The former head of one of China’s big state-owned banks has warned that emerging cryptocurrencies such as Libra and Diem could potentially enhance the “hegemony” of the US dollar, while also pointing to the need to confront the challenges posed by decentralised finance (DeFi).
Li Lihui (李礼辉), former head of the Bank of China (BOC), warned of the potential for statutory national currencies to be undermined by the global adoption of new forms of cryptocurrency.
“We must be on the alert that once Libra and Diem obtain approval, it is very likely that they will rapidly evolve into global super sovereign currencies, forming a replacement that supersedes sovereign currencies,” said Li at the 2021 China Wealth Forum (2021中国财富论坛) held in Qingdao from 24 – 25 July.
“There is also the possibility that in the digital era it could strengthen the hegemonic currency position of the US dollar.”
Li also warned of the challenges posed to traditional finance by the emergence and adoption of DeFi.
“Decentralised finance is a hot spot for future global financial regulation, and could also become a hot spot for future international financial competition,” said Li. “We should strive to establish digital financial advantages when confronting the world.
“Decentralised finance development has just entered its 12th year, and the seeds of mass usage and regionalisation have already emerged, so we must positively respond.”
In order to deal with the challenges posed by both emerging forms of cryptocurrency and DeFi, Li advocates measures including:
- Creating the world’s “best central bank digital currency.” “Creating the world’s best central bank digital currency is of benefit to maintaining China’s financial security in the digital era, maintaining China’s currency sovereignty, and effectively dealing with the external shock of digital currencies on our own currency system and financial system. It will also help with financial inclusion.”
- Considering how to create a “security shield” for digital financial infrastructure in the digital era. “We must deeply analyse the current and potential ability of distributed ledgers, decentralised finance and other digital technologies to ‘overturn things,’ and focus on research into digital currencies based on entirely new digital technologies.”
- Establishing an across-the-board financial regulatory system. “Innovations and applications in digital technology are currently transforming traditional models in the financial sector, and urgently need regulatory innovation. Digitisation of financial regulatory systems should be jointly established and shared by financial regulatory authorities, with the implementation of unanimous compliance standards. This will need to cover all financial institutions, and encompass financial markets and operations in different areas.”