In an online post on Bloomberg View, Fan Yifei, vice-governor of the People’s Bank of China has highlighted the benefits of central bank issued digital currencies, adding that efforts are underway at the PBoC in this regard.

Yifei points out various “fundamental defects” with existing cryptocurrencies, which includes unstable value, weak credibility, low level of adoption and potential for negative externalities. To that end, he states:

“Digital legal tender, issued by central banks, could help resolve many of these problems. Such a currency would be guaranteed by state credit, and could enable synchronized applications both online and off with greater range, convenience and security.”

He suggested that the PBoC is inclined towards adopting the circulation model of paper money for this purpose – the central bank would issue digital currency to commercial banks, the banks would in turn provide deposit and withdrawal services to the public, and together they would work to ensure the normal functioning of issuance and circulation.

“Central banks must carefully consider how to control issuance to ensure a stable value, which will be a key factor as monetary authorities compete to develop the most effective approach”, he added.

Yifei believes that such a model would make it easier for a legal digital currency to gradually replace paper money, and encourage commercial banks to participate in jointly administering the new currency, thus appropriately spreading risk, accelerating innovation, and better serving the real economy and the needs of the public. He also talks about a “controlled anonymous system” which would ensure that transactions can be traceable under certain conditions.

He further outlines the impact that a legal digital currency could have on the financial system. This includes increase in money multiplier, decline in demand for real currency and increase in the conversion of financial assets, ease of measuring velocity of money due to big data analysis which will make it simpler to calculate monetary supply and analyze currency structures, decrease in the cost of KYC and AML requirements and encouragement to innovation.

“The full impact of a legal digital currency can only be assessed after one is actually in circulation”, he added. “For now, banks must prudently develop the systems and macroeconomic controls necessary to maximize the positive effects of such a currency, while minimizing the negatives.”

Yifei said that the PBoC has been conducting in-depth research on key technologies, legal issues, financial and economic impacts, and the relationship between legal and private digital currencies. In addition, internal and external exchanges and corporations are being strengthened, and a research institution has been created to explore various aspects of such a currency.

He concluded saying: “We look forward to cooperating with all sectors of society to make China's legal digital currency a reality”.