Cryptocurrency to bolster yuan’s globalization

By Huang Zhen Source:Global Times Published: 2018/1/23 22:53:39

Illustration: Peter C. Espina/GT

The internationalization of the yuan began as the Chinese people and Chinese enterprises began to go global. Clearing with the US dollar in international trade is unfavorable for the yuan, since the nation's foreign reserves contain a large amount of the US dollar and China is continuing to buy US government debt.

Therefore, it is inevitable that China will seek to use the yuan as a payment method to mitigate the pressure imposed by its foreign reserves. However, the internationalization of the yuan has to take a very different path from that of the US dollar in past decades.

The international environment is different. The internationalization of US dollar was backed by its military force and formulated under the old international system after World War II. But expanded use of the yuan is taking a peaceful, gradual path through international trade and the Belt and Road (B&R) initiative, without challenging the current international economic order.

More importantly, technology has changed vastly, especially with the emergence of cryptocurrencies supported by blockchain technology. The People's Bank of China (PBC) has assembled a research team to study the technology needed to design a sovereign cryptocurrency, in preparation for establishing a research institute for digital currency.

It has also established a clearinghouse to test block chain technology. All has gone smoothly so far.

Developing a cryptocurrency will have a positive effect on the process of yuan internationalization. The digital technology can bring down costs and losses in the process of issuing and transferring the currency, by substituting for interbank transactions. It will also help stabilize the currency's value.

One problem that every nation has encountered is issuing more currency than the market needs, which leads to exchange-rate volatility. Cryptocurrencies may be a promising way to solve this problem, because they are very public and it's easy to determine demand for such currencies. Moreover, issuing the currency will be based on a mathematical model, which can limit the money put into the system.

Although the US dollar is still the most important currency and the key reserve currency for most countries, the application of cryptocurrencies will inevitably reduce its use and undermine its foundations. However, since some countries may not accept bilateral exchanges of cryptocurrencies, there should be an intermediate currency that will be exchangeable into every sovereign cryptocurrency. Some non-official currencies like bitcoin or an influential sovereign cryptocurrency may become the intermediary.

Competition may arise if every nation decides to issue a cryptocurrency. Whether a sovereign crytocurrency is strong enough depends on two elements. One is a nation's economic power. A cryptocurrency is just like paper currency, which is endorsed by the sovereignty of a nation, and that boils down to economic power. The other element is the asset to which a cryptocurrency is pegged, plus the issue method and cost.

Up to now, an asset, normally a tangible one, has still been necessary for the issue of a sovereign cryptocurrency. Some countries will peg their sovereign cryptocurrencies to oil, others to gold. There will be a spontaneous balance of exchange rates among nations.

The form of a sovereign cryptocurrency and its application still require careful study. The currency preferences of different groups have to be considered as well. It is too early to replace paper money with cryptocurrency, because many people still prefer cash.

The amount of cryptocurrency should be balanced between paper money and the cryptocurrency itself. But the amount of paper money in use has fallen significantly due to the prevalence of electronic payments. "No cash" is the way we're headed.

Before issuing a cryptocurrency, China should clarify that only the sovereign cryptocurrency supported by the government and legislation can be called a currency. Other cryptocurrencies are virtual currencies, lacking endorsement of sovereign nations.

The technology for sovereign cryptocurrencies will mature, but building the institutional and legislative frameworks will be a challenge. Such currencies shouldn't be issued until the legal framework is mostly complete.

There have already been cases of fraud involving initial coin offerings (ICO) and blockchain. China has banned ICO and bitcoin trade to avoid market chaos. The public also should be wary of projects using blockchain as a selling point.

Finally, blockchain is a technology that has applications beyond just generating digital currency. It is expected to play a part in fields that require validation, such as authentication and notarization.

The author is the director of the Financial Law Research Institute at the Beijing-based Central University of Finance and Economics.


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