Yao Yudong, ex-director of PBOC Research Institute, delivered a keynote speech in the 2016 China Shenzhen Fintech Summit, proposing an electronic Special Drawing Rights (eSDR) system based on blockchain technology to mitigate the liquidity shortage problem in 2017. His speech was titled: To issue eSDR to build a new type of super-sovereign cross-border payment settlement system.
Yao Yudong ex-director of PBOC Research Institute
A Global Central Bank with eSDR as universal currency
Yao explained the idea of eSDR and its issuance mechanism:
Under the joint efforts of the IMF and the member states, we can explores the prototype of the “global central bank” mechanism and attempts to innovate a digital monetary system, namely eSDR.
First of all, the decentralized issuance of eSDR is pegged with global economic growth and inflation level. the realization of which depends on algorithm, spontaneous running of nodes and terminals. The supply of eSDR is constrained by international rules.
Support of this comes from the IMF Charter Article 18:Allocation and Cancellation of Special Drawing Rights
Section 1. Principles and considerations governing allocation and cancellation
(a) In all its decisions with respect to the allocation and cancellation of special drawing rights the Fund shall seek to meet the long-term global need, as and when it arises, to supplement existing reserve assets in such manner as will promote the attainment of its purposes and will avoid economic stagnation and deflation as well as excess demand and inflation in the world.
Secondly, to build an international currency credit consensus mechanism via an open and transparent rules for smart currency.
Thirdly, the system shall be maintained by the various participants. Financial institutions, central banks, even non-financial enterprises and residents can be gradually incorporated into the system.
Obviously, the support of eSDR is to foster an opponent against US dollars, or at least weaken its influence.
According to the IMF, the creation and universal distribution of SDR is based on complementing the long-term global needs. Historically, there are only 3 allocation of SDR. The first allocation or 9.3 billion SDR was appropriated in 1970-1972. The second allocation or 12.1 billion SDR was appropriated in 1979-1981. The third one or 161.2 billion SDR was carried out in August 2009. It’s worth noting that the 2009 distribution played a key role in providing liquidity to the global economic system and complementing the official reserves of member countries during the global financial crisis.
He also voiced his concern for 2017:
With the end of QE by Japan Central Bank and European Central Bank in 2017, the global liquidity shortage may become a pressing issue. It’s worth trying to issue eSDR to supplement the global liquidity deficiency. As SDR do not enter the market circulation, the exchange rate is not credible. Compared with the SDR, eSDR should try to extend applications beyond the reserve function, like payment, financial transactions pricing. For example, some particular countries may be allowed to issue eSDR-denominated bonds.
The Research Institute of PBOC is a bureau-level research institution under the direct leadership of the head office of the People’s Bank of China. It mainly focus on the research of monetary policy theory, financial and economic development strategy and financial science, providing theoretical basis and research materials for the head office to formulate monetary policy, offering reference for decision-making and financial system reform.
Basically, it’s the brain of PBOC.
It’s not the first time that Yao proposed the idea of eSDR. He mentioned it via an op-ed article last November.
Why do Chinese Authority Support SDR?
On 7th November, the PBOC data indicates that China’s foreign exchange reserves dropped 45.727 billion US dollars in October to 3.1207 trillion US dollars, the lowest since the end of 2011. The tricky part is that if measured by SDR, the foreign currency reserve of China increases 2.984 billion SDR to 2,271469 trillion SDR in October.
China Foreign Currency Reserves by USD and SDR (January t0 March 2016) source: PBOC
As pointed out by Liang Haiming, a thinktank scholar in China:
“The People’s Bank of China has chosen to release foreign exchange reserve data denominated in US dollars and SDRs simultaneously for two reaons. The first is to eliminate the international community’s misunderstanding of China’s foreign exchange reserves and the drastic fall of the RMB exchange rate; on the other hand, it hopes to weaken the dominant position of USD in order to reduce its influence to the international financial markets.”
Then he elaborates the advantage of blockchain-based eSDR:
Blockchain-based eSDR has three major advantages: First of all, the fluctuation-proof feature of SDR remains unchanged. Countries that adopts SDR as the primary settlement means instead of USD may dodge the risk like exchange rate fluctuations, credit crisis, devaluation crisis and the risk arising from the US’s attempt to shift financial crisis. Secondly, eSDR based on the blockchain technology provides a strong support of trust with the “decentralized authentication mechanism”, which requires no union to guarantee its immutability. Thirdly, the eSDR can be decentralized so that the payer and the payee can trade directly on peer-to-peer financial networks, excluding third-party interventions and blockages.
He is also of the opinion that RMB will become a international safe-haven currency in the future.
At the end of the speech, Yao also pointed the dilemma of Bitcoin:
According to our common research, the dilemma of digital currency – Bitcoin is being stashed, rather than being traded. If no one use the digital currency, its value is low. If too many people use it, the price will rise. People will expect the price to rise and store them. If I pay you one Bitcoin, who else is going to pay me one Bitcoin?
To summarize, the PBOC is exploring a global currency based on blockchain technology to weaken the status of US dollars. Such system could be backed by member countries. Bitcoin is trapped by its own dilemma and therefore not important.
It is a long way to go before the eSDR alliance could be formed before major hurdles like agreement on creation and allocation of eSDR are overcame. But Chinese are fast to learn and adopt. Shenzhen plans to the first city in China to embrace digital currency.
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