While most countries were distracted by the pandemic, China staged a technological revolution. Matthew Graham, CEO of investment firm Sino Global Capital, said of the significance of the event: “Americans are still trying to figure out whether they should wear a face mask, while China is promoting revolutionary technology”
China surges ahead in a race that few people realize
In the 13th century, Kublai Khan, the Mongol Emperor who founded the Chinese yuan dynasty, reversed the monetary Convention by issuing a decree: “Accept my money or die.”
The threat of execution, of course, was nothing new then. Khan’s true innovation was his remaking of the money itself. The grandson of the terrible Genghis realized that he could Finance his Kingdom, not tied to limited reserves of precious metals. Its geopolitical reach will no longer depend on the grueling mining and smelting of ore transported along the silk road. Instead, he could use a limitless and easy resource, and earn money from trees.
Mulberry trees, to be exact. In one of the stories of a contemporary of Marco Polo, it is said that a traveling merchant from Venice admired “how the great Khan makes the bark of trees, like paper, pass for money in all his country.” Medieval Europeans were stunned. But the Emperor was ahead of his time. Fiat currencies-descendants of Chao Kublai Khan, backed by a government decree rather than hard assets-are the standard everywhere today.
Fast forward to our century, and China is developing money again. But this time, paper money is being thrown out: China is switching to digital technologies. And although it all ended badly for the Mongols (they fell into hyperinflation and lost the throne), the current leaders of the middle Kingdom have something much more stable and durable in mind.
China has moved further than any other major country in developing a national digital currency – in this case, the purely electronic yuan, based on technology inspired by blockchains, the accounting databases that underpin cryptocurrencies such as Bitcoin. President XI Jinping loudly endorsed blockchain in an October speech, making it the first major global leader to support the technology. Xi promised to “seize the opportunity” that will allow China to “take a leading position” in this area.
Futuristic money, clumsily dubbed “digital currency / electronic payment” or DC / EP, is a dramatic step in this direction. The government is committed to ensuring that the currency, which is currently in an experimental stage, is ready for wider adoption by the time Beijing hosts the winter Olympics in February 2022, allowing China to showcase its financial technology prowess on the global stage.
Chinese officials have publicly touted the currency’s many advantages: lower transaction and transaction costs, greater financial accessibility, and for the state to strengthen its ability to fight crime and expand its influence abroad. The innovation is intended to strengthen the Communist party’s control over the Chinese monetary system and at the same time restore the authorities ‘ control over Chinese tech giants, especially Tencent’s WeChat and Alipay, which are managed by Alibaba’s Ant Group division linked to the IPO.
Some observers even believe that the electronic yuan could mean the beginning of the end for the us dollar as a de facto international trade channel. For Westerners who think that the digital currency in China will bear fruit, and that this is an amazing opportunity. But this possibility will reduce America’s ability to defend its economic and political interests. “Allowing China to win the race to become a payment hub in the next century is a much bigger threat to our national security than the perceived threats that Westerners attribute to digital currencies,” says Katherine Haun, a partner at venture capital firm Andreessen Horowitz. who is on the Board of the Libra Association, a blockchain consortium created by Facebook.
For now, however, the perceived threats Haun refers to, such as balancing privacy, law and order, and economic stability, have hindered the development of digital currencies outside of China. Of the 66 Central banks surveyed in a recent study by the Bank for international settlements, 80% said they had started exploring the possibility of creating a digital currency. But only 10% were close to their release. The Federal reserve is not one of them.
A cashless society is a surveillance society
China’s gambit could help attract 225 million people without access to banking services. All they need is a smartphone, not even a regular Bank account. E-yuan wallets can be used to distribute incentive payments, subsidies, and tax refunds. But most importantly, digital money will provide the government with unprecedented oversight and precise control over China’s economy. As in the case of the ancient Khan’s money, the greatest benefits are likely to be received by the state.
When Edith Yung, a Chinese citizen and investor in the venture capital firm Race Capital, noticed a segment on Chinese state television about blockchain technology a couple of years ago, something seemed wrong.
“He tried to teach the masses in simple language what blockchain is,” she recalls. But the word decentralization-the mantra against creating cryptocurrency boosters-was not mentioned at all, ” she says. “It wasn’t a blockchain.”
