In a story that seems to have gone largely unnoticed by the western press, the China Daily reported that the PBoC has successfully designed a prototype that can regulate its future supply of digital fiat currency.
In a report, “PBoC inches closer to digital currency”, the newspaper stated that China’s central bank “has completed trial runs on the algorithms needed for digital currency supply, taking it a step closer to addressing the technological challenges associated with digital currencies, according to a top official associated with the project.”
China’s has been preparing for digital currency since 2016. In June this year, the PBoC “finished several digital money trials involving fake transactions between it and some of the country’s commercial banks.” Given over-invoicing of imports and the shenanigans in the shadow banking/WMP sector, we suspect that the commercial banks took to these trials like proverbial flies to feces.
The China Daily article goes on to suggest that, while there is no timetable, “China is likely to become the first country that would deploy a digital fiat currency.”
Far be it for us to question the accuracy of the China Daily – which Wikipedia notes is often used as a guide to Chinese government policy – but we were expecting Sweden (already the world’s most cashless society) to be first. It has been widely reported that the introduction of an “e-krona” is being investigated by the Riksbank. Forbes noted last month that “The inquiry is expected to be finalized in late 2019.” It would not replace cash, which accounts for 1% of transactions in Sweden according to a recent BBC report, but operate alongside physical cash initially.
So…while China expects to be first, it will be “some time before the currency goes public”. According to Di Gang, a senior engineer of the Institute of Digital Money at the PBOC, a number of concerns need to be solved like “managing risks and improving efficiency.” He added that “the government also needs to factor whether the public would use the currency.”
We know the answer to that.
Yes, although it would be much quicker if Chinese citizens could somehow use it to get their savings out of the country.
Back to the serious work of the PBoC’s Institute of Digital Money. Yao Qian, the director-general no less, said that the successful simulation of money supply had paved the way for the central bank to become the future sole regulator and policymaker governing the value of digital currency. That sounded like a veiled explanation for the recent heavy-handed clampdown on Bitcoin trading in the Middle Kingdom. Indeed, the story notes that “Unlike Bitcoin or other digital money issued by the private sector, the digital fiat currency has the same legal status as the Chinese yuan”
As this will be a government-backed digital currency, we wonder whether Jamie Dimon will be an investor or early adopter? Alternatively, he might be able to buy a Russian version in due course.
Yesterday, Cointelegraph reported that local news sources in Russia had been informed by the Minister of Communications, Nikolay Nikiforov, that President Putin has approved a plan for the issue of a “CrypoRuble.” There was no detail, however, on timeline and no any subsequent confirmation that we’ve seen. Coincidentally, or not, Nikiforov is quoted as saying “I confidently declare that we run (sic) CryptoRuble for one simple reason: if we do not, then after 2 months our neighbors in the EurAsEC will.”
So, the world might be moving towards digital, sovereign-backed currencies faster than many people realized. For the time being, however, Bitcoin and its private sector rivals continue to have the playing field to themselves.
Portfolio managers who want exposure to the cryptos either remain on the sidelines or, as Cathie Wood, CEO, CIO and Founder, of Ark Investment Management, said on Bloomberg TV earlier, are forced to pay a premium via the GBTC (Bitcoin Investment Trust).
Wood commented that “We are a registered investment company, Ark Invest, we can only own financial securities…our funds own GBTC which sells at a premium to the underlying bitcoin investment trusts…the premium is because of the scarcity value. In my IRA, for example, I can’t get any to crypto, except through a GBTC. No one can and the same with our funds…We’ve tried to buy the underlying, but the New York Stock Exchange preferred a traded security and that’s how we ended up with a GBTC.”
As the Bloomberg guests went on to discuss, the situation may not change unless and until Bitcoin futures are approved by the CFTC, perhaps in early/mid-2018. That could pave the way for the currently stalled approvals for ETFs with the SEC and bring additional institutional capital into crypto.