Top Facts on China’s Crypto Yuan and Related Blockchain Projects
The road to adoption is often a long and arduous one, and China seems to be the country making the biggest strides in the development and integration of blockchain-based technology on its home turf.
In April, after several years of work, the Chinese government announced the completion of two milestone initiatives involving blockchain and cryptographic technology. The first initiative pertains to the country’s central bank digital currency, named DCEP, which is reportedly being tested in four local cities.
The second development is related to Blockchain-based Service Network, or BSN, which is currently said to be fully operational. Meanwhile, China is also launching a grandiose plan dubbed the “Chinese Standards of 2035,” which outlines how the next generation of technology will be operated, including everything from telecommunications to artificial intelligence.
Here are some of the facts about China’s two biggest developments related to blockchain and crypto, what their true goals are, and why they have little to do with the intrinsic concept of blockchain and crypto.
Fact 1: Libra triggered adoption in China
China has evidently been working on a way to accept blockchain and cryptocurrencies over the last four years despite its general negative stance on the latter tech.
Musheer Ahmed, managing director at FinStep Asia — an advisory firm assisting fintech startups — explained to Cointelegraph that blockchain networks have been in development for over a few years in mainland China, with the Financial Blockchain Shenzhen Consortium, which was launched four years ago by top local firms such as Tencent and Huawei, being the first major initiative that engaged a host of private and state-owned companies:
“With the development and use of blockchain in the FISCO consortium, one could say it was a successful proof-of-concept which is now being explored in an all-encompassing way with BSN. Secondly, with President Xi stating the benefits of blockchain and need for its deployment nationwide, it was but a matter of time before BSN was launched.”
China’s President called for the country to accelerate its adoption of blockchain technology in October 2019, soon after Facebook CEO Mark Zuckerberg highlighted the threat of Chinese dominance that could grow with the emergence of its national cryptocurrency.
Facebook’s announcement of its Libra coin launch seemed to have changed the stance of the Chinese government on cryptocurrency. The very idea of privately-issued coins being used by over 2.3 billion people worldwide unveiled new prospects on the use of digital currencies and gave governments around the world a peek at what the financial landscape of the not-so-distant future might look like.
China took the lead in the race for its own central bank digital currency, outpacing its closest competitors. The central banks of the European Union, South Korea, Russia, Sweden and several other countries as well as the Eastern Caribbean Central Bank have also announced their own research into state-issued cryptocurrencies, but they are still at the legislation or trial stages, proving the paperwork falls second to action in China.
Fact 2: The BSN is centralized
A blockchain-based service network is the latest blockchain-related development from China, officially launching on April 25. In a nutshell, the BSN is a global infrastructure designed for helping blockchain projects launch applications at lower costs. The system can also be used for operating smart cities, digital economy platforms, database management and much more.
Jeff Chu, the founding partner of BN Capital — a firm focusing on investment and consulting in the blockchain industry and digital economy — told Cointelegraph that the BSN aims to build up a new type of global service network and create cross-regional and cross-institutional information services based on blockchain technology.
According to the latest data, the BSN has already attracted more than 2,000 developers and currently hosts 128 public nodes. All this looks like a typical decentralized structure, but it’s not the case with the BSN.
Speaking with Cointelegraph, Yifan He, the CEO of Beijing Red Date Technology — one of the founding members of the BSN responsible for research and development — explained that while the word “node” in the network’s structure is easily confused with a blockchain node, the BSN public city nodes, or PCN, have nothing to do with blockchain. He further explained:
“In fact, each PCN is a resource pool, used to allocate a portion of the computing power, storage and bandwidth resources from the cloud service or data center on which it was deployed to the BSN.”
Still, blockchain is used in the network, at least partially. Yifan He noted that the main goal of BSN is to create a public infrastructure similar to that of the internet and provide a “one-stop-shop” style blockchain-based service that integrates cloud resources, underlying frameworks, operating environments, key management, development SDK and gateway API.
In a conversation with Cointelegraph, professor Olinga Taeed, a council member and expert advisor at the China E-Commerce Blockchain Committee, compared the service provided by the BSN to cost-effective decentralized hosting aimed at stimulating the market.
Fact 3: The digital yuan is centralized
As previously reported, the People’s Bank of China plans to digitize the yuan rather than to launch a separate cryptocurrency. From the technical side, the digital yuan will be centralized and issued first by the central bank to local commercial banks and then to users for circulation. In China, the division between commercial banks and state banks is minimal, with three of the country’s largest banks being state-owned.
As such, the banks will be the only issuers and main circulators of the digital yuan by exchanging it for other currencies. Additionally, China’s central bank is likely to be engaged in designing the national cryptocurrency’s functionality and wallets, and may have access to the related data.
The need to make a payment system for using digital money as convenient as WeChat Pay may mean the absence of blockchain, and combining the latter with technologies such as NFC and PayPass may prove difficult. According to existing information, users will be able to transfer the CBDC seamlessly through their phones, while NFC technology and the internet will be used to make payments. Offline transactions are expected to be saved and processed once the device is online.
Another reason why the digital money system might not be based on blockchain is the technology’s insufficient scalability. In August 2018, the local media quoted Mu Changchun, deputy director of the PBoC’s payments department, who suggested that the blockchain platform couldn’t deliver the throughput needed for retail.
