China’s Centralized Crypto Pilot Project Fails to Impress Citizens

The Currency Wars Ensue

With Bitcoin and cryptocurrencies threatening the legacy financial system, countries began looking into digital currencies. The goal would be to stave off the devastating impact an alternative decentralized finance system would wreak on the economy. Such government-backed currencies, called central bank digital currencies (CBDCs), attempt to have the best of both worlds — the security, speed and convenience of blockchain and yet still let governments retain control.

In recent years, several countries have either or are actively looking into their version of digital currencies. But China’s CBDC ambitions have put western governments on tenterhooks like no other country has.

That’s because the country is already a formidable global economic powerhouse. And Xi Jinping’s government has made no secret of its desire to wrest the global supremacy of the US dollar. A digital yuan could plausibly provide a leeway for this to happen.

China is the King of Trade

It doesn’t help that China is now king on the international trade stage, having snatched that crown from the US. As the global reserve currency, the US dollar is used as the intermediary in international settlements, translating into demand for the US dollar. What if a digital yuan took over?

Remember, since transactions would be blockchain-based, transaction fees would be dramatically reduced and third parties would be eliminated. China has claimed it has no plans to dethrone the US dollar or any other currency, saying it only “wants to allow the market to choose.” But such reassurances are nothing to be trusted.

It’s this possible scenario that’s causing unease. Several government departments under the Joe Biden administration have been closely looking at the digital yuan’s evolution to better understand its long-term impacts, per a report by Bloomberg. When Mark Zuckerberg had to appear before the US congress to explain Libra, he tried calming fidgety lawmakers by reminding them that a China CBDC was the real threat, not the proposed Facebook-backed cryptocurrency.

All these concerns are legitimate. But for now, for all the big, scary bang surrounding an internationalized digital yuan, it seems to have left only a whimper.

Background on China CBDC

China began exploring a digitized version of its money in 2014. It has so far conducted trials of the currency, usually by giving citizens free money to shop with participating retailers.

The first-ever public trial was in October 2020. About $1.5 million in cash was given away to 50,000 people in the Shenzhen region. Supermarkets, pharmacies and even Walmart were among participating merchants. Its most recent trial was last month, this time involving 500,000 people in six provinces.

It Is All About Control

Chinese regulators have said the new currency will help combat money laundering and expand financial inclusion. But experts see much more underhanded motives — China’s Communist party could use the digital currency to exert more control over the country’s fintech industry.

Fears abound that the government will also capitalize on the real-time traceability of transactions to rein in dissidents. The bottomline is, China will highly likely use a digital yuan to strengthen its already massive state surveillance powers.

Indeed, this is one of the ‘turnoffs’ about the project to participants quizzed by Bloomberg. 33-year old Jan Chen said it was “a little scary” that authorities could have access to payments. Such concerns exist, despite clarification by PBOC’s Digital Currency Research Institute that e-wallets will be “anonymous” to the central bank.

The move by China has rattled not just western central banks nervous but also the entire traditional finance establishment. The US and the EU might be forced to create their own digital currency to offset any destabilization an internationalized renminbi could cause. But those state-backed and digitized currencies could pose an “existential threat” to banks, per Forbes.

China’s Relationship With Cryptocurrency

China has never really welcomed cryptocurrency. It is little surprise, given its ban on ‘western’ social media services like Facebook, Twitter, YouTube and other types of high-ranking media.

You don’t expect the same government to let a decentralized, irreverent currency disrupt the financial order. Its first crackdown on crypto was in 2013 when financial institutions were barred from offering Bitcoin-related services. In 2017, the government shut down local crypto exchanges when China was a hotspot for Bitcoin trading — accounting for 90% of the global volume. 

In 2019, the People’s Bank of China announced it was blocking access to foreign crypto exchanges and ICO websites, arguing digital currencies “are not supported by any real value.” It also cited easy manipulation and lack of protection by Chinese law regarding crypto trading agreements.

This month, the Asian country fired another salvo, expanding the scope of prohibited services that financial and payment institutions must not support. Under the new regulations, financial institutions should not allow the “registration, negotiation clearing, and settlement” of virtual currencies.

In a statement, three industry bodies: the National Internet Finance Association of China, the China Banking Association and the Payments and Clearing Association of China decried the recent “rebound of speculative trading activities of virtual currency” that has “seriously damaged the safety of the people’s investments and damaged normal economic and financial orders.”

The news from China contributed to Bitcoin’s dramatic price drop after Tesla pulled the plug on Bitcoin acceptance. The currency touched under $30k for the first time in three months after the announcement.

What is the Way Forward?

China best knows its motives for creating a digital yuan.

Whatever they are, the currency’s success would not augur well for the current global economic power dynamics. It could force other major economic players to follow suit, and that would change the face of finance as we know it. But we don’t know when China will launch the currency or what the actual implications will be. What we know is the project is so far struggling to make an impact at home.