China and Blockchain: A Love Story
The last two CryptOsint editions made brief mentions of the rivalry cooked up between China and Facebook, leaving some to wonder — why exactly does China care? To begin, let’s quickly address the elephant in the room with Facebook, then dive into the deeper history of blockchain technology in the county.
After Facebook announced the Libra project this summer, government officials from the People’s Bank of China (PBoC) announced that the central bank was also working on a similar digital currency based on the yuan. (In crypto-speak, China will be issuing a central bank digital currency, or CBDC). South China Morning Post’s Frank Tang expertly deduced in July of this year that China’s fears over Libra are multi-layered as officials feel that the currency could threaten Chinese cross-border payments and, potentially, the country’s financial sovereignty.
Disrupt the country’s financial sovereignty? How? Well, it all comes back to the hegemony of the U.S. dollar. Tang featured a quote from Wang Xin, director of the PBoC, that nicely sums up the situation:
“If the digital currency is closely associated with the US dollar, it could create a scenario under which sovereign currencies would coexist with US dollar-centric digital currencies. But there would be in essence one boss, that is the US dollar and the United States. If so, it would bring a series of economic, financial and even international political consequences.”
Since then, as we all know, things aren’t exactly going as planned for Libra. Facebook’s missteps could very well lead to China’s success. But, despite claims that it is very close to launching, not much has been clarified with regard to the specifics of China’s digital currency. One aspect of the digital yuan that is up for debate is if it is considered a cryptocurrency. If we’re going by a textbook definition of cryptocurrency, it is not. If we’re evaluating it on a spectrum of bitcoin to cold-hard cash, some could argue that it errs on the side of bitcoin.
Most crypto-enthusiasts consider a product a cryptocurrency if it is hosted on a public, decentralized ledger no one person can control or manipulate. Based on research findings from popular exchange Binance, the Chinese government will likely monitor all data on the currency and the only issuers will be commercial banks and the PBoC.
So, why take a digital currency venture on if it isn’t fully a cryptocurrency? Well, the Chinese are almost completely cashless thanks to the popularity of digital payment systems like AliPay and WeChat. Therefore, creating a wholly digital currency makes a lot of sense considering the physical yuan is now practically obsolete. By cherry-picking aspects of the underlying technology, the government can cut out the need for physical cash, while also removing the risk for duplicate transactions online — a significant problem before the invention of bitcoin and blockchain technology.
Another confusing aspect of China’s relationship with cryptocurrencies is that it is very pro-blockchain technology and very anti-cryptocurrency. In 2017, China banned cryptocurrency trading on domestic exchanges as well as initial coin offerings (ICOs), resulting in a mass exodus of Chinese-based fin-tech companies. A couple of months ago, government officials also expressed the desire to ban crypto mining. Chinese public officials claim that their dislike of crypto stems from too many instances of fraud and misuse; however, I suspect their actions also have to do with fears of popular cryptocurrencies overtaking the yuan or propping up the dollar.
This distaste for crypto has not stopped President Xi Jiping from calling blockchain technology “one of the nation’s core technologies” and supporting the passage of laws that would further develop the Chinese blockchain ecosystem. Xi isn’t the only one excited about blockchain technology in China. One Chinese province awarded $150 million in government funds to support blockchain development projects. Likewise, according to Decrypt’s Nicholas Marnioff, there has been long-held enthusiasm about the technology, including cryptocurrencies, among the country's public:
“As it stands, roughly 74 percent of Bitcoin nodes are Chinese, while about 225 blockchain patents have also been filed in China. And last year, the Cyberspace Administration of China administered new regulatory guidelines that will require all blockchain and crypto-based businesses to register with the government and pass along data regarding their customers.”
Though Xi initially was even against blockchain, several of the technologies use-cases appear to have changed his tune, specifically the idea of incorporating it into the Chinese government’s records. According to the South China Morning Post’s Editorial Board, streamlining government records into an immutable ledger could go far in stamping out long-standing issues of corruption in China. The board also states that the further support of blockchain technology could benefit both China’s public and private sectors, a rare net positive for everyone!
China taking blockchain under its wing could be a good thing. For starters, it’ll do wonders for mainstreaming blockchain technology. However, the current use cases China seems to be interested in are actually all things an advanced shared database could do, right? Considering their disregard for decentralization, China's projects don’t appear to need most of the unique aspects of blockchain technology. Is chanting “blockchain” just an effort to reap some of the benefits of this overly hyped market? Considering China’s track record of not being the most transparent country in the world, I’m skeptical of them co-opting a technology widely known for its accountability.