Contrary to what many in the western community believe, China is not opposed to blockchain technology.
The main contradiction in China's attitude towards digital currency has always been around the potential financial fraud and capital flight brought by bitcoin and some privately issued cryptocurrencies.In fact, since 2014 the people's bank of China has launched a blockchain-based digital renminbi project, which has received 71 patents and launched the trial operation of a digital cheque settlement platform between Banks.
The digital renminbi project has huge economic and political implications for China, and if widely successful, it will effectively expand the pboc's influence on the domestic and international economies, as well as on the geopolitics of currencies and the future of non-sovereign cryptocurrencies such as bitcoin.
To understand the pboc's motives, we must first distinguish between "digital fiat money" and "digital fiat money".The two are not the same; both have quite different effects on the money supply and the balance of power between central Banks and commercial Banks.
"The digitalization of fiat money" stems from the emergence of electronic payment/clearing and mature inter-bank IT system, which enables commercial Banks to generate credit supply more effectively and independently and expand the broad money supply (M2).In contrast, the "digital fiat currency" supported by the blockchain technology is independently issued by the central bank, and its circulation and withdrawal are under the control of the central bank, which is part of the basic currency.
Traditionally, central Banks have had only direct control over the creation and destruction of base money, but only indirect control over the broader, credit-flow-driven money supply.Now, with a digital fiat currency, it is possible for central Banks to bypass commercial Banks and regain outright direct control of money creation/supply, thereby structurally centralizing the power to formulate and implement relevant monetary policies and influencing socio-economic activity at a smaller level.
In Chinese society, highly advanced digital payment systems such as alipay and WeChat have created a cashless economic system. In terms of credit and savings, alipay and WeChat have begun to encroaching on the original fields belonging to commercial Banks.This is a form of money digitization, which is an abstract application on the M2 money supply level based on the network of commercial bank accounts.
The original digital fiat currency will be systematically incorporated into the central bank's benchmark currency, thus restoring the pboc's control and influence over all levels of economic activity and achieving stronger supervision.As fan yifei, deputy governor of the people's bank of China, said in a public interview: "with the consideration and help of technological innovation and other factors, we can gradually make the transition to the issuance and circulation of digital renminbi and implement effective supervision of the private sector."
Speaking through digital RMB: legal tender based on blockchain, make M0 great again
Too much M2 supply and a lot of shadow banking
From 2007 to 2017, China's M2 supply increased from 40 trillion yuan to 170 trillion yuan ($25.5 trillion), with an average annual growth rate of 15%, far exceeding the nominal GDP growth rate of about 10% in the same period.Much of this expansion has been caused by excessive lending by commercial Banks, with money flowing to property development, local government infrastructure projects and state-owned enterprises.
This led to a highly leveraged banking system and left the Chinese economy with huge debt risks.
Moreover, because of shadow banking, the M2 measure understates China's real broad money growth rate.High-yielding "wealth management products" and structured deposits offered by Banks, as well as Internet finance such as peer-to-peer lending, make up a separate rmb70tn financial industry.
Wealth management products alone grew from 500 billion yuan in 2007 to 30 trillion yuan in 2017.These "stealth money issues" do not count towards M2 and are often hard to track because they are hidden off bank balance sheets, making it harder for the central bank to manage China's economic cycle.Banks and financial institutions at all levels are mainly implementing stricter reporting and supervision in response to this problem, but this cannot solve the problem from the deep level.
Achieving change requires a new financial system.This is also possible with the digital renminbi, which is considered a monetary management tool for financial stability.
Speaking through digital renminbi: blockchain-based fiat currency that makes M0 great again the gap between China's bank assets and GDP growth is accelerating
Speaking through digital RMB: legal tender based on blockchain, make M0 great again M2 money supply is highly consistent with bank debt growth
How will China's central bank design its digital currency?
While the central bank is still considering different network design possibilities, it appears likely to be a network that requires authorisation, with nodes controlled by the central bank and the country's largest Banks.That means deals will be visible to Banks and governments, but not to the public.
Yao qian, head of the preparatory group for the digital currency research institute of the people's bank of China, said the digital currency system designed by the people's bank of China has several key elements:
Private cloud managed by people's bank as IT infrastructure;
The database, distribution and ledger management on the private cloud is completely controlled by the people's bank of China.
A reserve database accessible to commercial Banks, either on the central bank's private cloud or on the bank's local private cloud;
Digital RMB wallet client, issued and maintained by the people's bank of China, for all units and individuals;
Authentication center, the people's bank of China can manage the identity information of institutions and users;
The registration center completes the registration of currency ownership and keeps the ledger of digital currency generation, circulation and inventory management;
Big data analysis center, used for anti-money laundering, payment behavior analysis, regulatory control index analysis.
