China has been a leader in currency innovation since the deployment of paper currency in 1280 and a centralized banking system. And now?
Article written by Lorenzo Pasinato, member of Liuc-Finance and Investment Club.
Introduction
China has always been heading for what concerns currency innovation. For example, thanks to Marco Polo’s diary in 1280, we have witnesses of the first paper currency deployed in the history, along with the first centralized banking system that was trusted by the population allowing long distance transactions.
Even now, due to the decision of adopting cryptocurrencies and other types of financial innovations, China is becoming one of the most advanced countries in the world under the monetarist point of view.
How China set its predominance
China realized the presence of cryptocurrencies since the early 2000, but the government initially had specific worries regarding application of cryptocurrencies and blockchains in the country economy. Blockchains and cryptocurrencies would have been a problem, according to the authority, to national security, especially due to the high risk of immutability of information through blockchain and anonymity given by the purchase of cryptos. These two aspects would have been in contrast with government efforts, that were mainly focused on the censor of content, that was judged not appropriate from the Chinese administration.
Although as the time went by, the Chinese government slowly realize that not just the popularity of cryptos and blockchains was getting higher and higher, but also that this new technology could be vital for implementing Chinese technological development and economy.
China demonstrated vital interest in blockchains and in crypto currencies towards the point that at the end of 2010’s, 95% of all the cryptos mined in the world came from China. This discovery initially made the government commission a ban towards all the cryptocurrencies in China, starting from the early 2010.
The digital yuan
However, after a first period of resilience and indecision, China decided that crypto represented a significally opportunity for the country. By exploiting blockchain and cryptocurrencies, the government would have been able to increase economical gains, and an advantage position towards the American economy.
To do this, the Chinese government released the “White paper on blockchain technology and application development by the ministry of industry and information technology” in 2016.
This led to the launch of the first digital currency of the Chinese government, the digital yuan. Chinese government preferred, however, not to use, and still ban, regular cryptocurrencies from the national market like bitcoin, Ethereum etc... to build a crypto directly controlled and under the regulator mechanism typical of the Beijing government. China saw with the blockchain and crypto-system existence, the opportunity to reach the RMB (renminbi) internationalization goal that was set during the 2016 five-years plan. The ambition was to make the RMB a large reserve currency in the world economy.
To do so, a currency needs to possess some basic prerequisite: high trade volume and net creditor status. All these factors remain under the possession of the US dollar, with the Chinese currency that is just a little behind the American currency.
One of the main issues that in the past relegated the RMB behind the US dollar, was the controlled Chinese economy. Investors didn’t like and still don’t like to trust investments as soon as they realize that the country economy is strictly tight to the government control. According to president Xi Jinping declarations, cryptos are a strategical sector that will allow China to become even stronger and overtake United States in the country’s race for technological supremacy.
In fact, cryptos have become one of the largest growing sectors in China over the last two years, to a point that last year, 80% of population adults made at least a digital payment using cryptos.
The creation of these currency brought to the creation of 123 millions of individual wallets among the Chinese population, and during the 2022 winter Olympics games hosted in Beijing around 2 million of RMB was used in daily transactions.
Other possible ways to exploit these technology
Cryptos to function exploit the blockchain technology, that isn’t used just for currencies, in fact application of this technology can be also found in:
Blockchain is use for the development of Smart Cities infrastructures. Blockchains help monitoring different type of data registered by all the sensors that are placed in cities. This blockchain technology is going to be integrated in the future with artificial intelligence, big data, and data access tools.
Blockchain technology is used mostly for patrolling purpose since it cannot be traced and violated by the most, and its relative safe. It was used to pass and preserve sensitive data, for gather evidence against dissidents and to avoid possible public security attacks.
Blockchain method was used to implement and disseminate information’s from the government to the population, especially during the COVID 19 period. The vision that China has of this technology is mostly like a double-edged sword, that potentially is attacking the sovereignty position of the country, in a financial and a political way, but that can offer opportunities to advance the growth of China’s economy, improving payments and transactions, and tackle illegit activities. Perhaps China’s real aim is to build a digital system that can assess the global leadership in this field, while maintain a state of control on currencies and blockchain. The Chinese government is promoting a specific type of blockchain and cryptocurrency that is not open or fully decentralized, and if needed, the government can decide to roll back and reverse transactions. Can we still call this technology a blockchain or it completely changed its pattern and its nature in this way?
How the digital yuan works?
The currency has the same status and the same value of the fiscal currency, even because, its value is tied to it. The computer code that creates this crypto is controlled by the central bank, and in this case, currencies are not mined from crypto mining stations, but from central banks institutions, as this crypto is state-back based.
In these way, financial dealings of the population will be easily trackable by the central authorities. The launch of DCEP (the name of the digital yuan project), is expecting to enhance and make the renminbi a digital currency for cross-border relations, trade, and infrastructures exchanges. This might be a chance as well for China to use this currency to push and promote worldwide, the use of digital yuan and Alipay and WeChat apps, Chinese government-controlled app.
It's hard to define how the cryptocurrency market will react in the future, even because of the current market distress and crise. The fact is that, even if Chinese block chain strategy remains opaque, the fight is for sure, going to be between China and US. Although, still now, Us maintains and seems to be in advantage in the crypto/blockchain race.
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