By Alexander Zaitchik, Jeanhee Kim, Kelly Le and Angie Lau, Forkast.News. First in a series produced by Forkast.News with support from the Judith Neilson Institute’s Asian Stories project.
There is no bigger stage for the athletes and the host country than the Olympic Games. Modern China announced its arrival 13 years ago when 2,008 synchronized drummers performed at the opening ceremony of the Beijing Summer Olympics. In February, China is expected to use the Beijing Winter Olympics to showcase a creation of great international interest: the digital yuan, the first major digital central bank currency, or CBDC.
Consumers are unlikely to notice much of a difference when shopping with e-CNY, as the currency is officially known. It’s worth as much as cash and is activated by tapping, swiping or QR code. But the questions this form of money raises are profound. What will become of financial privacy as governments around the world move to phasing out physical cash? How will government-sponsored digital money affect China’s economy, its trade relations and – most importantly – the future of the global financial system now dominated by the US and the dollar?
“The question is not whether China’s CBDC will turn the current rules of global trade and commerce upside down,” said Pauline Loong, director of Hong Kong-based research consultancy Asia-Analytica. “The only question is how far-reaching the impact will be on issues related to the control of access to capital and its movements.”
But with all the consistency of the digital yuan, it’s a toe that peeks out of a huge red curtain. Behind this is an ambitious and largely invisible infrastructure program to reconnect the country and its economy with a distributed ledger technology known as blockchain. China made a conscious decision to secure a first mover advantage in what it believes is the future of the Internet.
If the digital yuan is Beijing’s tender for the digital frontier, its blockchain initiative is its bid to build the railroads.
The story of how China colonized the technological frontier begins with the 2008 financial crisis. Just a month after the Summer Olympics, an under-regulated US financial sector plunged the world into recession. It was a flaw that China no longer wanted to accept. As the crisis unfolded, at the G20 summit, then President Hu Jintao called on like-minded nations to “steadily promote the diversification of the international monetary system”.
On a cautious response, China made progress in creating institutions parallel to those dominated by the US. In 2010, when Washington’s sanctions effectively excluded Iran from the international financial system, China’s focus on cross-border currency flows increased.
Until then, domestic concerns fueled creative thinking about monetary policy. One of them was how to lift 400 million Chinese out of poverty with “underserved” Chinese. The e-commerce giant Alibaba introduced a mobile payment system in 2008 and took advantage of the country’s high smartphone adoption: According to the Pew Research Center, 800 million Chinese would use smartphones by 2015. But such private payment systems left the Bank of China on the sidelines and contributed little to the rising Communist Party leader Xi Jinping’s anti-corruption strategy, which required closer state oversight of the money.
Then, around 2012, regulators started seeing strange patterns in power grids across the country. From Xinjiang to Inner Mongolia, huge amounts of electricity poured into warehouses full of powerful computers and colossal servers. The processors worked with numbers to create – or “mine” – a new kind of money called. to produce Please bi in mandarin. At their peak in the late 2010s, Chinese miners are said to be 95% of the world’s Please bi, or Bitcoin.
This money had no connection with any bank or centralized authority. It was completely digital and uniquely secure. Each transaction was sent to every computer on a network for confirmation and was permanently recorded in a long series of distributed ledger entries or blocks.
Chinese officials immediately saw the effects of this unregulated activity. In 2014, the Peoples’ Bank of China (PBOC) began investigating the possibility of a government version of Bitcoin. With each passing year, with the disappearance of the paper yuan from the economy, the idea became more plausible. According to PwC, 96% of Chinese people were shopping online regularly by 2019.
“Before many governments knew the basics of Bitcoin, the Chinese authorities began to take the lead in the security of the network on the mining side,” said Ian Wittkopp, vice president of Sino Global Capital, based in Beijing. “This led to the development of a strong blockchain and crypto ecosystem.”
By October 2020, the digital yuan was ready for pilot testing among China’s crowds. In all, 750,000 lottery-selected people received 150 million e-CNY ($ 23 million) for around 70,000 brick and mortar stores and a number of online retailers.
