The former head of the Chinese central bank says that Facebook’s plans to launch its own cryptocurrency in the form of Libra could have profound implications for the global monetary landscape.
Zhou Xiaochuan (周小川), former governor of the People’s Bank of China (PBOC), said that there was an international trend towards greater currency convergence, and that cryptocurrencies such as Libra could vigorously expedite the emergence of a “globalised currency.”
Zhou made the remarks at the recent “Chinese Foreign Exchange Management and Reform Forum” (中国外汇管理改革与发展) jointly held by the China Financial 40 Forum and the State Administration of Foreign Exchange (SAFE).
The former central bank governor said that Libra represented two key improvements upon preceding cryptocurrencies.
The first is the use of reserve backing to prevent volatility and speculative investment.
Zhou said that three years ago PBOC proposed that future cryptocurrencies should make reference to the experiences of the Hong Kong dollar, which enjoys 100% backing from US-denominated assets.
This means that Hong Kong’s exchange fund has enough highly-liquid US-denominated reserve assets to provide one US dollar for every 7.8 Hong Kong dollars.
The second key improvement is that Libra can make use of the advantages provided by Facebook’s 2.7 billion international user base to specifically target global demand for cross-border transactions.
Zhou points out that the maturation of new technology tends to increase transaction efficiency and reduce costs, and that Libra will be able to cater cross-border payments between developing economies which often remains an expensive, slow and inconvenient process for users.
Zhou nonetheless said that the success of Libra remains an uncertain matter, and that the future could see the emergence of a more international, globalised form of hard currency won’t necessarily be Facebook’s proposed cryptocurrency.
A number of institutions are attempting to establish a more internationalised form of money which will lead to the problem of hard currencies undermining weak currencies, and pose a challenge to the Chinese renminbi and China’s forex management.
For this reason Zhou considers it imperative for China to shore up the status of the renminbi as an international hard currency, highlighting its inclusion as part of the IMF’s special drawing rights as marking a significant increase in its free usage.
“From the perspective of the integration of domestic and foreign currencies, [we need to] put the renminbi in an advantageous position in terms of future internationalisation and globalisation, to service China’s economic development and the Belt and Road initiative, as well as maintain economic stability and prevent economic crisis” said Zhou.