Ex-PBOC Governor Zhou Xiaochuan Weighs in on Chinese Central Bank Digital Currency, Facebook’s Libra

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Zhou Xiaochuan, the former long-standing governor of the Chinese central bank, shared his opinions on the People’s Bank of China’s (PBOC) proposed statutory digital currency as well as Facebook’s proposed Libra stablecoin at the 10th Caixin Summit (2019年第十届财新峰会) (7 – 10 November) in Beijing.

While Zhou said he was unable to provide any details on the likely scheduled of PBOC’s proposed central bank digital currency (CBDC), he did highlight the lengthy period of time that central bank researchers had been working on the project.

According to Zhou PBOC first began to commence research into a CBDC at least five years ago, but “initial research perhaps did not advance that rapidly or vigorously because the technology takes a very long period of time to grasp.”

“Now [they’ve] been doing it for quite a few years, and perhaps have quite a few ideas.”

Zhou speculated that the focus for PBOC will be wholesale issuance of digital currency, given the perils involved in direct retail provision.

“The central bank is likely to focus more on wholesale, providing digital currency for wholesale [transactions] between banks and between third party payments providers,” he said.

“Theoretically speaking the digital currency done by the central bank could also provide services for retail, but retail services could also bring a very large shock to the existing financial system. For this reason, everyone is also being extremely cautious.”

Zhou also said that the initial focus for China’s CBDC will be the Chinese domestic market, given that use of a digital currency for cross-border remittances or investment will mean satisfying a far broader range of criteria.

For cross-border transactions, Zhou pointed out that it couldn’t be just “any one central bank that can manage it,” but will instead “require a joint mechanism.”

With regard to Facebook’s proposed Libra digital currency, Zhou said that the use of stablecoin will require a corresponding basket of currencies, but that if a Libra committee manages this basket, this will create concerns about whether a private entity can provide what’s essentially a public service with full integrity.

“The public will have doubts about its stability,” said Zhou. “People will inevitably have their doubts about whether there are strong profit motives behind a private Libra committee.”

Zhou did highlight the potential strength of Libra for cross-border remittance purposes, stating that “I personally feel that this option is the most rational.”

Zhou pointed out that given the transaction handling volume for blockchain and distributed ledger technology isn’t that high, making it unsuitable as the basis for a digital currency that is used for high-volume retail purposes.

Cross-border remittances are far fewer in number, however, posing less of a challenge for a blockchain-based digital currency, while there is still widespread dissatisfaction with the efficiency of existing cross-border remittance systems.

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