Forkast News: China bets on blockchain
By Alexander Zaitchik, Jeanhee Kim, Kelly Le and Angie Lau, Forkast.News. The first in a series produced by Forkast.News with support from the Asian Stories project of the Judith Neilson Institute.
There is no stage bigger than the Olympic Games, for the athletes and the host country. Modern China announced its arrival 13 years ago when 2,008 synchronized drummers performed at the opening ceremonies of the Beijing Summer Olympics. In February, China is expected to use the Beijing Winter Olympics to unveil a creation of intense international interest: the digital yuan, the central bank’s first major digital currency, or CBDC.
Consumers are unlikely to notice much difference when shopping with e-CNY, as the currency is officially known. It will be worth the same as cash and activate with a tap, swipe, or QR code. But the questions raised by this form of money are profound. As governments around the world move to phase out physical cash, what will happen to financial privacy? How will state-sponsored digital money affect China’s economy, its trade relations, and – most important of all – the future of the global financial system now dominated by the United States and the dollar?
“The question is not whether the Chinese CBDC will upset current global trade and commerce rules,” said Pauline Loong, director of Hong Kong-based research consultancy Asia-Analytica. “The only question is what will be the extent of the ramifications between the issues of who controls access to capital and its movement.”
But for all the consequences of the digital yuan, it’s a toe sticking out of a giant red curtain. Behind it lies an ambitious and largely invisible infrastructure program to rewire the country and its economy with distributed ledger technology known as blockchain. China has deliberately acted to secure first-mover advantage in what it believes to be the future of the Internet.
If the digital yuan is Beijing’s offer for the digital frontier, its blockchain initiative is its offer to build the railways.
The story of how China successfully resolved the technological frontier begins with the 2008 financial crisis. Just one month after the Summer Olympics, an under-regulated US financial sector plunged the world into recession. It was a vulnerability that China decided it was no longer willing to accept. As the crisis unfolded, then President Hu Jintao called on like-minded nations at the G20 summit to “constantly promote the diversification of the international monetary system.”
Receiving a quiet response, China has moved forward by creating institutions parallel to those dominated by the United States. In 2010, when Washington’s sanctions effectively excluded Iran from the international financial system, China’s focus on cross-border currency flows intensified.
At that time, domestic concerns prompted creative thinking about monetary policy. One was how to lift 400 million “underbanked” Chinese out of poverty. E-commerce giant Alibaba introduced a mobile payment system in 2008, taking advantage of the country’s high rates of smartphone adoption: By 2015, 800 million Chinese would use smartphones, according to the Pew Research Center. But such private payment systems left the Bank of China on the sidelines and did little for the anti-corruption strategy of nascent Communist Party leader Xi Jinping, which required closer monitoring of money. by the state.
Then, around 2012, regulators began to see strange patterns in power grids across the country. From Xinjiang to Inner Mongolia, huge amounts of electricity flowed into warehouses filled with powerful computers and colossal servers. Processors were calculating numbers to produce – or “mine” – a new kind of money called Bi you bi in Mandarin. At their peak in the late 2010s, Chinese miners reportedly produced 95% of global production Bi you bi, or Bitcoin.
This money had no connection with a bank or with any centralized authority. It was completely digital and particularly secure. Each transaction was broadcast to every computer on a network for confirmation and permanently recorded in a long series of distributed ledger entries, or blocks.
Chinese authorities immediately understood the implications of this unregulated activity. In 2014, its People’s Bank of China (PBOC) began exploring the possibility of a government version of Bitcoin. Year after year, the disappearance of the paper yuan from the economy made the idea more plausible. In 2019, according to PwC, 96% of Chinese people regularly shop online.
“Even before many governments knew the basics of Bitcoin, Chinese authorities began to take leadership of network security on the mining side,” said Ian Wittkopp, vice president of Beijing-based Sino Global Capital. “This has led to the development of a strong blockchain and crypto ecosystem.”
In October 2020, the digital yuan was ready for pilot testing among the Chinese masses. In total, 750,000 people selected by lottery received 150 million e-CNY (US $ 23 million) to spend in approximately 70,000 physical businesses as well as a large number of online retailers.
