China’s Answer To Crypto Is The Digital Quartz Yuan

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As part of its quest to become an advanced economy, China initially appeared to embrace cryptocurrency. In 2011, just two years after the birth of bitcoin, the country opened its first bitcoin exchange. In 2016, both a center of commerce and a maker of equipment used to mine bitcoin, China was a very influential player in the industry.

But since 2012, when Xi Jinping took over China, that crypto calculation has changed. It is increasingly clear that the essence of the cryptocurrency offering which can be freely issued by private companies and individuals, and which enables decentralized and anonymous transactions, is deeply at odds with the approach of the Chinese Communist Party ruling the digital economy under Xi. In 2019, as Facebook dreamed of a crypto project known as Libra, Mu Changchun, a senior official at China’s central bank, warned that a super sovereign digital currency developed by the private sector was definitely a threat to central bank authority.

In the same year, Mu was appointed to head the team dedicated to developing the cryptocurrency-inspired Chinese digital yuan idea, while giving Beijing back the power of control. Now, as China begins to enforce its toughest crackdown on crypto, the digital yuan is closing in on reality.

What is the digital yuan?

After nearly eight years of development, the digital yuan entered the wallet of ordinary users last year in government-led trials. Digital currency is distributed to consumers by the central bank through six major commercial banks, usually through a wallet app. Users can make payments by scanning QR codes or using portable devices, including physical wallets embedded in digital yuan chips developed by Postal Savings Bank of China, one of the six banks. As of June, around 20 million yuan digital wallets existed and the transaction volume had reached 34.5 billion yuan ($ 5.3 billion), according to the government.

In designing and promoting the sovereign virtual currency, the Chinese government has three main objectives, in addition to being at the forefront of the deployment of a digital currency.

He wants to better understand how money circulates in the country, what is hidden in cash transactions and even in mobile payments whose data belongs to private companies. This is apparently to improve monetary policy and also to prevent illicit activities, including money laundering. It aims to regain control of payments which are increasingly negotiated by private companies such as Ant Groups Alipay and Tencents WeChat Pay. As part of a broader regulatory crackdown on tech, these two companies have faced antitrust investigations and pressure to share data with the state. She hopes to eventually strengthen the international position of the yuan (easier said than done if everything else stays the same).

Initially, many doubted that a state-developed digital yuan wallet could compete with payment systems already provided by Chinese tech giants. The digital yuan doesn’t have many advantages over existing payment tools, but looks more like food stamps which will come with a lot of restrictions, so personally I would resist using it, one Weibo user said, referring to the stamps used to obtain rationed food in the 1980s.

But the digital yuan incorporates a key function that could make it more attractive, especially among rural users: people can transact with it even if they are not connected to the Internet, simply by tapping together two compatible phones. digital yuan. This [offline function] is extremely powerful in China, especially in rural areas, says Fiorenzo Manganiello, founder of private equity firm Lian Group, which owns renewable bitcoin mining farms in Europe. This is clearly a big advantage.

Global concerns over the digital yuan

The rest of the world will have their first major glimpse of the digital yuan at the Beijing Winter Olympics next year, and the Chinese government has been busy preparing for this deployment. The Games will feature ATMs that can convert foreign currencies, including US dollars, into virtual Chinese currency, which will be carried in a digital yuan wallet card. They want the digital yuan to have some sort of Olympic release party, says Josh Lipsky, director of the Atlantic Council think tank’s GeoEconomics Center.

But the road to internationalization will not be easy. On the one hand, China’s tight exchange rate control has already hampered the wider use of physical yuan, and this policy will continue to deter some from adopting the digital version. A digital yuan does not solve the problem that some people who hold renminbi overseas will want to sell that renminbi and exchange it for dollars, Victor Shih, a Chinese political economy expert and professor at Quartz, told Quartz last year. the University of California at San Diego. Almost two-thirds of the world’s foreign exchange reserves are held in US dollars, compared to 2% in yuan.

Beijing’s reputation for glimpsing citizens’ lives through apps could also be a major concern for potential digital yuan users. Surveillance objections could even see countries pressuring their athletes to avoid using the digital yuan at the Games; in the United States, some politicians in the Republic are already applying this pressure.

Unlike truly anonymous cryptocurrencies, China’s central bank claims that the digital yuan will come with controllable anonymity, as users can only get the digital wallet by registering with their cell phone number. Since Chinese people must register their numbers with real identities, this promise may not carry much weight. Mu, the central bank official, said that service providers generally do not provide user information (link in Chinese) to the bank, which makes the wallets registered. using mobile numbers completely anonymously.

But it is the broader ethics of control that presents concerns for international companies. What do you think of the digital yuan and the ability of the People’s Bank in government to potentially stop payments if something goes wrong? Lipsky asks. I think western investors and western companies are watching the development of the digital yuan very closely and considering what it means for their business operations in China.

The threat of currency

Although China has been working on the digital yuan since at least 2014 (pdf), its efforts have become urgent with the emergence of stablecoins like Diem (formerly Facebooks Libra and yet to be officially launched). Stablecoins are cryptocurrencies that peg their value to traditional assets such as the U.S. dollar, thereby removing some of the volatility characteristic of cryptos, which could potentially give them wider appeal.

Certainly, the development of cryptocurrencies has enabled the development of the digital yuan, says Zennon Kapron, director of Kapronasia, a Singapore-based fintech consultancy. [It] really opened the doors in terms of technology or concept of being there.

In China, a huge chunk of digital payments is already handled by private-sector mobile wallets like Alipay and WeChat Pay, whose level of control is already a concern for Beijing. Stablecoins have spread fear of pockets of anonymous digital payments and bypassing the yuan entirely.

The idea that you might have a global stablecoin attached to a business that might be primarily dollar-based, and therefore transactions might occur within Chinese borders on the dollar or on a basket of currencies, it’s is worrying, says Lipsky. Because you are losing control.

China’s volatile history with cryptocurrency

Bitcoin emerged in 2009, amid the global financial recession. Two years later, BTC China, the country’s premier bitcoin exchange, began allowing Chinese citizens to trade the cryptocurrency. In 2013, a group of Chinese crypto bros founded Bitmain, today the world’s largest maker of bitcoin mining machines.

Crypto has found fertile ground in China for several reasons, not least because many locals in the country were already familiar with the concept of virtual currency thanks to Tencent. The gaming giant’s Q coin was not a cryptocurrency, but was used to pay for value-added services and was already changing hands in secondary markets.

For people in China under capital controls and looking for places to invest in addition to top-notch real estate, bitcoin was also both an investment option and a way to transfer funds. abroad. Between 2010 and 2016, several crypto exchanges and manufacturers of bitcoin mining gear were established in China, as investors crammed into waves of initial coin offerings.

This did not suit Beijing. China banned ICOs and crypto trading in 2017, the same year the development of the digital yuan jumped into high gear. In 2021, China banned crypto mining, forcing many miners to flee to countries like the United States or Kazakhstan. The government has also ordered banks and payment companies to ensure that they do not provide services for crypto-related transactions, a crackdown that could make the digital yuan one of the few viable digital options in the world. country.

They are ensuring that as they enter this new era of central bank-backed currency, all potential risks to the market are removed or mitigated, Kapron said. [The] the crackdown on mining and cryptocurrency fits into that narrative. As we move through this new situation, you remove all risk and try to do your best to make sure we start with a clean slate.

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