BitOoda Global & Regulatory Analysis, 9/2/2019: China’s Crypto Entry: Game-Changer or Just Another Control Mechanism?

Following our analysis last week of Bank of England Governor Mark Carney’s proposal to create a new virtual currency created and managed by a network of central banks, we thought it would be fitting this week to address the other recent development with potentially significant implications for the global financial and monetary system: China’s launch of its state-backed digital currency.

We have talked with some of our partners and clients who think this represents a significant move by Beijing to advance its long-term macroeconomic strategy, and that the announcement of the currency’s upcoming release was calculated for maximum impact in light of the U.S.-China trade war and the Hong Kong protests. China’s anti-crypto stance — including its ban of ICOs in 2017 and its labeling STOs as illegal in 2018 — was designed to keep the country’s digital asset activity at bay until the central government could enter the market with the maximum economic benefit for the state, according to this camp.

On the flip side, we also note the opinions of those who believe China’s Central Bank Digital Currency (CBDC) will not be a functional cryptocurrency and may be designed largely as another mechanism for the state to monitor and control its population. While we don’t yet know what this means for Hong Kong’s financial autonomy, particularly considering the recent rise in Bitcoin adoption as a result of the ongoing protests, some believe the CBDC will be only one of several potential “super-sovereign currencies” on the horizon and may not represent significant structural change.

Our view is that the potential financial impact of the issuance of a state-issued digital currency from the world’s second biggest economy should not be underestimated or dismissed; the fact that authorities will gain another mechanism to monitor Chinese society is a moot point.

  • Beijing’s use of seven trusted financial entities — Alibaba (with over 600 million customers), Tencent (with over 1.8 billion active WeChat users), and Chinese banks that represent some of the largest in the world — along with the two-tiered structure designed to process 300,000 transactions per second underscore its intent to utilize this new asset to expand its global economic influence.
  • Reports that the technology has been ready since 2018 lends credence to the argument that the People’s Bank of China (PBOC) is deliberately timing the currency’s rollout as part of its economic contest with the U.S. and/or to assert more economic control in light of the instability in Hong Kong.
  • China’s unofficial endorsement of Libra — alongside Alipay and WeChat pay — as a “stable” cryptocurrency indicates the changing stance the country is taking on crypto in general, following years of unwavering disapproval of all activity (other than mining).

The currency’s expected use for retail payments, interbank clearing, and cross-border payments, given the size of China’s economy and the sheer scope of transactions and global connectivity, raises the likelihood that the introduction of the currency will have significant impact both within and outside China’s financial system. BitOoda stands ready to utilize our industry-wide network, comprehensive knowledge of global markets, and robust regulatory stack to help our clients take advantage of developments like this across the crypto ecosystem and beyond.

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