Digital currency can help meet new financial challenges

Mu Changchun, deputy director of China’s central bank’s payments department, said recently that the People’s Bank of China is working on its own digital currency, which may be launched soon.

According to Mu, a centralized management model and two-tier operation system will be used to manage the central bank’s digital currency. The central bank will be the upper-tier operator facilitating the exchange of the digital currency at banks and other financial institutions, with the banks and other financial institutions forming the lower tier.

Libra cryptocurrency

Under this operating system, commercial banks and other financial institutions have to deposit the full amounts they expect to exchange with the central bank as reserves. Which indicates the central bank’s digital currency will have the characteristics of infinite legal tender, and the nature of the digital currency will be digitalized yuan. The central bank’s digital currency will be like a technological upgrading of the legal tender, which will not change the monetary attribute of bank reserves and cash.

Recently, some companies including Facebook and Walmart announced they will launch digital currencies. In particular, Facebook intends to link its Libra cryptocurrency with a basket of currencies with the aim of making it a standard global currency, raising public concern worldwide and making many wonder what stance the Chinese government would take on digital currencies.

The central bank’s announcement that it will launch a digital currency shows the Chinese government supports the development of digital currency. As a new type of legal negotiable instrument, a digital currency signifies the upgrading of the existing legal tender, and the extension of the yuan into cyberspace.

Although Libra is linked to real assets, many governments and other institutions have questioned its validity as a legal tender since it would be issued by a non-government entity. More important, digital currency issued by non-government entities may seriously undermine global financial services and destabilize the financial market.

The digital currency/electronic payment mechanism has the credit guarantee of China’s central bank. Which means the solvency of the digital currency will be fully guaranteed, and it won’t have negative impact on the real economy.

The digital legal tender will promote China’s financial market construction to a great extent, and help experts make a thorough analysis of the currency using big data. Data analysis of the yuan, in turn, will be a useful reference for the decision-makers and the implementation of monetary policy, even macroeconomic control policy.

Digital currency can help meet new financial challenges
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