Top Chinese political advisers have proposed a regional digital currency that would be backed by four major Asian currencies including the Japanese yen, Korean won, Hong Kong dollar and the yuan.
The proposal unveiled Thursday describes the currency as a “stablecoin,” a term for cryptocurrencies designed to hold their value and backed by a reserve currency, although it does not explicitly mention crypto or blockchains.
The People’s Bank of China (PBOC) would lead the proposed effort. The basket of underlying collateral would follow the special drawing rights (SDR) model of the International Monetary Fund (IMF), where each country’s currency is assigned a different weight based on its economy.
As such, the proposal resembles the original vision for libra, before that Facebook-spawned project watered down its plans and pivoted to developing digital versions of individual fiat currencies. (The Libra Association recently welcomed Singapore investment company Temasek as its first state-owned entity member.)
The proposed stablecoin would help facilitate trade among the four countries, which is key to economic recovery in the region after coronavirus, its proponents said. It would do so by improving cross-border settlement and clearing services with a new payment network and digital wallet for enterprises.
Neil Shen, founding and managing partner of Sequoia China and a member of China's upper house, presented the proposal to Chinese legislators during the Two Sessions, the country’s largest annual political gathering.
Nine other advisers who are also upper house members, including Kennedy Wong, a solicitor of the Supreme Court of Hong Kong, former chief secretary of Hong Kong Henry Tang and Hong Kong-based Chinese billionaire Songqiao Zhang, co-signed the proposal.
Shen attended the first session of the Chinese People's Political Consultative Conference (PCC) on Thursday. The PCC is essentially an advisory upper house where a range of organizations and independent members help the government make national-level decisions. This meeting will be followed by plenary sessions of the National People’s Congress (NPC) starting Friday and lasting for about two weeks.
Proposals out of the PCC do not tend to have the same level of influence as the more concrete bills discussed in the NPC because the bills will yield significant changes in laws and regulations. However, in this case the proposal might have some sticking power.
California-based Sequoia Capital, Sequoia China's parent, is one of the few big-name VC firms that have ventured into crypto. It invested in $10 million in one of the largest global crypto exchanges by volume, Huobi Group, when it was based in China in 2014. (Huobi Group is now based in Singapore.)
The stablecoin proposal also suggests creating a regulatory sandbox and scaling up the system in Hong Kong over time to improve cross-border payment services between the four countries.
Led and supervised by the PBOC, companies from private sectors would launch the stablecoin and develop the project with the latest financial technologies. Enterprise users would be able to store the coins in a digital wallet and deposit cash at a custodian as reserves to back their stablecoins, according to the proposal.
The Hong Kong Monetary Authority and PBOC can create a framework to regulate the stablecoin’s cross-border transactions, manage risks and discourage money laundering, the proposal said.
The stablecoin could be launched ahead of China’s national digital currency and pave the way for its rollout by testing use cases to identify potential risks and technical problems. If launched, the stablecoin could be “seamlessly” connected with the digital yuan, the proposal said.
The proposal stresses Hong Kong is one of the most important financial gateways that connect mainland China to the other Asian countries, with over 70% of cross-border renminbi payment processed in the city.
Hong Kong could be the most favorable jurisdiction for such a regional stablecoin. The Hong Kong Securities and Futures Commission created a licensing system to regulate virtual assets transactions and trading platforms in November.
Among the first 12 entities awarded with the license are Tencent’s WeBank; Alibaba’s fintech arm Ant Financial; Infinium Limited, a joint venture that includes Tencent, Industrial and Commerce Bank of China (ICBC) and other two Hong Kong-based institutional investors; and SC Digital Solutions Limited, whose 65 percent stake is owned by Standard & Chartered Bank.
On the other end, the PBOC and the top Chinese financial watchdog, the China Securities and Regulatory Commission (CSRC), recently put forward a slew of new measures to reform the financial system in the Guangdong-Hong Kong-Macao Greater Bay Area and encourage blockchain applications for improving international financial services in this area.
In 2017, the Chinese government came up with an initiative to further integrate the Guangdong province with Hong Kong and Macau in a bid to build stronger financial connections between these cities and the mainland. The initiative encourages banks in the Guangdong-Hong Kong-Macao Greater Bay Area (GBA) to have a regional network and operate in a more interconnected financial system.
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