China Digital Currency
An electric board showing exchange rate between South Korean Won and Bitcoin at a cryptocurrencies exchange (Photo: Retuers / Kim Hong-Ji)

Former Chinese central bank governor Zhou Xiaochuan openly suggested that China considers the creation of its own cryptocurrency as a response to Facebook's proposed new digital currency called Libra.

The former head of the People's Bank of China (PBOC) stated that the country could learn from Hong Kong's current monetary system.

In his statement, Zhou was referring to the ability of commercial entities in Hong Kong. Select financial institutions in the city are allowed to issue their own notes backed by US dollar currency reserves. Hong Kong currently has three banks that have been allowed to issue notes under their names, these banks are the Bank of China Hong Kong, HSBC, and Standard Chartered.

Under Hong Kong's de facto central bank, the Hong Kong Monetary Authority, the three banks are strictly regulated to make sure that their currencies are always worth around the same amount to the dollar. This model allows the currencies to withstand huge fluctuations in the market, something Zhou is suggesting would help China with its cryptocurrency plans.

Zhou, who was the head of China's central bank for over 15 years, revealed his idea of following Hong Kong's banking model as a way for China to come up with its own digital currency. The difference, of course, would be the use of blockchain technology, which is the current system being used by digital currencies such as Bitcoin and Facebook's proposed Libra cryptocurrency.

Zhou acknowledged in his speech that part of the problem of early digital currencies was that most of its proprietors were only after quick profits. The focus apparently should have been more towards establishing a viable means of financial transactions that are safer and more secure.

The former head is an open backer of China's plans to create a sovereign digital currency. Zhou suggested that China allow the central bank and other "commercial entities" to issue their own digital currencies. Zhou did not elaborate on what types of commercial entities would be allowed to issue digital currencies in China, but analysts speculate that Zhou may have been referring to large tech firms such as Alibaba and Tencent.

Both companies currently have well established digital payment platforms in China with hundreds of millions of users. Alibaba operates Alipay, while Tencent operates WeChat Pay.

While some market analysts are supportive of Zhou's proposal, some blockchain experts are apprehensive of the plan of giving large tech firms the ability to issue their own digital currencies. Critics of the plan argue that China should only allow central banks and commercial banks to have this ability.