Six months later, new studies allowed open participation. This was the first monitored release of the digital yuan into the wild. In June, nursing homes in Chengdu taught elderly residents how to handle the new money.
Such care and expense are necessary to ensure that the Olympic debut is rehearsed as well as these 2,008 drummers, said Peter Cai, who studies China’s economic and trade policy at the Lowy Institute in Sydney. “The cost of doing something wrong is enormous,” he said. “Chinese officials are right to talk about digital currency as if it were a new frontier. What is the full impact on financial, banking and payment systems or the conduct of any monetary policy? I don’t think anyone has a firm grip on that. And that includes China. ”
The next internet
During two decades of historic economic growth, China has had a mixed record of high technology. It has endeavored to achieve self-sufficiency in the manufacture of semiconductors and chips – not to mention dominance. It was ahead of the curve in 5G broadband, but it is lagging the West in areas of arguably more strategic value like artificial intelligence.
When it comes to blockchain, China appears to have taken a leading role in a technology of importance. After President Xi promised in 2019 that blockchain would “lead the next wave of China’s digital transformation,” thousands of companies reportedly launched blockchain projects spanning everything from retail banking to global shipping and supply chains. This plethora of activities continues. Wittkopp said: “This is a field in itself. No other country is even in the vicinity. “
These projects are changing a digital ecosystem that, according to a recent McKinsey study, is already one of the most advanced in the world. China has 850 million internet users and more than a quarter of the most successful startups in the world. One of them is Hangzhou-based Ant Group. The financial services giant has more than 50 blockchain-based decentralized apps or dapps in areas such as shipping, insurance claims processing, and charitable donations. The Internet search company Baidu, the Google of China, has 20 Dapps, including one that has processed 35 million electronic evidence for China’s “Internet Court”.
It is not just technology companies that mark territory on the blockchain border. A division of the Industrial and Commercial Bank of China has developed Dapps for retail and business. The insurance giant Ping An is using it to finance public construction projects. A Dapp used by China Construction Bank has helped local banks lend out $ 134 billion.
“Blockchain will make our technology and society work better,” said Yifan He, blockchain evangelist and CEO of engineering company Red Date Technology. “All IT systems in the world can communicate as if they were in one room.” He predicts that in 10 years all transactions that require more than two parties will be blockchain-based.
The state of the blockchain today is like the Internet in 1993, he said. Back then, most companies could not afford the entry-level costs of the nascent Internet (which began as a public infrastructure project under the supervision of the Pentagon).
In April 2020, China formalized its blockchain bet by creating the Blockchain-based Service Network (BSN) managed by Red Date. It is an infrastructure platform that enables private companies, especially small and medium-sized enterprises, to overcome the two biggest barriers to entry – interoperability and prohibitive cost.
“We have already built everything for you; You just connect to it and work on your smart contract, ”said He, who claims that the cost of developing a simple Dapp within the BSN could be only 1% of the commercial blockchain.
By its first anniversary in April 2021, the BSN had attracted 20,000 users and more than 2,500 projects at 120 “hubs” across China, as well as Johannesburg, Northern California, Paris, São Paulo, Singapore, Sydney and Tokyo. S-Labs, a Beijing startup, used it to develop applications that helped over 5,000 SMEs find more than 500 million yuan in loans during the pandemic. Li Ming, S-Labs chief technology officer, said the BSN is easy to use as it meets the standards of the Chinese government and helps them find customers. “The biggest advantage of BSN is the brand effect.”
And if he has his way, today’s youth will be the first blockchain-native generation. This fluency is already being developed in high schools, where the BSN is studying how to teach students, including by running programming competitions with cash prizes. “Blockchain should be a fundamental skill,” He said. “The idea is to help more people get used to the technology.”
In June, Red Date closed $ 30 million in Series A funding that was characterized by its global reach. Large investors from Saudi Arabia, Switzerland and Thailand took part.
The second part of this series examines how China is using technology – especially the digital yuan – to drive initiatives that intertwine the economy and geopolitics, span concrete and virtual infrastructure, and span the hemispheres from Cambodia to the Caribbean.