Fact 4: The digital yuan is being tested
In April, the first screenshots of the digital yuan application surfaced online. Evidence suggested that the tests were conducted among whitelisted clients of the Agricultural Bank of China from the Shenzhen, Xiong’an, Chengdu and Suzhou regions.
It was also reported that the new currency would be used by Suzhou-based companies to pay subsidies covering up to 50% of local workers’ transport costs starting from April 2020. World-known merchants such as McDonald’s, Starbucks and Subway were invited to participate in the test as part of the Xiong’an Smart City program.
BN Capital’s Chu stated to Cointelegraph that the Xiong’an pilot recommendation list mainly focuses on catering and retail enterprises. More information will appear with the release of the official statement on the digital currency’s pilot test in May.
Fact 5: The digital yuan will strengthen the economy
In a conversation with Cointelegraph, Paul Sin, the leader of FinTech Practice and Asia Pacific Blockchain Lab, said that the official goal of the digital yuan is financial inclusion. In particular, it will be used to significantly expand the financial infrastructure of the country and increase the efficiency of cross-border payments.
Sources have previously stated that the world’s largest banks, including the Industrial and Commercial Bank of China, the Bank of China and the Agricultural Bank of China as well as the Union Pay association of Chinese banks and two of China’s largest fintech companies, Alibaba and Tencent, will be using the cryptocurrency to streamline operations and facilitate a smooth onboarding process.
Chu pointed to the yuan’s internationalization as one of the main reasons behind the introduction of China’s cryptocurrency, as well as the high popularity of smartphones and mobile payments in the country. In addition, the digital yuan will reportedly ensure convenient payments for tourists during the 2022 Beijing Olympics.
Fact 6: Decrease reliance on the United States dollar
Among other reasons outlined for the digitization of the national economy, analysts have pointed out China’s struggle to contain the U.S. dollar domination of global markets. As such, despite holding over $3 trillion in foreign currency reserves, China sees digital currencies as a means of breaking away from the U.S. dollar. Commenting on the issue, China E-Commerce Blockchain Committee’s Taeed opined:
“China does not wish to be reliant on the US dollar which conveys a different ideology and control and thus encourages projects that enhance independent currencies and undermine dollar supremacy.”
The launch of the digital yuan is seen as more of a security measure, as China’s victory in the digital currencies domain may ultimately become a step toward the end of the U.S. dollar as the global reserve currency. Some analysts predict that the digital yuan will replace the dollar on the world market in 15 years.
Fact 7: The digital yuan will not see mass use
Chu told Cointelegraph that the main task of the digital currency currently being implemented in China is to replace paper money, which is the first step in the development of its digital economy. However, according to him, the full transition to a digital Chinese economy will take years:
“It should also be noted that even if the pilot of China’s digital currency is successful, the proportion of digital currency in the total amount of currency may remain at a low level for a period of time, and it is unlikely that the traditional financial system will be reconstructed in a short time.”
In an interview with Cointelegraph, Beijing Red Date Technology’s He called China’s digital currency “just a testing project,” adding that it won’t have any impact on the Chinese economy, world trades or financial worlds:
“At the beginning, it might only be able to be used between individual customers and merchants. It would not even support corporate-to-corporate transfer. […] Also, it is expected that the individuals won’t feel any difference using DCEP from using AliPay or WeChat Pay.”
He also added that the spread of use of the currency will also depend on three things: the volume that the Chinese central bank will officially release, the level of interest from commercial banks, and the willingness of people to use it instead of Alipay and WeChat Pay. However, according to him, the digital yuan is unlikely to attract the same level of interest as Alipay and WeChat Pay. He also added, “Until DCEP is officially used on corporate-to-corporate money transfer or international wire, it will not have any visible impact on Chinese economy.”
Fact 8: China won’t use its CBDC to dominate the world
With the introduction of the digital yuan, China aims to establish a dominating position in the blockchain market rather than in the world economy, as Taeed’s comments to Cointelegraph suggested:
“China wants to be the home of blockchain, as the West Coast is the home of digital IP, believing that blockchain will be 10x greater than the internet.”
He also added that the future global market for blockchain is considered to be over $100 trillion, of which China aims to dominate 70% — a share it currently has and seeks to maintain. Chinese peer-to-peer payment systems are already larger than payment systems such as Mastercard and Visa combined, so the new currency is considered to be part of a suite of fifth-generation payment systems.
Fact 9: China still skeptical on crypto
Given the fact that the digital yuan is the only legal cryptocurrency in China, the country’s government is unlikely to change its stance on cryptocurrencies in general. FinStep Asia’s Ahmed told Cointelegraph:
“I do not expect that the authorities will change their view on retail cryptocurrencies. They will likely continue to be banned, especially if the authorities want the e-RMB to be widely adopted with no competition. Another reason cryptos will continue to be banned is to do with the cross border nature of cryptocurrencies which could lead to capital movement out of mainland, which is highly restricted.”
Looking ahead
While both projects are still at an early stage of introduction into mass use, it’s now clear that they have become the largest developments in the field of cryptographic technologies in Chinese history. Some experts have high hopes for the country’s Blockchain-based Service Network and CBDC. Chu shared his expectations with Cointelegraph on the matter:
“We shall believe that legal digital currency will show strong vitality in various business ecosystems and payment channels in the future.”
The People’s Bank of China has not yet confirmed the official launch date of the new currency, but local news outlets tentatively place it in the middle of 2021, meaning that the next two years could be decisive for the wide adoption of these technologies.
