A Brief on China's Forthcoming "Cryptocurrency"

by John Rizzo, CTO, CYDigital

Shortly, China will be launching its own cryptocurrency, which may not be a cryptocurrency. China’s big four state-owned commercial banks (the Bank of China, the China Construction Bank, the Industrial and Commercial Bank of China, and the Agricultural Bank of China) will be the only issuers of China’s CBDC (Central Bank Digital Currency).

It feels more like a digital replacement for the Yuan than a true cryptocurrency, and it will better facilitate the financial lifecycle for many Chinese citizens since they are heavy users of digital payment system like Alipay.

Chinese officials have stated they want to strike a balance between anonymous payments and being able to track money flow to prevent money laundering. This may be disingenuous as China has moved away from anonymous transactions (cash exchanges) and to digital payments at a breakneck speed. It is more likely that the goal is deeper tracking of transactions. “It might be more accurate to say that the PBOC (The People's Bank of China) is looking to release digital cash with extra surveillance.”[1]

Reporting notes that the CBDC could look akin to Libra, which may be reflected in two ways: (1) as a system capable of handling very high transaction rates, and; (2) it will be on a permissioned blockchain. It may be a fully private blockchain not just in who has the rights to execute the consensus protocol and decide the mining rights and rewards, but also who maintains and can audit the shared ledger.

Some additional notes:

1.    China has been dependent on the USD as the global reserve.

2.    The new CBDC will be backed by the yuan.

3.    The yuan is dependent on USD and CBDC is backed by yuan.

4.    Currency manipulation issues are the main worry for other governments.

5.    China wants to make CBDC a global currency.

6.    China’s big four state-owned commercial banks, as well as fintech giants Alibaba, Tencent, Union Pay, and an unnamed company, will be the first batch of organizations to receive the CBDC.

7.    The PBOC’s Digital Currency Research Lab:

a.     Launched  Shenzhen Fintech Research Institute;

b.    Went on a hiring spree for blockchain architects and cryptography specialists;

c.     Filed more than 50 patent applications to detail the potential design of the state-backed digital yuan system but will strip off most cryptocurrencies’ anonymity and decentralization features.

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[1] Roger Huang, “China's Digital Currency Is Unlikely To Be A Cryptocurrency,” Forbes, 8/14/19, https://www.forbes.com/sites/rogerhuang/2019/08/14/chinas-digital-currency-is-unlikely-to-be-a-cryptocurrency/#4d4a3f8c6a52