People's Bank of China (PBOC) lays regulatory foundation for its CBDC

Beijing is creating its own government-ruled digital currency. China seeks to have its planned sovereign digital currency ready in time for the 2022 Winter Olympics.

China has understood very well that to become and stay a technology powerhouse, it needs to remain at the forefront of new technologies. As part of its innovation strategy, Beijing is creating its own government-ruled digital currency (we must bear in mind, though, that the digital yuan itself is not a cryptocurrency, but rather a digital variant of the yuan that is pegged 1:1 to it).

As previously mentioned in my article “China expands its Digital Yuan testing to Hong Kong and Macau”, in April, after several years of work (the research started in 2014), the Chinese Government announced the starting of the tests of the country's central bank digital currency (CBDC), DCEP (Digital Currency Electronic Payment), in four major cities (Shenzhen, Suzhou, Chengdu and Xiong’an), notwithstanding the COVID-19 crisis. China seeks to have its planned sovereign digital currency ready in time for the 2022 Winter Olympics in Beijing.

On August 14, China took a step further: its Ministry of Commerce announced that a pilot run of the country’s CBDC will begin in several new areas very soon, including the Greater Bay Area (GBA), which includes the two Special Administrative Regions of Hong Kong and Macau.

Nevertheless, China is not the only country exploring or even testing its own CBDC. Actually, according to a report published by the Bank of International Settlements (BIS) in early 2020, 80% of Central Banks in the world are working on CBDCs (in some cases, they are just starting to do research on it, while in some other cases, such as China and The Bahamas, the work is much more advanced -in this sense, The Bahamas has just launched the world´s first CBDC beyond a pilot program).

Furthermore, the COVID-19 pandemic is turbocharging digitalization in general, and the interest in virtual currencies in particular.

Despite the speed in which China has been initially testing its digital yuan, something was missing: a regulatory foundation. This is currently being solved, since, last Friday, October 23, the People's Bank of China (PBOC), which is China´s Central Bank, published a draft law that aims to provide a regulatory framework for its CBDC. The digital yuan's regulation has actually been included in the latest version or a proposed banking law (the baking regulations currently in place have been active since 2003, therefore an amendment was very necessary). The revision is part of the central bank’s plans to lay out a path that would facilitate a wider rollout of China's long-anticipated digital yuan, whose tests, as I said, started in April.

The draft of the new law is on the table for public consultation until November 23, 2020, according to the statement released by the PBOC last week. Basically, its aim is to give more clarity to the regulation of China's CBDC.

The proposed law states that the yuan is the official currency of the People's Republic of China in both physical and digital form. The new law will also clear the way for the digital yuan to be the one and only official yuan-pegged token in Mainland China. In other words, individuals and institutions are prohibited from making and issuing a currency designed to “replace” digital yuan circulation. This move would presumably ban all non-state-sanctioned yuan-backed stablecoins.

As per Article 22 Section 3 of the document, “To prevent risks associated with virtual currency, any other legal entity or individuals cannot issue or sell tokens to replace the circulation of Renminbi,”.

For anyone that violates such regulation, the PBOC will halt such activities and forfeit any proceed from the making and selling of yuan-backed digital tokens and issue a fine that is up to five times of the involved proceeds.

As I explained in my article “Mainland's approach toward blockchain offers HK many opportunities” (China Daily HK Edition, January 17, 2020), on December 27, 2019, Chinese regulators issued a joint regulatory warning on the rise of the virtual-currency trading activity in the country. Therefore, Beijing's goal has always been to create its own world-leading and government-ruled digital currency while trying to maintain control over the types of digital or cryptocurrencies traded within China.

As previously stated, this revision, if finally passed, will take a toll on some of the biggest crypto-related businesses in China, since many Chinese investors conduct crypto-to-crypto trading with stablecoins.

To sum up, if DCEP proves to be viable, it will imply a breakthrough, but a regulatory foundation for that was necessary. China´s rationale behind its DCEP is multiple: monetary policy, social policy, technology and innovation, global geopolitics, financial crime prevention… China will be the first big country having successfully implemented a State-run digital currency, allowing us to prepare ourselves for a more digital and convenient future. That being said,  China's harsh stance towards private individuals and institutions issuing yuan-pegged tokens should not surprise us, since China´s strategy has always been and still is to maintain control over the types of digital or cryptocurrencies traded within their borders.

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