Cryptocurrencies in China: from banning to betting on them

Cryptocurrencies in China: from banning to betting on them

A story of love and hate. Or, in this case, first hate and then love. That is how the relationship of the second biggest world economy and cryptocurrencies could be described. In 2017, the Chinese Government prohibited the use of cryptocurrencies. However, on January 1, 2020, China’s cryptography law came into effect, this way allowing the commercial development of cryptography. What is the reason behind this change of heart?  

Opportunity instead of threat 

The Chinese government has changed their perception of cryptocurrencies. Even though they were first addressed as a threat, they are now an opportunity to jeopardize US dominance in the global market. The legalization of cryptocurrencies in the country is but the first step to launch the first digital currency issued by a Government: the digital yuan (DCEP). Although the digital yuan is not exactly a cryptocurrency like the ones now available on the market, the concept is similar.  

The value of a digital yuan is not based on speculation, but on the real value of the currency, which has a 1:1 equivalence with its digital version, making this one of the main differences between the digital yuan and other cryptocurrencies. Moreover, each digital yuan must be signed by the People’s Bank of China (PBOC). So, banks distribute the digital currency among their clients, who are then able to download it in their virtual wallets to use it in a growing network of stores.  

The Olympic Games as a showcase 

The PBOC hopes to have this currency available before the Olympic Winter Games Beijing 2022. Some digital yuan trials have already been carried out in the Chinese cities Shenzhen, Suzhou, Chengdu and Xiong´an, as well as through the Chinese ride-hailing giant Didi Chuxing

If the digital yuan project is successful, the need for physical money and methods of payment such as PayPal would become obsolete, posing this way a threat to US financial dominance. Up to date, 60% of known foreign currency reserves consist of dollars, but the trend could change with the introduction of the digital yuan in the market. A widespread adoption of the digital yuan would lead to its presence in central banks reserves.  

China leads the digital race 

The world witnesses a new international race for the digital currency market. A race where China has the lead. However, the Asian giant is not alone. The European Union and the United States also plan to launch their own virtual currencies in the future. 

On October 2, 2020, the European Central Bank issued its report on the digital euro. The report details the reasons behind the creation of the digital euro, the potential effects, and legal considerations. Meanwhile, a digital dollar bill has been introduced by the Democratic Party in the United States. The main purpose of this is to lessen the economic impact caused by the COVID-19 crisis. 

The importance of ensuring privacy 

Digital currencies are presented as a more convenient method of payment and as a tool that could lessen the effects of the current health crisis. Nevertheless, there could be some disadvantages. The fact governments could easily monitor digital methods of payment represents a privacy issue that causes several experts to be distrustful in that regard. 

For instance, in the digital yuan case, it could allow a rather “invasive” Chinese Government access to the information of the digital currency’s users, both Chinese and international individuals, which is of particular concern. So, for this method of payment to successfully enter the market, introducing measures that ensure the privacy of users, as it happens in the cryptocurrency market, will be necessary. 

The future of the economy seems to rely on digital currencies despite the disadvantages. It is but one step further in the tokenization of economy process, which has been previously discussed in this blog. With China, the European Union, and the United States involved, the creation of these digital currencies becomes more relevant. But whether the Asian giant will benefit from being the first one to bet on such a method of payment that, ironically, was banned until last year remains to be seen. 

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