China announced that its state-backed, central bank issued digital currency (CBDC) won't be decentralized and will only partially use a distributed ledger, causing doubts over whether it can be classed as a cryptocurrency.
China's CBDC will be established through a two-tier system: it will be issued by the People's Bank of China (PBoC), while the country's commercial banks will provide the second-tier service of transmission through the financial system.
Mu Changchun, deputy director of the PBoC, revealed the launch of the digital offering at last weekend's China Finance 40 event. He said:
This two-tier system is suitable for our national conditions. It can use existing resources to support and develop commercial banks and smoothly promote digital currency.
Not a Cryptocurrency
The digital asset will not act as cryptocurrency such as bitcoin or ether, however, as China has already made it clear that transactions will be monitored.
This has led to much criticism from crypto-enthusiasts who have expressed their views on social media. On Reddit, Derricksaurus said:
Isn't cryptocurrency by nature decentralized? Isn't that the allure and value of crypto? By "developing systems" I am assuming they are meaning "we want to control it" then isn't that just what we call currency? Or at best digital currency?
Another Reddit user calling themselves boatsaregreat said:
My only guess is that they want to make people stop using decentralized cryptos and the easiest way is to lure them to their own.
Libra Causes a Stir
China's CBDC project has been expedited by the announcement in the spring this year that Facebook was looking to launch the Libra cryptocurrency next year. The response by several central banks has been similar to China's: launch a national cryptocurrency to challenge Libra before it gains traction.
Indeed, governments and central banks are not the only institutions concerned over the possibility of a non-governmental entity issuing its own form of currency.
While governments are concerned about the possible impact on domestic currencies and central banks are worried about the implications for monetary policy - the commercial banking industry is perplexed about the possibility of its role in the financial system becoming diminished.
Nevertheless, China's broader aim for its cryptocurrency may be to help it circumvent some of the financial pressure it is coming under from US trade sanctions.