China’s central bank is developing a state-run cryptocurrency in response to Facebook’s Libra
Reasoning behind China’s hostility towards cryptocurrency
China’s stance towards Bitcoin, and cryptocurrency in general, has been hostile—and understandably so. China tightened capital controls in the wake of a shock yuan devaluation in 2015 and has continued to implement measures to mitigate capital flight out of the country. Some of these measures include increased disclosure requirements for buying foreign currencies and tightened restrictions on corporate investments overseas.
These measures culminated in a blanket ban on cryptocurrency exchanges and ICOs in September 2017 and Bitcoin mining in April 2019. Part of the reason for these bans is to help policymakers prevent a downward spiral in yuan depreciation against international currencies facilitated via cryptocurrency.
These policies are necessary so long as China wishes to maintain a peg against the U.S. dollar and set independent interest rates.
Facebook’s Libra stokes policymaker concerns
Now, Facebook’s Libra with its base of 2.4 billion monthly active users, poses another threat to Chinese capital controls.
Considering Facebook is beholden to pressure from U.S. policymakers, it is in China’s interest to ensure Libra does not take hold in the country. Facebook’s services are already blocked in China and it’s unclear whether users outside of Facebook will have incentive to adopt Libra.
“If [Libra] is widely used for payments, cross-border payments in particular, would it be able to function like money and accordingly have a large influence on monetary policy, financial stability and the international monetary system?” asked Xin at an academic conference hosted by Peking University, as reported by the South China Morning Post.
With approval from the State Council, the PBOC is working with market institutions to create a central bank cryptocurrency. A digital currency similar to Facebook’s could help China’s central bank maintain control over its economy.
Such an asset would pose few benefits for holders over the country’s already ubiquitous WeChat and Tencent digital payment options. Meanwhile, the black market trade of Bitcoin in China continues to thrive.