Picture Credits- Digital Yuan
China appears to be in favour of Blockchain but skeptical of Cryptocurrencies
Wanting to be at the forefront of technology including Artificial Intelligence, Machine Learning, Internet of Things, and Blockchain. China’s 13th five-year plan describes blockchain as a “strategic frontier technology”. Cryptocurrency on the other hand is viewed with skepticism having the potential to cause social and financial instability.
Unfavorable stance on Cryptocurrencies
Given strict currency controls on the RMB, China is concerned about cryptocurrencies being used as an alternative to RMB circumventing forex controls. The regulation “Notice on Preventing Bitcoin Risk” from 2013 states that Bitcoin cannot be treated as currency as it is not issued by a monetary authority and is not legal tender. The regulation specifies that financial institutions cannot make or receive payment in Bitcoin or provide any Bitcoin-based services. Ironically, despite cryptocurrency-related activities by financial institutions being banned, they are tasked with the job of monitoring cryptocurrency transactions. The “Tips on Preventing the Risks of so-called Virtual Currency such as Bitcoin” released in 2017 raised concerns about cryptocurrencies being used for illegal activities like drug trafficking and money laundering given the anonymity and cross border access that they provide. It also talked about the risks to unsophisticated investors who might lose lifetime savings in a speculative asset class that they don't fully understand.
A different regulation in 2017 banned Initial Coin Offerings (ICOs) after wild speculation in ICOs earlier that year with over 65 ICOs in which Chinese investors invested ~US$400mn.
Despite unfavorable stance, cryptocurrencies are not banned
While financial institutions are not allowed to offer crypto-related services, cryptocurrencies are not to be used as currencies and cryptocurrency exchanges and ICOs are banned, NO regulation actually bans cryptocurrencies themselves or prevents individuals from holding or transferring them. In fact, recent court decisions have even given Bitcoin the status of “virtual property” that is “valuable, scarce and disposable”. A recent Civil Code includes cryptocurrencies in the scope of inheritance rights.
Favorable stance on Blockchain
Unlike cryptocurrencies, China looks quite favorably at Blockchain and Distributed Ledger Technology (DLT). It is keen to develop internal capabilities in this technology. However, its regulation of the technology appears to be going against the original principles of privacy and anonymity that blockchain pioneers aspired for. The Blockchain Information Services Management Regulations (BISMR) requires enterprises providing blockchain-based services to register with regulators, conduct full KYC of users, and monitor and prevent illegal activities on the blockchain.
China is encouraging R&D on its own Digital Currency
China appears cognizant of the fact that new technologies will replace paper money. This explains the developments around Central Bank Digital Currency (CBDC) called Digital Currency Electronic Payment (DCEP). Before crypto enthusiasts go celebrating that they’ve made a believer of a skeptic, it's important to understand that not only is DCEP nothing like Bitcoin but also it actually goes against the basic principles of Bitcoin. Bitcoin is all about decentralization while DCEP aims to further centralize the monetary system, giving greater power to Beijing to monitor financial transactions and trace cash flows. In fact, it doesn’t even use blockchain technology. The only connection to blockchain is the use of asymmetric cryptography.
The above is likely to be true for the American version of digital currency as well. Any central bank-issued digital currency is likely to be subject to the same monetary supervision that extends to fiat cash.
And it is investing in Blockchain Infrastructure
Another key development is that Blockchain-based Services Network (BSN), a blockchain infrastructure firm backed by the Chinese government has integrated its data centers with 6 blockchains: Ethereum, EOS, Tezos, EOS, NEO and Nervos. Miners on these blockchains can run nodes and DApps using data storage and bandwidth provided by BSN. BSN services are more cost-effective when compared to the likes of Amazon Web Services or Alibaba Cloud that the nodes use currently.
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