China Invests in Blockchain but Not in Cryptocurrency

CHINA INVESTS IN BLOCKCHAIN BUT NOT IN CRYPTOCURRENCY – 5 REASONS WHY

More often than not, there is this rhetoric about crypto. Sure, it is not far from the truth. There are serious loopholes in the financial system and institutions that have plagued the weaker sections for decades.

Bitcoin, founded by a no-one-knows-him Satoshi Nakamoto, was the first cryptocurrency known to us. Numerous cryptocurrencies have sprung up since then.

In this post, we are going to discuss the relationship between one of the most powerful nations with this nascent technology – and try to decode its stance on this supposedly disruptive technology. But yes! China invests heavily in distributed ledger technology while trying to ban the use of “foreign” cryptocurrencies. Their strategy is quite clear and based on 5 main reasons. Let’s explain.

Putting it on the Block(chain)

Being the country with the highest number of patents in blockchain, China is undoubtedly big on blockchain, the underlying technology for cryptocurrencies.

Not only this, Chinese investments in blockchain were a whopping 22% of all the investments worldwide.

Just to keep us all from guesswork, the Chinese President himself made it pretty clear that blockchain is in fact a priority for him and the government. In a publicly made announcement from 2019, President Xi was quoted saying:

TAKE BLOCKCHAIN AS AN IMPORTANT BREAKTHROUGH INDEPENDENT INNOVATION OF CORE TECHNOLOGIES.

But, what about one of the biggest use cases for the same technology? Let’s see:

China & Cryptocurrency | Chasm of Daylight?

A technology powerhouse in its own right, China and its companies have long emerged as one of the most pragmatic coalitions when it comes to building new products with bleeding-edge technologies.

As cryptocurrency was approaching its never-seen-before boom in 2017, tech pundits across the world were interested in whether China would embrace the technology.

It didn’t.

As upstarts around the world started building products based on blockchain, putting cryptocurrency in front of users – oceans of apps were out there. From crypto-backed loans to deposit services and margin trading & derivatives, these apps did it all.

Soon enough, the conventional institutions such as central banks, card processors, and the governments – all slapped bans and sanctions on these products.

Known for being an innovator in the last couple of decades, the pundits expected China to be different. Or maybe just don’t ban it outrightly.

But, it did.

Depending on one’s bias for or against crypto, people may have their opinion about this.

But the truth is – that China has encouraged experimentation with cryptocurrency as well as the technology it is built upon, i.e. blockchain.

China’s investments in blockchain innovation

As a matter of fact, the Chinese government and its lower bodies have been pretty clear about their stance on investments in blockchain innovation. There is another side to this, however.

Around the same time as China and the blockchain advocates were figuring out a way to outplay Libra, a Stablecoin launched by Facebook that many in China believe to be US-backed, the Chinese government made an announcement. It came with a stern warning about investors making sure that they invested in blockchain, and not any random projects that are in fact cryptocurrency masquerading as blockchain.

As this happened, a lot of crypto believers were disappointed. The BTC prices nosedived until they soared back up.

The other side of this was pretty understandable. The announcement was made with solid reasoning for this direction.

No one can totalitarian monitor the Internet

Chinese officials believed that a lot of companies and exchanges set up servers outside China put a front-office in the mainland, and then lure people into buying cryptocurrencies.

A lot of these companies, as we know already, will put transaction limits on how much you can take out and even go on to manipulate prices with insane volumes.

Not a lot wrong with that announcement, now you think?

But over the last couple of years, a lot of people in the blockchain and crypto community have believed that while China is bullish on blockchain – the same is not even remotely true for cryptocurrency.

The important question left unanswered is “Why?”

Well, here are 5 reasons:

1. Fear of overloading the banking system

The only way China could include cryptocurrency into its existing monetary and banking system is by getting their bankers to fight an uphill battle of technological innovation to even catch up with the cryptocurrency-based transactions.

Because China wants to keep a close eye on each and every transaction, it would have been almost impossible to track and monitor every encrypted and anonymous transaction using cryptocurrencies.

A big reason why China chose to distance itself from cryptocurrencies could be its foresight to predict an operational and technological catastrophe. Known to control in its own beautiful manner, technological uncertainty is the last thing the Chinese government would allow in their backyard.

2. Strive to keep regulation simple

One of the biggest reasons why China is not enthusiastic about crypto is the fact that it suits their style of regulation.

As the gold standards collapsed, economies started pushing for their own currencies. From dollar to euro and from Yen to Yuan, it’s all a result of that. The reason why this concept of currencies works is because it is based on something bigger than technologies and regulations – trust. The public and corporations trust the government to ensure a stable availability of banknotes in supply.

Unlike a complicated governance system in the USA, where the governments and even regulatory bodies can be lobbied, China is way more ruthless than possibly any other government. Rightly so, it’s what suits them.

Undermined regulatory bodies

Unlike the USA, where the SEC and other bodies were open to the interpretation of the term currency and cryptocurrency’s role, China did not want even a possibility of their regulatory bodies and standards being undermined. This is the reason why China refused to tag Bitcoin and others as currency in the first place.

