As you may recall back in April of this year, the National Development and Reform Commission (NDRC) made an interesting announcement concerning crypto mining. The state planning agency was considering a complete ban on crypto mining in the country. Whether or not this proposal will go through is up in the air, however, the possibility is still strong.
One of the reasons behind this potential ban is that China does not find the mining industry to be lucrative. Especially not for the country’s economy. The reveal of this impression of cryptocurrency mining came about upon the issue of a notice from regulators in Inner Mongolia. For checking cryptocurrency mining, the distribution of the notice was by five departments of Inner Mongolia. Moreover, a statement by the regulator clarifies the stance on mining:
“The virtual currency ‘mining’ industry belongs to the pseudo-financial innovation unrelated to the real economy, and should not be supported.”
The five departments include the Financial Office, Development and Reform Commission, the Office of the Ministry of Industry, the Big Data Bureau and the Public Security Department. According to their general consensus, the crypto mining industry does not deserve attention.
So, what is the reason for the remainder of this announcement and the preceding events relating to it? Well, for the most part, it’s about people’s outlook on the topic. That is to say, there is a negative perception some may have regarding China’s relationship with cryptocurrency. By banning crypto mining, that must mean they are against cryptocurrency altogether.
This isn’t entirely true, though.
The central bank is getting close to finally issuing its own state-backed cryptocurrency. In addition, it will issue it to seven institutions in the near future. According to them, the rationale behind this is to “protect” the supremacy of its foreign exchange.
The first recipients
Paul Schulte was once the global head of financial strategy for China Construction Bank up until 2012. He states that seven institutions will receive the cryptocurrency upon its completion. These institutions include the following:
- Industrial and Commercial Bank of China
- The Bank of China
- Alibaba, one of China’s largest financial technology companies
- Tencent, the other largest financial technology company in China
- Union Pay, a league of Chinese banks
An individual who is playing a role in the development of the cryptocurrency confirms this claim. The seven institutions will go on to receive the new asset as soon as it launches. This effectively adds the eighth institution to the list of recipients who will acquire it first.
The source providing this information is keeping their identity anonymous. Furthermore, they are refusing to disclose the name of the eighth company. This individual was once an employee of the Chinese government, thus enforcing their desire to remain anonymous. The source confirms that the technology behind the cryptocurrency’s foundation has been ready since last year.
They are of the belief that the cryptocurrency could potentially launch as soon as November 11. This is speculative, though it does not appear outlandish, as it’s China’s busiest shopping day, “Singles Day.”
Upon the cryptocurrency’s launch, the recipient institutions have a specific responsibility. They will need to distribute the cryptocurrency to 1.3 billion Chinese citizens. On top of this, they have to disperse it to those doing business in the ‘renminbi’, China’s fiat currency.
The source also points out that the central bank holds out hope concerning the cryptocurrency’s availability. To elaborate, they hope it will eventually be accessible to spenders in the United States and other countries. They anticipate this possibility to come true by way of relationships with analogous banks over in the West.
Why diverse recipients?
The idea behind the distribution of this cryptocurrency to various institutions is not exactly original. In fact, using a diverse assortment of China’s credible institutions to circulate the cryptocurrency is reminiscent of other similar ideas. These are ideas that are prevalent all over the world.
Libra, which is a cryptocurrency Facebook is planning, is a good case in point. This currency will receive support from a basket of currencies that central banks will issue. Furthermore, this basket will have support from various companies. These include Uber and Mastercard in the United States, Vodaphone in England, and Mercado Pago in Argentina. Not too long ago, there was a proposal of an idea by the governor of the Bank of England, Mark Carney. His idea was that of a new currency that receives backing by a number of central banks. The intent behind this would be to take the U.S. dollar’s place as the global reserve currency.
There is one key element that differentiates China’s digital currency from Libra. Moreover, that difference also sets them apart from, as Schulte puts it, Carney’s “synthetic hegemonic currency” (SHC). Libra is comparatively more than early-stage computer code. What’s more, it would appear that the SHC has not made much progress beyond simply being in Carney’s mind. The Chinese cryptocurrency, however, is ready to launch; or at the very least, it’s close to being ready.
Schulte, who now runs an eponymous bank research firm, says that:
“China is barreling forward on reforms and rolling out the cryptocurrency … It will be the first central bank to do so.”
Bypassing the banking system of the West
It is hard to find a big organization or government institution that doesn’t show considerable interest in the crypto space. Obviously, China’s central bank has jumped on the bandwagon with the development of its own digital currency. With this in mind, China’s journey towards its currency’s launch comes as a measure to offset potential competition. The competition, in this particular case, is Facebook‘s Libra.
Jeremy Allaire, the CEO of the consumer finance company, Circle, comments on this. He says that China’s approach towards a central bank digital currency is the most progressive. It is true that governments from all around the world are actively experimenting with it. However, the might of China’s economy, not to mention their execution capabilities, surpasses others.
In an interview with Phoenix Chinese News, Allaire emphasizes the strategic thinking of the People’s Bank of China. He would further uphold the claim that the bank is the only central bank working on cryptocurrency with research orientation. This effectively grants the Chinese central bank with an additional edge over various other digital currency projects.
Allaire brings up the potential interaction of digital Yuan with other cryptocurrencies in the market that are dollar-pegged. Relating to this, he expresses excitement about the possibility of interactions between the bank’s currency with stablecoins. Specifically, stablecoins that attach to the United States dollar. He said:
“For us, we’ve been working for multiple years on the US Dollar coin that’s been growing very fast. And I think that we’re excited to see how things like the Chinese central bank digital currency could eventually interact or be traded with things like US Dollar coin.”
