There’s a ton of speculation surrounding China’s new Bitcoin replacement…and speculation often brings confusion.
The digital yuan, as it’s called, is sort of a cryptocurrency and sort of not. It copies some elements of Bitcoin while abandoning others. It’s an investment, but not the kind you think. And lastly, it has a surprising relationship with WeChat Pay and Alipay, China’s equivalents to PayPal.
So to set the record straight, let’s cover everything you need to know about China’s new crypto!
China has a history of disliking cryptocurrency
Hearing that China is releasing an official state cryptocurrency may be a little surprising at first. That’s because if you know anything about the PRC’s history with crypto, you’ll know that they’re not exactly big fans.
China has held a disdain for crypto pretty much since the start. According to Chinese law, cryptos “cannot and should not be circulated and used in the market as currencies.”
Bitcoin has been banned in the People’s Republic since 2013, initial coin offerings (ICOs) are 100% illegal, and all trading platforms have been tossed into the Great Firewall to be immolated. Plus, the government has spent enormous resources patrolling the countryside for illicit mining operations, pulling them up like a Georgia farmer uproots kudzu.
At this point, you might be wondering – if countries like the USA and Bolivia have warmed up to crypto, why does the Middle Kingdom hate it so much? Well, there’s a smorgasbord of reasons. First, crypto trading has been directly tied to criminal activity in China. According to The Diplomat, Chinese authorities have so far discovered 170 criminal groups in 23 separate provinces all laundering money using crypto. This signaled to the Chinese government that foreign cryptos would be hard to control – so they should stamp it out ASAP and replace it with their own.
Plus, bitcoin mining operations have placed a tremendous amount of stress on the Chinese power grid. According to Sci News, by 2024 Chinese crypto miners will take up as much energy as an entire midsized country. That’s nearly 300 Terawatt hours and 130.50 million metric tons of carbon emissions.
And for what? the Chinese authorities want to know. From their perspective, the Chinese people aren’t benefitting from hosting 65% of the world’s mining – far from it. To them, the Chinese mining industry is like having a roommate who sucks up all the power and Wi-Fi doing sketchy stuff in his room and refuses to pay his share of the bills. Once China started missing their climate targets, they banged on their roommate’s door with a clenched fist and told him to pack up his s*** and get out.
This ongoing “eviction” has led to what the crypto community has dubbed “the great mining migration.” Chinese miners have begun either selling off their hardware (gently-used RTX 3080, anyone?) or moving to places like Texas or La Paz who welcome miners with open arms.
As a direct result of China’s crypto suppression efforts, since 2017 the amount of Bitcoin traded globally with the Chinese yuan has plummeted from 80% to under 1%.
…so, why is China launching its own crypto?
After eight years of vigorously hating crypto, it’s at least a little surprising to see China introduce a crypto of their own. To the crypto community, it’s like seeing your friend who hates avocados show up to lunch with homemade avocado toast.
But like a good farmer, China wasn’t just clearing their field of kudzu for the sake of having fertile land – they were making room for something else: something they could monitor, control, and eventually profit from.
China hates Bitcoin (but they love the idea)
China and Bitcoin were destined to mix about as well as skittles and fish. Imagine you’re in a boardroom in Beijing, trying to sell the People’s Bank of China on a new currency that:
- They can’t control.
- Has a mysterious creator (probably American).
- Places an astonishing amount of stress on the national power grid.
- Allows online transactions to circumvent the country’s firewalls.
- Carries the ability to destabilize the national economy.
After the uncontrollable laughter subsided, you’d be politely, but promptly, escorted out of the building. But on your way out, you’d overhear the CCP officials murmuring behind you. Secretly, there were actually a few parts of your presentation that they liked.
What does China like about crypto?
What draws the Chinese government to crypto is the idea of replacing paper currency – a clunky, archaic way of facilitating transactions that’s vulnerable to counterfeiting. The Chinese would know – they themselves invented it 1,000 years ago.
In addition, the idea of a currency that could easily pass through borders where its citizens work and live, such as the nations along the Belt and Road Initiative, aka the “New Silk Road,” is incredibly appealing.
Finally, unlike paper, digital currency is much more easily distributed, monitored, and controlled.
So, they developed their own crypto: the digital yuan
Starting in 2014, the People’s Bank of China began developing their own, proprietary cryptocurrency: the digital yuan.
As you read this, the digital yuan has already begun rolling out:
- The People’s Bank of China has given out hundreds of thousands of “red packets” to random lucky citizens, each worth 200 RMB (~$31 USD).
- Over 3,000 merchants have begun accepting digital yuan, including Starbucks and Alibaba.
- Public sector employees have begun receiving payments or subsidies as digital yuan.
- Millions of Chinese citizens have downloaded the official app, China Construction Bank’s Digital Yuan Wallet.
Photo courtesy of China Briefing
This all begs a simple question: is the digital yuan an exact clone of Bitcoin? Or something else?
What makes the digital yuan different from Bitcoin?
The People’s Bank of China made this distinction pretty clear by giving the digital yuan its own classification; it’s not a cryptocurrency, it’s a “central bank digital currency (CBDC).”
Aside from an official state name, here are five key factors separating the digital yuan from Bitcoin:
1. It’s centralized
The biggest difference between Bitcoin and the digital yuan is that the latter is extremely tightly controlled and regulated by The People’s Bank of China.
