China’s central bank seeks to create the legal space for its upcoming state-backed digital currency in a proposal released Friday that would also ban all other digital currencies tied to the yuan.
The potential change follows several months of extensive development and deployment of the so-called digital yuan, a central bank digital currency created by the People’s Bank of China. A digital alternative to cash, the currency is undergoing large pilot tests among hundreds of millions of people in major cities and is expected to be released publicly before the country hosts the 2022 Winter Olympics.
In the draft revision to the country’s central banking law, the yuan is specified as including “physical and digital forms.” It also prohibits others from creating or issuing “token coupons or electronic tokens for the purpose of replacing the market circulation” of the yuan, with the penalty for violations being a monetary fine and the shutdown of the yuan-tied currency.
The latter rule would threaten stablecoins — an asset-backed type of cryptocurrency — which are pegged to the yuan and therefore seen as competition to the state-backed digital yuan. This includes a yuan-backed stablecoin by Tether, which operates one of the world’s largest cryptocurrencies of the same name. China has restricted crypto activity in the past, banning the trade of cryptocurrencies as well initial coin offerings in 2017, although its citizens can still hold digital tokens as assets.
The central banking law, which is the legal foundation for the PBOC, was first adopted in 1995 and most recently amended in 2003.
China leads the pack of dozens of countries that are currently researching or testing a central-bank digital currency, following a sharp acceleration of interest and activity in the technology in the last two years. It was, however, beaten to the punch by the Bahamas, a country thousands of times smaller by population that nevertheless officially released the first central bank digital currency on Wednesday.
The proposal also includes a wide range of other changes to “prevent and resolve financial risks and maintain financial stability,” the PBOC said, according to a translation by Reuters. These include strengthening its management of financial stability and coordinating the supervision of systemically important financial institutions and structures.
The PBOC is seeking public feedback on its proposal through Nov. 23.