Issuance of a digital sovereign money might intensify competition between commercial banks, and the resulting changes in the relationship between banks and their customers will prompt banks to step up development of individualized, scenario-based services in order to improve their overall competitiveness, Yang advised.