Some might wonder why there is a need for blockchain or distributed ledger technology (DLT) if the nodes are not highly decentralized, providing a better coordination paradigm than traditional money supply management that relies heavily on bookkeeping.Blockchain's tamper-proof features and private key encryption technology prevent fake transactions and forgeries, while also making it easier for China's central bank to manage the currency.
Speaking through digital RMB: legal currency based on blockchain, M0 makes China's central bank great again digital RMB currency flow
What is the impact at home and abroad?What's the future?
The introduction of digital renminbi would not only make cash and currency obsolete (which has actually happened in China), but would also make it easier for commercial Banks and M2 to control.This means the people's bank of China can more effectively control and manage the overextended debt and credit markets.
Because of the traceability and programmability of blockchain, it will be much more difficult to hide banking products and services on the balance sheet.
This also makes it easier to implement monetary policy, more accurate in its assessment, and more accurate in the measurement of money supply, velocity of circulation, money multiplier and distribution.The people's bank of China can write rules on the direction of digital yuan at the code level.If it wanted to cool the property market, for example, it could simply set up procedures to prevent the digital renminbi from entering the property sector.
For regulated individuals, their consumption history and balance of assets can be clearly seen on the blockchain, which makes it easier for regulators to assess credit, identify money laundering, prevent tax evasion and capital flight.Of course, that could reinforce criticism from privacy advocates of China's social-credit scoring model, but it's unclear whether that criticism will have any impact on the government's thinking on such issues.
The digital renminbi could even increase its influence in overseas economies.As One Belt And One Road's reach deepens, a digital, borderless and stable currency will facilitate international trade between more than 60 countries along the route.Together with China being venezuela's biggest creditor, with more than 14 per cent of the sovereign debt of African countries, this would allow China to offer a digital renminbi as the next reserve currency for emerging market economies to their Cousins facing a local fiat currency crisis.
Will these countries be more willing to let China influence their economies and monetary policy than to rely on the U.S. federal reserve's dollars?After all, the dollar was the biggest beneficiary in world war ii, with the United States acquiring nearly 40 percent of the world's gold reserves, making the dollar the only currency to anchor gold in the postwar bretton woods system.If the yuan becomes a reserve currency for these emerging nations, it will be crucial to China's global political expansion.
There is no definitive answer.But it would be highly co-ordinated with the de-dollarisation of monetary policy that China is pursuing vigorously: reducing dollar holdings in its foreign exchange reserves, sharply increasing its gold holdings and selling us treasuries.In any case, these moves are likely to increase tensions between the us and China and could even force the us to adopt a similar digital dollar model.In fact, the federal reserve has implicitly recognized the existence of a large number of stable anchored dollar COINS such as USDC, TUSD, GUSD and so on in its digital dollar. In fact, it serves as an important link between legal currency and non-sovereign digital currency in the circulation of digital currency.
We have a little time before these problems become urgent.Still, change is coming.People working on the project say they will conduct a 10-minute review of the application process
Years or longer, with a lot of observation and adjustment, and various use case experiments in special economic zones such as shenzhen.Ultimately, the plan would use incentives such as higher transaction costs for cash to push people to use digital currencies.
Cash is expected to disappear almost entirely.
What does this mean for bitcoin?
A final question: what does this mean for decentralized, non-sovereign cryptocurrencies like bitcoin?
While non-sovereign cryptocurrencies first emerged in a climate of censorship resistance, the underlying blockchain technology is now being used by central Banks to further centralize their economic and monetary policy powers, which seems somewhat inconsistent.
But from the Chinese government's perspective, the reasons are not hard to understand.In the long run, digital renminbi could make global trade more efficient and money laundering more difficult.
However, given the global scope of the central institutions (including various institutions both private and public) the concerns of the monitor, and mismanagement of monetary policy may trigger a Venezuelan bolivar currency crash that long-term risk, there is no reason to believe that such digital fiat project can effectively weaken the ordinary people for encryption non-sovereign currency consensus, on the contrary, also could promote the class of sovereign encryption monetary demand.
A programmable fiat digital currency can provide a seamless passageway from fiat to cryptocurrency.Government programs aimed at centralizing control of currencies could intensify competition from non-sovereign monetary systems like bitcoin.In an environment where government money is tightly regulated and controlled, and where financial privacy cannot be guaranteed, anonymous, non-sovereign currencies such as bitcoin or privacy COINS are becoming increasingly important.