China to Launch Own Cryptocurrency: Here’s What We All Need to Know

What happens when the government of the world’s second largest economy decides to issue its own cryptocurrency?

China sent shockwaves with its recent announcement about issuing its own version of Bitcoin. Government-run newspaper Xinhua ran a front-page story that praised Bitcoin as a successful application of blockchain technology, marking a dramatic change of attitude towards cryptocurrency adoption.

Back in September 2017, China banned all cryptocurrency exchanges as Bitcoin prices soared. The government feared that citizens may convert their yuan to decentralized and difficult-to-track crypto assets. China has always been wary of its citizens moving their assets out of the country.

This is an interesting development in the world of crypto assets and doing business in general. However, it may not be as good as it sounds. Having the support of an influential government may appear encouraging for cryptocurrency, but there are fears that the move may entail some uncomfortable recoil.

According to a senior official of the People’s Bank of China (the country’s central bank), they are close to issuing their own cryptocurrency. In-house researchers have been studying cryptocurrency for over five years and have been working intensively since last year to develop the necessary systems. A law passed in October will take effect in the first month of next year to enable the development of cryptography business and guarantee cyberspace and information security. Details about China’s cryptocurrency are scarce for now, but things will become clearer once the said law is approved.

From the get-go, China made it clear that it is developing a Central Bank Digital Currency. This is significantly different from the idea of having a decentralized digital medium of exchange championed by cryptocurrency advocates. As such, cryptocurrency supporters and businesses are worried that China’s Big Brother tendencies may extend to its brand of cryptocurrency.

The concerns are not entirely unfounded. Peterson Institute for International Economics in Washington researcher Martin Chorzempa, in an interview with The New York Times, expressed his concern on the potential monitoring the Chinese government may have over the users of its cryptocurrency. “It’s extraordinary power and visibility into the financial system, more than any central bank has today,” Chorzempa said.

The use of China’s cryptocurrency may be tagged as a potential threat. Businesses may need to find ways to ascertain that it does not facilitate activity monitoring or compromise their customers’ private information. It may be necessary to use data masking or other solutions to protect data that should not be made available to third parties, including government regulators.

With this digital currency, analysts believe that China wants to replace cash in circulation but without affecting credit and monetary policy. Additionally, this is seen as a way of promoting the circulation of the yuan and its widespread acceptance and use internationally.

China is said to have expedited its state-sponsored cryptocurrency plan after Facebook’s Libra announcement. Facebook has an influential presence worldwide, so the perception is that it can introduce a cryptocurrency that can go mainstream. China apparently wants to one-up the social media giant to take the lead in the global cryptocurrency race.

China has already taken out cryptocurrency mining from the list of “undesirable activities” based on the new edition of China’s Industrial Structure Adjustment Guidance Catalog. The lifting of the ban will take effect in 2020, which means more Chinese consumers will soon be exposed to the nitty-gritty of crypto asset mining and use, in preparation for the release of the People’s Bank of China’s official cryptocurrency.

It’s also worth noting that even as China banned cryptocurrency trading and transactions, many Chinese still manage to do cryptocurrency trading and other related transactions by using foreign exchanges, especially those based in Hong Kong and Japan. It is more sensible for China to officially allow and dominate the crypto market than to let foreign players establish a significant presence (in China) through the underground economy.

China is well on its way to become a cash-ditching society. In 2018, it is estimated that around 600 million Chinese have been using online and mobile payment systems. More than two-thirds of Chinese consumers prefer to go cashless when paying for food, groceries, services, and various other transactions.

The use of a blockchain-backed digital currency in China will only create slight changes, since most Chinese are already accustomed to doing it cashless. If anything, consumers will just need to become familiar with the use of cryptocurrency wallets. This shouldn’t be difficult for the largely tech savvy Chinese consumers. Also, Chinese payment platforms will most likely simplify the process by integrating cryptocurrency wallets in their standard interface. Similarly, they will likely become crypto exchanges themselves to simplify the process of acquiring or converting crypto assets into fiat money, vice versa.

It would be different if a non-Chinese cryptocurrency were to penetrate the Chinese market. As Tencent noted in a white paper, Facebook's Libra can threaten the digital payment systems currently dominating China and other Asian markets, particularly WeChat and Alipay. Tencent acknowledges Facebook’s potential in winning market share in places with no credible local currency or access to basic financial infrastructure. Libra may even attract Chinese cryptocurrency enthusiasts who trade in the dark web or black markets.

In its “World Economic Outlook: Challenges to Steady Growth” report, the International Monetary Fund (IMF) mentions that the rapid growth of cryptocurrencies could create new vulnerabilities and risks for the global financial system. These risks are attributed to the underlying technologies and systems (of cryptocurrency) that are relatively new and yet to extensively tested.

Cryptocurrency sanctioned by the Chinese government will indubitably attract users not only in China but in many other parts of the world. It will most likely become as valuable as the yuan for global trading. However, as the IMF report points out, there are risks involved. One incidence of theft or actual evidence of activity monitoring (by the Chinese government) can lead to dumping, which can drastically drop the cryptocurrency’s price (or exchange rate), unless the Chinese government develops a way to control the volatility.

China’s cryptocurrency may become widely adopted, but it’s unlikely to change the global financial system significantly. Since it will not be similar to Bitcoin in being decentralized and democratized, it may operate just like a digital fiat currency. Its key goal will be to enable secure payments without shadowing Bitcoin’s confidentiality/anonymity feature.

Bitcoin price rose when China announced its change of policy on cryptocurrency. However, it’s difficult to predict if crypto asset holders or enthusiasts will rush to buy China’s cryptocurrency. Given China’s propensity for regulation and monitoring, purists may not be keen on it. If it will be too regulated, it will not become a competitor to other cryptocurrencies but more of a digitized version of China’s fiat currency.

The possibility is too remote. While banks are said to be fearful of Bitcoin and other crypto assets, many have actually started setting up systems and infrastructure to provide services related to it. Again, China’s cryptocurrency is reportedly not going to replicate the core attributes of Bitcoin, so it will not be offered as an alternative, let alone a better option.

To clarify, China’s aggressive involvement in cryptocurrency is not bad by any measure. It’s a welcome development. At the very least, it can demonstrate the advantages and disadvantages of a regulated cryptocurrency. It can help improve blockchain technology and foster cryptocurrency innovations.