They alone manage the distribution and value of the digital yuan, which is doled out in a “two-tier” system where the state gives it to the commercial banks and the banks distribute it to the people.
2. It’ll be used to actively monitor and program consumer behavior
One of the bigger draws of Bitcoin is that it’s pseudo-anonymous. There’s no government nor financial institution lording over every single transaction 1984-style. Nobody’s stomping out the activity they don’t like, charging taxes or fees in real-time, or worse, exerting influence on what should be a free market.
Granted, the IRS is extracting blockchain data specifically to crack down on tax dodgers and scam artists, but that’s mostly for our benefit.
With the digital yuan, however, nothing will be anonymous.
The adoption of the digital yuan is:
“giving the Chinese government enormous control over the economy,” Boris Schlossberg, managing director of FX Strategy for BK Asset Management, told CNBC. “Not only will Chinese policymakers know every consumer choice made in the economy, but they could also directly affect spending behavior by making the currency expirable by a certain date.”
That level of centralized authority and control goes somewhat against the original Bitcoin doctrine, to say the least.
3. It’s legal tender = a direct cash replacement
Satoshi Nakamoto, the mysterious founder of Bitcoin, never actually intended for his creation to replace paper currency. He (she? They?) didn’t actually see much of a problem with in-person cash transactions; per his original 2009 whitepaper, “These costs and payment uncertainties can be avoided in person by using physical currency.”
The digital yuan, by contrast, is designed to replace cash. As merchants and commercial banks develop the infrastructure for supporting the digital yuan, it’s likely that China will institute a mandate similar to India’s in 2016 where citizens will be required to turn in their cash, starting with the highest denominations.
4. It’s more stable than a surgical table
It might go without saying, but the digital yuan won’t have quite the same roller-coaster volatility that’s made so many early Bitcoin investors rich. Quite the opposite, in fact.
Instead, the digital yuan is designed to directly reflect the paper yuan’s value at all times. So unlike Bitcoin, the digital yuan will always have a stable, real-world value.
5. It’s designed to support (not replace) third-party payment services
The other day, I bought a little crypto through PayPal, and the irony wasn’t lost on me. Satoshi Nakamoto was pretty clear that Bitcoin was purpose-built to replace third-party payment services like PayPal, Zelle, and Apple Pay so that you and I could circumvent their “inherent weaknesses.”
So for me to buy Bitcoin through PayPal is like charging up a Tesla using a gas-powered generator.
But curiously, the People’s Bank of China doesn’t see these privately-owned payment systems as a threat to the digital yuan. Rather humbly, it sees the digital yuan as a way to support them.
According to Mu Changchun, Director of the People’s Bank of China’s Digital Currency Research Institute, the digital yuan could actually serve as a “backup” to platforms like Alipay and WeChat Pay “if they were to experience financial or technical problems.” The People’s Bank of China seems to acknowledge that these two platforms currently account for 98% of the country’s virtual transactions, so forcing over a billion people to swap payment platforms overnight could be disastrous. Better to integrate for now, and perhaps take a larger market share later (through competition or legislation).
How will the digital yuan affect crypto values?
To borrow an analogy from the show Billions, daily crypto values are like “a pig on LSD – you never know which way they’re gonna go.”
For that reason, it’s hard to predict how the rollout of the digital yuan will affect crypto prices around the world. Some say the recent explosive rise and fall in crypto values is what’s driving governments around the world to release their national crypto faster. Some say it’s the other way around – that the rising number of governments developing centralized cryptos is what’s causing prices to fall.
Zooming out further, China’s ongoing crypto crackdown has likely had more of an effect on values than the slow rollout of the digital yuan. Bitcoin’s survival is dependent on the health of the global blockchain, two-thirds of which is maintained in China. The U.S. and more recently El Salvador have created safe destinations for fleeing miners, but acquiring visas and transporting a thousand graphics cards over the Pacific Ocean isn’t so easy.
The disconcerting location of the blockchain isn’t the only ongoing threat to crypto investments. Here are some other risks to consider:
- Cryptos being taxable, but not FDIC insured.
- The proven vulnerability of cryptocurrency exchanges.
- Losing or locking yourself out of your crypto wallet.
- Countries tamping down on the blockchain’s power consumption.
- The number of countries banning Bitcoin outpacing the number of countries accepting it.
- An impending “Bitcoin winter.”
For El Salvador to start recognizing crypto as legal tender is a win for the crypto community, but it may not be the big victory they need right now. Prices are 40% down, “winter” may be coming, and Elon Musk will no longer take your BTC for a Model 3.
In short, the digital yuan may not be the biggest immediate threat to your crypto investment, but there are plenty of other wolves circling. I’m not definitively saying prices will go up or down; just that, as with all forms of investing, there are risks worth considering.
China’s new “cryptocurrency” (or more accurately, their central bank digital currency) isn’t itself much of an immediate threat to crypto prices. Designed to simply replace physical banknotes, it’s hardly even a cryptocurrency in the traditional sense at all.
The global rollout of the digital yuan might inspire other nations to crack down on Bitcoin and release their replacements as well.
It’s hard to say. The only certainty is that the rise of the digital yuan has sent a clear and powerful message to the economies of the world: crypto, in some form, is here to stay.