When the NBK first started considering a digital asset in 2014, Bitcoin only broke into the mass consciousness. Libertarians liked the way it allowed values to be passed on independently of government. But many banks saw something equally appealing in blockchain distributed Ledger technology: the ability to track financial activity with incredible accuracy.
China, always wary of capital outflows that could weaken its currency, has preemptively banned banks from processing cryptocurrencies since 2013. But the country’s leadership has studied and carefully selected aspects of blockchain technology for the DC / EP project, while maintaining its innate transparency, but rejecting its potential to push back the authorities.
With e-currency, China will have even more control over the money circulating in the system. Digital transactions do not necessarily have to pass through a checkpoint. Transparency will be an integral part of every possible internal Ledger. It could also allow the country to monitor investment risks more closely, potentially helping prevent the debt crises that periodically cripple China’s economy. Instead of solving problems after the fact, the electronic yuan will allow China to ” control everything in advance, program everything in advance.”
But skeptics fear more insidious results. Mu Changchun, head of the NBK’s digital currency research Institute, promised that DC / EP will offer “controlled anonymity.” But many consider this phrase an Orwellian oxymoron. Most likely, the digital currency will give the state financial awareness.
With the help of the electronic yuan, China will be able to track transactions of criminal suspects and terrorists, as well as labels that can be applied to dissidents and ethnic minorities. It doesn’t take much imagination to imagine how this technology can be combined with China’s nascent “social credit” system, granting privileges to decent citizens and denying access to Finance to anyone deemed disloyal.
It’s getting harder and harder for the West to keep up
After Facebook announced its plans for Libra in 2019, CEO mark Zuckerberg warned Congress That the free world risks losing its advantage over China. Since then, Libra has lowered its ambitions after initial setbacks, while the NBK has accelerated the timeline. And China may gain more than just a technological advantage: the electronic yuan represents the best chance to challenge the dollar as the world’s reserve currency by imposing the image of Mao Zedong on George Washington.
The US has benefited enormously from the dollar’s status as the world’s reserve currency since world war II. Exporters sell cheaper in the US, and lenders demand lower interest rates because they are paid in a globally recognized currency. The US also faces less risk of exchange rate fluctuations and has more influence on the monetary policies of smaller countries.
All monetary systems are subject to network effects, gaining more value as more people use them. Today, the yuan accounts for only 2% of the world’s foreign exchange reserves, while the us dollar accounts for more than 60% (and the Euro 20%). But if DC / EP ever reaches critical mass, it will probably be thanks to China’s “one belt, one road” global trade and infrastructure initiatives.
The belt and road, a Central element of XI Jinping’s foreign policy, helps China build a network of economically dependent client States from Southeast Asia to Egypt and Ecuador. If China manages to attract these countries to the e-yuan ecosystem, it could help the currency become a serious counterweight to the dollar. China has significant leverage over these countries – many of them have borrowed heavily from Beijing.
Last December, United States Treasury Secretary Steven Mnuchin told Congress that he and fed Chairman Jerome Powell considered digital currency a secondary issue. This may reflect a deep-seated disbelief that China can overtake America. The hawn, member of the Board of Libra, complains: “Every day it becomes more difficult for projects supported by the West to keep up with the times.”
DC / EP can cause problems for the US even without obtaining global reserve status. Thanks to the dominance of the dollar, the US is the global financial controller: they can effectively decide who is approved or blacklisted to use the SWIFT network, an international money transfer system. This allows the US, for example, to ” apply very targeted sanctions against specific Russian oligarchs in response to bad behavior.”
The Chinese digital currency threatens this power. “One of the built-in features of DC / EP is a direct transfer of money bypassing SWIFT,” notes Jennifer Zhu Scott, founder of Radian Partners, an investment firm in Hong Kong. Wider implementation of DC / EP could reduce America’s ability to punish adversaries and criminals and provide anyone involved in a political dispute with the US with an alternative place to do business.
The Chinese government is taking advantage of the opportunity to become an integral part of the global digital space for decades to come. Yifan he, CEO of Red Date Technology, a state-backed company that aims to offer blockchain-based cloud services, compares all this work to “building the next Internet.” The regular Internet, of course, owes its existence to research funded by the Pentagon. It’s a reminder that technologically ambitious governments can fundamentally change economic history. Just remember Kublai Khan.