Say final goodbye to banking as we know it

So is China readying its own Bitcoin? Banish the thought. It’s far bigger than that. Yes, just like any other cryptocurrency — or for that matter, cigarettes in prisoners-of-war camps — the upcoming digital yuan will be “tokenised” money. But the similarity ends there. The crypto yuan, which may be on offer as soon as 2020, will be fully backed by the central bank of the world’s second-largest economy, drawing its value from the Chinese state’s ability to impose taxes in perpetuity. Other national authorities are bound to embrace this powerful idea.
Little is known about the digital yuan except that it’s been in the works for five years and Beijing is nearly ready to roll. The consensus is that the token will be a private blockchain, a peer-to-peer network for sharing information and validating transactions, with the People’s Bank of China in control of who gets to participate. To begin with, the currency will be supplied via the banking system and replace some part of physical cash. That won’t be hard, given the ubiquitous presence of Chinese QR code-based digital wallets such as Alipay and WeChat Pay.
Ever since the advent of the 17th-century goldsmith-banker in London, the most crucial thing in banking has been the ledger, a repository of irrefutable records to establish trust in situations where it doesn’t exist. When Peter in Vancouver agrees to send money to Paul in Singapore, they’re forced to use a chain of interlinked intermediaries because there’s no ledger in the world with both of them on it. Blockchain’s distributed ledgers make trust irrelevant. Paul devises a secret code, and shares its encrypted version with Peter, who uses it to create a digital contract to pay Paul. A cumbersome and expensive network of correspondent banks becomes redundant, especially when it comes to the $124 trillion businesses move across borders annually. Imagine the productivity boost;
picture the threat to lenders.
China isn’t the only one experimenting. Fast, cheap cross-border payment settlement is one application of JPMorgan Chase & Co.’s Quorum, an Ethereum-based platform on which the Monetary Authority of Singapore is running Project Ubin, an exploration into central bank digital money. These are early days, but if blockchain technology shows promise in handling a large number of transactions simultaneously, then digital currencies could become substitutes not just for physical cash but also for bank reserves.
That’s when the game changes. Reserves at a central bank are maintained by deposit-taking lenders. A digital yuan — or Singapore dollar or Indian rupee — could bypass this system and allow any holder of the currency to have a deposit at the central bank, potentially making the state the monopoly supplier of money to retail customers. As Agustin Carstens, the general manager at the Bank for International Settlement, noted recently, “If the central bank becomes everybody’s deposit-taker, it may find itself becoming everybody’s lender too.”
But why would central banks want to demote their own banking systems? One answer, looking at Europe and Japan, is that negative interest rates are doing that anyway. Lenders are starved of profit because while the central bank charges them for keeping money on deposit, they can’t as easily pass on those negative interest rates to their own depositors. If the global economy gets mired in long-term stagnation, official digital currencies will at least be an efficient way of monetary easing without involving banks.

—Bloomberg