Thus, Chinese policymakers are weighing options that would allow the issuance of a digital currency the state could control. One option, proposed by ex-PBOC governor Zhou Xiaochuan, would be to allow "commercial entities" to issue digital currency backed by their own assets. In July, Zhou suggested China could learn from Hong Kong, which has long utilized such a model with paper currency notes issued by HSBC, Standard Chartered and the Bank of China that are backed by the banks' U.S. dollar currency reserves.
The Hong Kong Monetary Authority, which acts as the former British colony's central bank, pegs the Hong Kong dollar to the greenback at a rate of 7.75-7.85:1. If China adopted such a model for its own digital currency, it could eschew the high volatility typical with cryptocurrency, Zhou argues.
Since Zhou has not specified what type of commercial entities would issue digital currency, some observers have suggested that China's internet finance giants would be obvious choices. From a technology standpoint, that makes perfect sense as both Alibaba and Tencent already have comprehensive digital banking ecosystems. With the blessing of regulators, they surely would be capable of issuing digital currency that could be used within those ecosystems.
In fact, as noted by Quartz in a July report, Tencent issued a digital currency of its own called QQ Coin 14 years ago. Designed to pay for online services and games in Tencent's ecosystem, QQ Coin cost 1 yuan ($0.15) each. Beijing cracked down on QQ Coin in January 2007, allegedly because the digital currency was associated with money laundering, although perhaps equally out of morality concerns: The coins were reportedly popular on gambling and adult entertainment websites. QQ Coin still exists today, but can only be used to pay for virtual goods and cannot be redeemed for above its purchase price.
Meanwhile, even if Beijing does reinvigorate efforts to create a sovereign digital currency (or currencies) of its own, we do not expect a full-throated crypto revival in China. The Chinese leadership remains skeptical of the merits of cryptocurrency and concerned about its potential to destabilize the financial system by fomenting money laundering and capital flight.
Such concerns are amplified by the Chinese economy's steady deceleration. In the second quarter, the Chinese economy grew at its slowest quarterly pace in 27 years. At the same time, the Sino-U.S. trade war is dragging on, without a resolution in sight. Now is not the time for bold experimentation with digital currency.