China completely banning public cryptocurrencies in the country is not exactly breaking news. What’s more, it should be common knowledge to those keeping tabs on crypto news. Be that as it may, the country still understands the significance of both crypto assets and blockchain technology. An early move in the digital currency market by China is likely to give them an edge over other economies.
Not too long ago, the stablecoin firm, Tether, made an announcement concerning its Chinese-Yuan. They state that this fiat currency is managing to peg digital currency, CNHT. Despite this, it is unclear as to how far it will be able to keep up in the market. Specifically, as soon as the Chinese central bank’s digital Yuan is out on the market.
On the contrary, there is a frequent struggle in the United States to successfully conquer regulatory issues. Regarding potential competition in the crypto market, Facebook has taken the initiative to address it. They state that it’s Libra cryptocurrency is planning to launch sometime next year in 2020. With that in mind, it has not always been smooth sailing. Even now, for all its progress, it still has a difficult time handling the regulators. Therefore, Facebook recently made the announcement that Libra will tie to an array of major fiat currencies. This, however, does not include the Chinese Yuan.
Allaire says that there’s a strong possibility that the digital version of the Chinese Yuan could surpass Western sovereignty. Basically, China could create its own space, demanding the digital Yuan while also toughening up its position in economics.
Cryptocurrency… but is it, though?
By now, it should be apparent that China’s adoption of digital payments is certainly an interesting one. Though they are on the brink of banning crypto mining, they are still open to creating a cryptocurrency for their central bank.
However, there is an increasing amount of speculation surrounding this. It is not necessarily against the cryptocurrency itself, but it pertains to its identity nonetheless. For all the instances of people referring to it as a “cryptocurrency,” there is some speculation that it’s unlikely to actually become a cryptocurrency in the traditional sense.
Some would prefer to call it “highly monitored digital cash.”
Similar to Libra, the announcement of China’s upcoming digital currency is automatically receiving the label of “new cryptocurrency.” Doing so may pique excitement and strength for cryptocurrency as a whole, including Bitcoin and Ethereum. This new digital currency will possess a variety of traits that make it more comparable to a centralized digital currency. Thus, it will be less similar to a true cryptocurrency. Overall, it’s more conclusive to assume that the People’s Bank of China aims to release digital cash with extra surveillance.
Zhou Xiaochuan, the former governor of the People’s Bank of China, makes an argument in response to Libra. He says that the Chinese state should “make good preparations and make the Chinese Yuan a stronger currency.”
The digital currency that the bank is proposing appears to be exactly like that.
The only issuers of the currency will be commercial banks and the People’s Bank of China. The divergence between the state and commercial banks is incredibly narrow in China. Libra provides some level of nominal decentralization by way of an assortment of companies and organizations. These companies and organizations are all part of the central system of Libra. This pretense may not exist in China, though.
There was a statement made in 2012 by the Congressional Research Service. It indicates that three of China’s largest banks are completely owned by the state. Furthermore, the largest shareholder of four out of five – while also offering shares to both the public and foreigners – is the Chinese government.
In reality, a lot of the partners the central bank could have will be under the control of the state. Alternatively, the state could have a heavy influence on them. The distribution of the cryptocurrency will likely be an affair of the centralized variety. Moreover, chances are slim that members of the public will be part of the mining process or governance decisions. This is similar to the case with Bitcoin as well as Ethereum.
The Chinese central bank requires all of its major decisions to gain approval by the top bodies of the Chinese Communist Party. The likelihood of it operating as it has been with commercial banks prior to this is strong. There will be at least some liberalization, but primarily in ‘lockstep’ with the party’s overarching political goals. The party still elects bank directors, and the People’s Bank itself has to listen to the State Council.
It’s entirely possible that the People’s Bank of China will design all wallets. Moreover, it may be able to access all transaction data. It’s uncertain as to whether or not private partners can involve themselves in regards to data analyzation or wallet assembly. Patents that the central bank files imply that they want complete end-to-end control of the entire process. This makes it unlikely (especially since it will be seen as a central bank currency) that many services will have permission to access the data. On top of that, it’s unlikely that there will be public records similar to a blockchain.
The odds that there will be a blockchain element in this new digital currency are not very good. In fact, the entire notion is inconceivable. Mu Changchun, the deputy director of the People’s Bank of China’s payments department, makes a note about blockchain technology:
“…blockchain platform just couldn’t deliver the throughput needed for retail.”
With that in mind, there are several aspects that will be rendered moot. These include public displays of data, explorers of blockchain, a decentralized consensus algorithm, and of course, mining.
It’s possible that the People’s Bank will employ the governance structures it uses with commercial banks to issue Chinese Yuan. This means that the distribution will be under the control of the same mechanisms for fiat currencies, not decentralized stakes or proof-of-work.
The focus of China’s central bank appears to be on making the Chinese Yuan exceptionally more versatile. This is in lieu of actually launching a separate cryptocurrency. One of its patent claims makes the following note:
“The virtual currencies issued by private entities [have] fundamental flaws given their volatility, low public trust, and limited useable scope. … Therefore, it’s inevitable for the central bank to launch its own digital currency to upscale the existing circulation of the fiat currency.”
It’s abundantly clear that it is launching a digitized version of the Yuan instead of a cryptocurrency. Specifically, a cryptocurrency whose main purpose is to compete with it, Libra, and also cryptocurrencies that are “private-entity.”
A good chunk of implications enforces the judgment that the People’s Bank of China is not technically constructing a cryptocurrency. At least, not one that is akin to Bitcoin, Ethereum, or even Libra. Instead, it is likely building its own version of centralized digital cash with the additional feature of extra surveillance.
Whatever comes of it, it will certainly be an interesting addition to the world of digital currency.