By categorizing cryptocurrencies as securities (entities that hold value) or currency (medium of value exchange), the USA and many other countries were able to monitor and regulate them according to their existing system that has been around for decades.

The same could not be done in China. The black-and-white nature of how the Chinese government interacts with other bodies is the biggest reason behind this.

3. The Sino-American Struggle for Supremacy

The rate of growth that China has maintained over the past decades is phenomenal. So good that it has brought its way to the top ranks among nations. Putting it behind no other country except America.

Now, having interests in different issues around the world – the two power centers are always trying to outplay the other. This has led the two countries and their governments to have the opposite stance of their supposed adversary.

The 5G effect

Take 5G. Take Coal. Or any of the geopolitical issues, you’ll never find the two countries sitting on the fence. They always have something to say, regardless of having a vested interest in it.

The same goes with Cryptocurrency.

The USA tried to regulate cryptocurrency by banning ICOs (to avoid scams) and enquiring into the billions of dollars that were raised by various projects including KIN and EOS.

To make sure that China is ahead of everyone else, it needs to limit adoption for other projects and make room for its home-grown Digital Yuan.

The LIBRA effect

As LIBRA was created and launched in 2019, the whole tech spectrum started gushing about it. The white house in the USA was getting lobbied for it.

It was expected to be the next big thing in crypto. Rightly so, a US government backing could have done wonders for the project.

At the same time, PBoC (People’s Bank of China) was planning to launch its government-minted legal digital currency that would help them to put China on the next level when it comes to trade and finance across the globe.

In a conference held in mid-2019, the executives from the Chinese government also declared that creating a robust and reliable Digital Yuan is a top priority for them. Not only this, they were going to dedicate more resources to the said project to make sure that China is ahead of this curve.

The centralization effect

Now, we all know how China thrives because of rock-solid centralization across all verticals in the country and its industries. Cryptocurrency is nothing different. To make sure that the government-backed CBDCs and retail payment products based on cryptocurrency have ample room to capture, they’re doing everything in their power to quash other projects.

These actions, though anti-competition, are not really anti-crypto. The only issue left now is decentralization.

The very point of introducing cryptocurrencies is to break the opaque glass ceiling in our present centralized financial institutions. Can a digital (yet centralized) currency do the job?

The Chinese government and authorities seem to think so!

4. Need for Control of the Money

The system put by the Chinese governments and rulers over the years has got them so far. This unique level of control on everything from its people and industries to money has never been sustained for such a long time.

If having an incredible growth rate over more than two decades with low unemployment and never-seen-before levels of industrialization is called a success, China and its centralized structure are successful.

To put all this in action, however, the Chinese government along with PBoC (People’s Bank of China) works very hard to control the money. From handing out loans to countries in South-East Asia and Africa for “infrastructure projects” to controlling (influencing) media sentiments in western rich countries, being in contention for the most powerful country in the world has its own costs.

High cost of control

To bear these costs, China and its government do everything in its power. And the most important part of this will be the money of the biggest working population that the world has ever seen. As long as all this money is in the hands of the government, they can continue to position China as the power center for the world.

The rise of cryptocurrency can shake things up, though. As workers stop keeping their cash in the Chinese banking system, the government can find it hard to keep up with the commitments it has made over the past couple of decades.

This is the reason why China has such a strong stance against cryptocurrencies. Again, the importance of having its own digital currency, however, is not a brainer for the government. This is the reason why we see them pushing to launch and promote Digital Yuan.

5. Pitting Yuan with the Dollar

Putting Yuan on the world map has been on the agenda for the Chinese Government for almost a lifetime now. The biggest challenge it faces to do so is the biggest and strongest currency around – the USD.

The main reason why China wants it so badly has less to do with their own welfare and more with putting the US in an uncomfortable position. Because of the fact that the dollar is strong and hailed as the primary currency for global reserves around the world, the United States is able to pay a lower amount for dollar assets. Not only this, deep military and welfare spending at home is only possible because of the reduced exchange-rate risk it enjoys.

China vs USA

To unseat America from the top, it is important for China to weaken the dollar. To do this, the PBoC (People’s Bank of China) has been pushing hard for their homegrown digital currency.

As the world grapples with COVID-19, PBoC has already launched a pilot run for the digital currency in four key regions of China. If the Chinese government is able to launch this successfully, they can make American companies adopt the Digital Yuan, hence eroding the dollar’s dominance in a foolproof manner.

To be successful with the Digital Yuan, however, it would be crucial for China to consolidate its foothold when it comes to virtual currency, hence the strong treatment for cryptocurrencies that we see today.

Conclusion

the biggest priority for the Chinese government is to ensure a streamlined banking system back home. Putting a check on the amount of cash in circulation is a big reason behind the unstoppable push for Digital Yuan by the PBoC.

The government tends to believe that its true potential can only be realized if other currencies (that they cannot control) are out of the equation.

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