Yesterday Li Lihui gave an online talk about digital currency in state media People’s News. Lihui is the former president of the Bank of China, and heads the Blockchain Research Working Group at the China Internet Finance Association. While he spoke about China’s central bank digital currency or DCEP, he also expressed the view that any future supranational digital currency or global stablecoin should be China-led.
He explored digital currencies in three groupings, legal digital currencies such as central bank digital currencies (CBDC), virtual currencies including Bitcoin, Ethereum and stablecoins, and trusted institutional currencies such as JPM Coin from JP Morgan.
While his talk regarding CBDC was informative, he didn’t shed any more light than the analysis last week in state media, which outlined how the DCEP works. One illuminating comment was in response to a question about using the digital yuan for international transactions. Lihui said that the central bank has not made specific provision for this. Yet.
Lihui’s most interesting views were on supra sovereign digital currencies, such as the potential for Facebook’s Libra. Although he expects there will be more than one such currency. In particular, his suggestions about how China should address the challenge are provocative.
Threat of supranational digital currencies
These supranational currencies are a threat because they don’t just bypass commercial banks, but also national sovereignty and potentially supersede central banks.
The risk is particularly high for weaker countries that have economic difficulties, where a supranational digital currency could replace the local currency because of a lack of trust. It may be less of a risk for prosperous economies, where those currencies may anchor a supranational currency such as Libra’s plan. However, he sees the potential for there to be a primary and secondary status for currencies.
While supranational currencies such as Libra may start by focusing on payments, eventually, they will supplant commercial banks when they gradually expand into savings, financing, investment, insurance and asset transactions.
Lihui sees the potential for them to impact global currency hegemony. He predicts the supremacy of such a currency and a “globally circulating supranational digital currency may no longer have a clear country label.”
His biggest concern is the impact on the internationalization of the renminbi. “If the renminbi fails to be integrated into the global digital currency system, it may weaken the scope of future influence,” said Lihui.
What China should do to address the supranational currency challenge
Lihui suggests a three-pronged approach for China. Firstly, digital currency is one part of the digital transformation of the entire financial sector. Hence he believes China needs to rapidly develop a digital financial system, including digital financial issuance, digital financial market supervision, amongst others.
Secondly, he believes that digital currency is at the core of future global economic competition. “It is necessary to study the feasible path and implementation plan of issuing a China-led global digital currency.”
And finally, he addressed governance aspects. China should develop national standards for digital financial technology. But at an international level, it should strengthen coordination of supervision and establish a unified standard for international supervision of digital finance.