Since February China has had in place the world’s most restrictive policy regarding cryptocurrencies. No initial coin offerings allowed. Cryptocurrency exchanges shut down. Banks banned from dealing in bitcoin (BTC) and retailers from accepting it.

While the government, represented by the People’s Bank of China (PBOC), officially frowns upon digital currency, Chinese investors do not; prior to the crackdown, they accounted for 90 percent of the global volume in bitcoin exchanges. So scratch digital currency as a viable tool of China’s monetary policy, right?

Wrong. The central bank may be put off by the disruptive way cryptocurrencies like bitcoin operate but it is speeding ahead toward creating its own digital currency. However, it won’t operate in the usual way as far as China’s investors are concerned.

Central Bank Gears Up

The PBOC is gearing up for a pilot program to test a digital currency’s ability to complement systems already in place, says Martin Chorzempa, an economist at the Peterson Institute for International Economics and an expert on China’s monetary policy.

Instead of a medium for private money transfers with little oversight by governments or banks, China’s central bank will use the blockchain technology of its planned digital currency to keep tabs on money transfers that might now go unrecorded as cash transactions.

“They haven’t actually been issuing digital currency to individuals, as far as we know,” Chorzempa tells ThirtyK. “But they’ve been conducting trials on trading, using distributive ledger technology. It’s the kind of thing you need to do to make sure your technical system is robust.”

But the actual issuance of currency is inevitable. “It’s coming, and it’s not far off,” Chorzempa says.

The ‘Anti-Bitcoin

The currency, however, will be far different from current manifestations. Chorzempa describes it in an article for the Peterson Institute as the “anti-bitcoin.”

Instead of a medium for private money transfers with little oversight by governments or banks, the PBOC will use the blockchain technology of its currency to keep tabs on money transfers that might now go unrecorded as cash transactions.

“It will remain centrally controlled and aim primarily to replace cash, rather than compete with bank deposits and other financial products,” Chorzempa writes in his article. “In effect, the plan allows China’s government to use digital currencies to increase control.

Controllable Anonymity

Summarizing a recent announcement by Fan Yifei, PBOC deputy governor, Chorzempa notes: “Cash is virtually untraceable and can be transacted with no records, but the digital version replacing it will have controllable anonymity.’”

Other central banks, including the U.S. Federal Reserve, will eventually follow suit, he adds, attracted as much by being free from the financial burdens of maintaining a paper system (printing bills, transporting them, keeping them secure, replacing old ones) as by thwarting illegitimate or criminal transactions.

Despite its official restrictions, China has plenty of bitcoin entrepreneurs as investors, who are still free to buy from individuals or from foreign brokerages as they seek to free huge amounts of accumulated capital from national restraints, Chorzempa says.

Bitcoin Mania

“There’s an enormous amount of money stuck there because of capital controls,” he says of China. The national bitcoin mania of recent years was driven by a desire to transfer funds freely across national borders or to diversify wealth into non-renminbi investments.

“There’s a lot of money in the Chinese real estate market or the stock market, which as concentrated risks are not necessarily a good bet,” Chorzempa says. Hence, the pent-up demand for ICOs.

But a PBOC-approved digital currency will not likely be the answer to the prayers of frustrated Chinese investors.

Ed Newton
Ed Newton contributes to a range of business and general publications. He was an award-winning staff reporter and columnist for the Los Angeles Times for nearly a decade and later wrote for Reuters and the New York Post.