Six months later, further trials resulted in open participation. This was the first supervised release of the digital yuan into the wild. In June, Chengdu nursing homes were teaching elderly residents how to use the new money.
Such care and expense is needed to ensure that the Olympics debut is as good as those 2,008 drummers, according to Peter Cai, who studies China’s economics and trade policy at the Lowy Institute in Sydney. “The cost of having something wrong about this is huge,” he said. “Chinese officials are right to talk about digital currency as if it were a new frontier. What are all the implications for the financial, banking and payments systems, or the conduct of monetary policy? I don’t think anyone has a firm grip on this. And that includes China.
The next internet
In two decades of historic economic growth, China has had a mixed record when it comes to high technology. It has struggled to achieve self-sufficiency – not to mention dominance – in the production of semiconductors and chips. It was ahead of 5G broadband, but lagging behind the West in areas of arguably greater strategic value, such as artificial intelligence.
When it comes to blockchain, China seems to have taken the lead in a major technology. After President Xi in 2019 pledged blockchain “will lead the next wave of China’s digital transformation,” thousands of companies are said to have launched blockchain projects related to everything from retail banking to global shipping and supply chains. This profusion of activity continues at a steady pace. Wittkopp said: “It’s a field of one. No other country is even close.
These projects are transforming a digital ecosystem that was already among the most sophisticated in the world, according to a recent McKinsey study. China has 850 million internet users and more than a quarter of the world’s top performing startups. One of them is Ant Group, based in Hangzhou. The financial services giant has more than 50 decentralized blockchain-based applications, or dapps, in areas such as shipping, insurance claims processing and charitable giving. Internet search company Baidu, the Google of China, owns 20 dapps, including one that processed 35 million electronic evidence for the Chinese “Internet court”.
It’s not just tech companies that dot the land on the blockchain frontier. A division of the Industrial and Commercial Bank of China has developed dapps for retail and business. Insurance giant Ping An uses them to finance public works projects. A dapp used by the China Construction Bank helped local banks facilitate loans of $ 134 billion.
“Blockchain will make our technology and our society run better,” said Yifan He, blockchain evangelist and CEO of engineering firm Red Date Technology. “It can make all the computer systems in the world communicate as if they were in one room. He predicts that in 10 years, all transactions requiring more than two parties will be blockchain-based.
The state of blockchain today is like the internet of 1993, he said. Back then, most companies couldn’t afford the entry costs of the nascent Internet (which began as a public infrastructure project overseen by the Pentagon).
In April 2020, China formalized its bet on the blockchain by creating the Blockchain-based Service Network, or BSN, managed by Red Date. It is an infrastructure platform that enables private entities, especially small and medium-sized enterprises, to overcome the two biggest barriers to entry: interoperability and prohibitive costs.
“We have already built everything for you; you just need to log into it and work on your smart contract, ”said He, who says the cost of developing a single dapp within BSN could be as little as 1% of the commercial blockchain.
By its first anniversary in April 2021, the BSN had attracted 20,000 users and over 2,500 projects spread across 120 “nodes” across China, as well as Johannesburg, Northern California, Paris, São Paulo, Singapore, Sydney and Tokyo. S-Labs, a Beijing-based startup, used it to develop applications that have helped more than 5,000 SMEs find more than 500 million yuan in loans during the pandemic. Li Ming, CTO of S-Labs, said BSN is easy to use because it meets Chinese government standards and helps them find customers. “BSN’s greatest convenience is its branding effect. ”
And if successful, today’s youth will be the first native generation of blockchain. This master’s degree is already being developed in high schools where the BSN explores how to teach students, including hosting programming competitions with cash prizes. “Blockchain should be a core skill,” He said. “The idea is to help more people learn about technology.”
In June, Red Date closed with a $ 30 million Series A funding that stood out for its global reach. Large investors from Saudi Arabia, Switzerland and Thailand participated.
The second part of this series will examine how China is deploying technology, especially the digital yuan, to advance initiatives that combine economics and geopolitics, straddling concrete and virtual infrastructure and spanning hemispheres, from Cambodia to Caribbean.