Mad Crypto: If you think China’s official cryptocurrency is coming soon, think again

This post first appeared in Frank Chaparro’s weekly column “Mad Crypto,” which is sent to Genesis members’ inbox every Monday morning. Celia Wan, who specializes in cryptocurrency trends shaping Asia, filled in for Frank this week. 

It is funny sometimes, being a Chinese native living in the U.S. reporting on finance during a turbulent time. Like, say, when the U.S. President is championing a prolonged trade war against China with only recent signs of a truce, packaging it as a personal triumph against an authoritarian government maliciously manipulating its currency to rack the U.S. economy. 

Oh well, who am I to say he's not doing the right thing to protect the American economy and American workers? Although the trade war narrative does creep into almost everything I encounter. Our column last week talked about bitcoin being a safe haven after the Chinese yuan depreciated to a historically low point, the $414 every U.S. household has to pay on average to support the trade war, and very recently, the People’s Bank of China (PBoC)’s deputy director of payments Mu Changchun saying its official cryptocurrency is close to launch. 

And so commences a new round of Twitter fear that China may beat the U.S. in yet another high technology. After all, they have taken AI, gene editing, and quantum communications, but certainly not this beloved, decentralized technology that we all cherish for its ability to resist censorship and defend democracy! Perhaps even worse, Mu said that PBoC’s digital asset architecture will “maintain a centralized management model” - real world parody is better than fiction sometimes. 

However,  as much FOMO as Mu’s speech might have spread, we at The Block have reasons to believe that PBoC is not going to launch the digital currency it spent five years researching anytime soon.

First off, the U.S. prolonging the trade war with China is still one of PBoC’s biggest headaches as it tries to stabilize the yuan to counteract damages caused by increased tariffs. Meanwhile, domestically, ratifying shadow banking and controlling the “gray rhino” risks in the financial sectors are what the central bank regards as its top priorities. As the Chinese economy is surrounded by these uncertainties, it is difficult to imagine that it will divert much attention to cryptocurrencies, especially given all the AML and KYC hurdles the regulator must overcome before implementing this new technology.

Indeed, in a speech given by former PBoC director Zhou Xiaochuan in July, Zhou specifically mentioned AML, KYC, as well as anti-terrorism as some of the major concerns that needed to be addressed when deploying a blockchain-based financial system. In a previous speech, Zhou also said that to test a nascent technology like cryptocurrencies in China, the world's second-largest economy, may have unintended, irreversible consequences. Therefore, according to him, the best course of action is to experiment with it in a smaller country first, after which China will consider adoption if a successful precedent is set. In plain English: China is not going to be the first mover in cryptocurrencies. 

However, if the PBoC is not going to issue a cryptocurrency anytime soon, what’s up with all the FOMO? After all, ever since Facebook’s Libra project was announced, several of PBoC's high-level officials have come out drumming their vision of a central bank-owned cryptocurrency.

We may actually have to thank Libra for this one. As evident in the speeches given by these government officials, a major grudge the Chinese government holds against the U.S. is the dominance of the dollar, and one of the bank’s greatest fears related to Libra is its potential to reinforce that dominance around the world, challenging the Chinese yuan's global standing.

However, the immediate solution to thwart this challenge may not be developing a Big Brother coin, but rather to strengthen the power of yuan globally, perhaps with a little help from capital control, according to Zhou.