If you need a country in which the cryptocurrency and blockchain paradigms seem to change daily, China is your target. It seems that some sort of new policy or announcement is coming out of the Middle Kingdom with every news cycle. The one thing we know for sure is that the future of cryptocurrency in China is unsure. One day it looks bright, the next day it looks dim.
Two of the more recent stories out of China involve a brand-new blockchain app that allows Communist Party members to pledge their allegiance, and public speculation by a former Chinese official that the People's Bank of China (PBC) will be the first to issue a national digital currency.
What makes things so confusing in China is that there is no clear regulatory framework in place. Average citizens can own and trade cryptocurrencies to their heart's content. Merchants can even accept crypto payments if they like. But financial institutions are prohibited from holding digital assets or facilitating transactions based on them. So while cryptocurrency is technically legal in China, it is practically unusable.
Where does this leave the Chinese government? In a position of deciding whether to continue its own use of private cryptos or take the plunge and release a central bank digital currency (CBDC). To get a better feel for what is going on here, let's look at the two previously mentioned new stories.
Pledge your allegiance with blockchain
This first story is less about cryptocurrency and more about how the Chinese government views blockchain as a tool for its own success. According to CoinDesk contributor Wolfie Zhao, the Chinese Communist Party (CPC) just released a decentralized app (dapp) with one primary purpose: to allow party members to permanently pledge their loyalty. 'Permanence' is the key operating word here.
One of the hallmarks of blockchain ledgers is immutability. In other words, there is no changing or deleting a transaction once it has been verified and added to the next block in the chain. A record in a completed block is a permanent record. What does that mean to CPC members who pledge allegiance to the party through the party's new app? It means a permanent record of that person's commitment.
This has obvious benefits to the party in that it can permanently keep track of who is a committed member and who is not. But the ramifications of such tracking are another matter altogether. It is quite possible that the CPC could use its blockchain data for nefarious purposes. We will leave it at that.
If we take this concept one step further, it is not hard to imagine a day and age when blockchain technology is being used to drive election polling. Not that it would matter much in China, but it would be a big deal in other places. Indeed, an experimental system is already up and running in Russia. Certain voting precincts in Moscow allow blockchain voting on noncritical, community issues.
Imagine what would happen if all the polling technologies in the world were replaced with blockchain polling. Imagine being able to vote for your national and local leaders using a smartphone app. It sounds tantalizingly wonderful except for one small detail: the immutability that makes cryptocurrencies like Bitcoin more secure could also be used to manipulate polling results.
Time will tell whether CPC members will show a willingness to pledge their allegiance to the party through the new app. If they do, who knows what the CPC will do with the data? If they don't, it will be back to the drawing board for the party.
Predictions of a CBDC
Moving on, a second CoinDesk story from contributor David Pan suggests that the People's Bank of China (PBC) is generally serious about releasing a government-backed digital currency as soon as possible. In terms of official statements, the government has been back and forth on this for several months. But now we have affirmative statements made by a former high-ranking congressional official.
Pan reports that former Congressional Financial and Economic Affairs Committee deputy director Huang Qifan recently admitted in public comments that the PBC will be the first central bank to issue its own digital currency. He is wrong on one count: Venezuela has already done it. That aside, the deputy director's comments seem to back up rumors that China is racing to release a digital currency sooner rather than later.
Huang also used the occasion of his speech to explain how and why CBDCs represent the best way to deal with competition from private stablecoins. He specifically mentioned Facebook's Libra saying that he does not believe the project will succeed.
"Some companies attempt to challenge sovereign currency by issuing bitcoin or Libra," Huang said. "The decentralized blockchain-based currencies are not supported by sovereign credit and hard to become real wealth."
It is clear that Huang is no fan of Libra or any other privately owned and operated cryptocurrency. Perhaps that's why he is so adamant about the PBC releasing its own digital currency. He and his colleagues still in government see private cryptos as an economic threat. They do not intend to stand by and do nothing, thus they have been working on a national digital currency for some time now.
Confusion is to be expected
If you follow cryptocurrency news in detail, you know full well that many of the statements coming out of China are contradictory. One government official says one thing and another contradicts a day later. The government releases official policies one day followed by new policies months later. This confusion is to be expected.
Why? For a couple of reasons. First is the reality that launching a national digital currency is not as easy as it sounds. You or I could fork Bitcoin's core and, within minutes, create our own cryptocurrencies. We could do the same thing with the Ethereum core. But such a cryptocurrency would be useless in the immediate future because there is nothing backing it. Central banks have much the same problem.
A central bank like the PBC may want very much to launch a stablecoin. But whatever they come up with has to have some sort of inherent value if people are going to use it. It would be one thing if the token were merely a digital representation of the yuan. Chinese citizens could trade in their minted coins and paper bills for digital tokens instead. But if the idea is to create something completely separate from the yuan, you now have a value problem.
Building the infrastructure
The second problem lies in building the infrastructure to support a national digital currency. Just creating a CBDC is only half the equation. You need to have a computer network capable of supporting it as a day-to-day currency. That means a network as fast and robust as the Visa and MasterCard networks that power global business.
Unfortunately for cryptocurrency developers, such networks do not yet exist. There isn't a single crypto network on earth capable of doing what Visa's network can do. Without such a network in place, it is unrealistic to expect any CBDC to make its corresponding fiat obsolete.
There is no way to know if infrastructure problems are the thing holding up China's CBDC, but it's a safe bet that they are struggling in this arena. The code is already out there in the cyber sphere, as are all the strategies and methodologies for facilitating crypto transactions. The only thing missing on a global scale is infrastructure.
Where it leaves China
So, where does all this leave China - as both an economic power and a potential cryptocurrency haven? It leaves them holding a bag full of who knows what. In other words, government and central bank leaders probably don't know any better than anyone else how soon a CBDC will be ready to go. And when they do finally think they are ready to launch they will do so without any guarantees of success.
Meanwhile, party leaders understand the value of blockchain as a record-keeping tool. Whether or not a CBDC ever gets off the ground probably won't dissuade the party from distributing their new app among members and compelling its use.
Meanwhile, expect the Chinese government to continue investing heavily in blockchain technologies. They clearly see the benefits of blockchain in a variety of applications ranging from monetary systems to record-keeping. It will not be a surprise if China declares within the next couple of months a goal to be the dominant blockchain producing country in the world.
For the rest of us, China's obvious hostility to private cryptocurrencies provides some important insight to what we might be up against. Huang's recent comments lend credence to rumors that China wants its eventual CBDC to become the world's preferred reserve currency, replacing the U.S. dollar. That would mean big things in both the balance of power and global economics.
If you follow crypto news, keep your eye on China. What they do over the next 6 to 12 months could have major implications around the world.