The Governor of the People’s Bank of China (PBOC), Zhou Xiaochuan, has given an extensive interview [transcript] in which he sets out the Bank’s current thinking about digital currency. 

[Zhou] said that “it is an irresistible trend that paper money will be replaced by new products and new technologies.”

From Chinese Central Bank Goes Full Steam Ahead with its Own Cryptocurrency | Finance Magnates

Couldn’t agree more. I am in complete alignment with the Party about this. I do not understand why reactionary forces defend physical cash against the march of progress. The governor goes on to set some broad parameters around just how such a digital currency might operate and, let us simply observe, it’s no bitcoin.

From the central bank’s perspective, a digital currency should be designed in a way that can best protect people’s privacy, but we also need to pay attention to social security and social order

From Chinese Central Bank Goes Full Steam Ahead with its Own Cryptocurrency | Finance Magnates

Couldn’t agree more. Society should set the dial, not technologists, no matter how much we think we know better. The governor’s argument here isn’t about where the privacy dial should be set (I expect I might disagree with his position on the precise setting), but about who should set it. And I agree with him that society is the right answer. Whether this means through democratic vote or some other mechanism I leave as an exercise for the reader. (Yes, it is true that a great many voters are ignorant and easily swayed by propagandists, and I for one think some form of permissioned voting is crucial if we are stave off economic doom in the long run, but I am just one voice in this matter

We think, therefore, as a legal tender, digital currency must be issued by the central bank.

From Chinese Central Bank Goes Full Steam Ahead with its Own Cryptocurrency | Finance Magnates

Couldn’t agree more. It looks as if the Chinese Communist Party read my blog about the new report from Positive Money. If a country wants a digital currency, then it makes complete sense for the central bank to provide it.

Xiaochuan believes it will take about ten years for a digital currency to fully replace cash in China but he has plans how to gradually phase out paper money

From Chinese Central Bank Goes Full Steam Ahead with its Own Cryptocurrency | Finance Magnates

Couldn’t agree more. We need a national plan to deal with this, and I only wish the stooges of post-imperialist corporatism at the Bank of England had such vision. We too need a plan on how to gradually phase out paper money.

What I don’t understand is why this announcement by the PBOC governor attracted so much attention in cryptocurrency circles. This is for two reasons. First of all, the whole point of a cryptocurrency is that it derives its value from cryptography not from some external unit of account. There is actually no point in a central bank issuing cryptocurrency, whether it’s BritCoin or Remibicoid, when what they should actually be doing is issuing a digital currency that they are responsible for managing the value of. (Well, whether they should be issuing digital currency or not depends on your macroeconomic perspective and I don’t propose to sidetrack into that here: let’s just say that they should for the sake of argument.)

Governor Zhou Xiaochuan is clear in his reasoning. He says that the PBOC spent a lot of effort researching blockchain technology and has concluded that blockchains are too resource intensive and too limited in throughput to form a practical mechanism, for exchange. This does not mean that some future blockchain technology that is based on some cryptocurrency, that is based on a double-spending solution that is not based on proof-of-work, might not be suitable. That’s entirely possible, although it seems to me unlikely that any such cryptocurrency would offer cost or efficiency advantages over account-based systems because, apart from anything else, that’s not a design goal.

To reiterate: the governor said that he has plans to gradually phase out paper money. Wowza. The costs for cash transactions will increase, as the banks start charging fees for accounting physical cash, but he is realistic in saying that digital currency and physical currency will coexist for a long time. As I have written before I don’t think a “cashless society” means a society in which notes and coins are outlawed, but a society in which they are irrelevant. Under this definition and with the guidance of the central bank, China could easily achieve this goal.

I say this with complete confidence, because they were able to affect the transition from specie to paper money effectively and in a short time. In the mid-13th century, Kublai Khan instituted a system of paper money (I refer to Marco Polo’s description of the system here). The Khan had a robust acceptance policy: if you didn’t take the paper money at par, he would kill you. In a short time, paper money overcame the inconvenience of coins with the very positive effect that trade (and therefore the economy) grew. I won’t mention how the story ended (that’s in my forthcoming book) except to note that it didn’t end well, a reflection of the problems occur when the central bank succumbs to the temptation to over-issue.

Obviously I’m not suggesting that we adopt Kublai Khan’s stern but clear policy on the acceptance of new payment instruments. Personally I would favour executing people who do not accept electronic payments only as a last resort, but it does seem to me that if the Chinese government were to go down the digital currency route, it really would not take that long to have the world’s first large-scale national digital currency up and running. If the Chinese can abolish cash, so can we.

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