China: The New "Space Race" for Currency Leadership?
The latest twist in the cryptocurrency saga is a renewed pickup in activity in China.
In a fairly dramatic reversal from their previous ban on cryptocurrencies (due to it being a method of moving money offshore), there is now a clear and sizable blockchain push in the region.
President Xi has publicly announced that the country needs to “seize the opportunity” afforded by blockchain technology. Within a speech to the communist party committee, he touted the ability of the technology to affect a massive change in the country’s business sector and the broader economy. They are now onboard, new laws are being enacted and they are pushing ahead, quickly.
This renewed blockchain interest in the East could be the behind the recent explosive rise in the Bitcoin price....
What are they doing?
Firstly, local sources note that adverts for blockchain courses have begun appearing on popular apps and social media sites in the country. Also, articles saying blockchain technology is "scam" have now been banned. The u-turn in the desire for positive public perception is loud and clear.
Local governments around China are now funding blockchain ventures. For example, 70% of Bitcoin is already mined in China, largely due to the surplus of cheap hydro-power in certain regions with protracted rainy seasons. This power source is now likely to be government funded for the new blockchain projects in the region. This is a simple example, many other projects will be similarly funded.
Importantly, the country will also be launching a state backed cryptocurrency next year. No specific dates have been given but its expected to be a “stablecoin” pegged to the local currency, i.e. simply a digital version of the renminbi. One of its goals is to replace cash. However at the same time, it would allow a level of visibility to the government which could help crack down on money laundering, tax evasion and the financing of terrorist groups. The advantages are clear, particularly in a country know for its surveillance.
So whilst China is embracing digital currencies right now, the Western world is fighting them, as can be seen by the backlash on plans for Facebook’s "Libra" coin. China is moving towards a leading position in the blockchain industry whilst the Western world stands back and watches.
What does this mean?
It’s very difficult to say right now. Other countries may follow suit and tokenize their own currencies. Mark Zuckerberg recently stated that America needs to innovate, else the US dollar could be put at risk (though this is largely seen as an excuse to push his own currency). It's very early days but this could potentially have implications for the reserve status of the US Dollar in the long term.
Akin to the Space Race?
I read an article on this subject which compared the potential outcome of this to a “currency race”, akin to the US vs Russia space race in the 1960’s. Could this be the beginning of a digital currency race? Is this a Sputnik moment for the Federal Reserve? Given China has the lead and has the necessary governmental control to ensure widespread adoption, does the U.S. needs to fast-track the launch of Libra or a similar crypto like currency?
The world's power that succeeds in adopting a stable currency that is easy to exchange across borders and used as a value peg for other currencies will lead the 21st century economy.
It’s going to be very interesting to watch this play out. What we can say for sure is that the region which once posed a threat to the future of cryptocurrency adoption, has clearly switched sides. Bitcoin clearly still remains a threat to China, this should not be read as a push for Bitcoin adoption. However, the technology behind Bitcoin is clearly now moving further into the traditional financial system. The virus is spreading.
Remember to subscribe to keep up to date with the noise coming out of China, as well as other important updates!