Rebecca Liao is the co-founder of Skuchain, a currency agnostic blockchain platform for global trade, and served as a policy adviser to the Biden and Clinton presidential campaigns.
When China banned all cryptocurrency transactions in late September, it continued to move full steam ahead on its digital yuan and Blockchain-Based Service Network, known as BSN.
Is this another example of China’s fondness for implementing contradictory policies, or is Beijing attempting to pull off a technical impossibility? Perhaps a bit of both.
While blockchain technology underlies all cryptocurrencies, it has many uses in other fields that China is keen to pursue, such as trade finance, data sharing and identity management.
However, crypto generally leads when it comes to innovation and adoption, with other blockchain categories then applying many of the technology and business lessons for themselves. Banning crypto while trying to move forward with other blockchain applications would be like killing the car engine and getting out to push.
China’s latest crypto regulations are the most comprehensive to date and represent a concerted attempt to excise crypto activity from the domestic financial system. They prohibit all crypto transactions and mining, the process by which many crypto transactions are validated, and overseas crypto exchanges are also not allowed to provide services to China-based users.
A total of 10 Chinese government agencies, including the central bank, as well as financial, securities and foreign exchange regulators, will coordinate to enforce the regulations.
These new measures reflect a conviction among Chinese authorities that crypto “disrupts the economic order” and enables the “transmission of individual risks to the wider society,” according to the China State Council’s Financial Stability and Development Committee.
In response, China’s crypto market has routed transactions offshore, continuing to evade national authorities, with Huobi, the most popular crypto exchange in China, already seeing significant outflows.
Decentralized exchanges like Uniswap and dydx, on the other hand, have seen a sharp uptick. The latter has benefited in particular because its product functions much like the Chinese exchanges that have since suspended operations.
Since its inception, cryptocurrency has been immensely popular in China because retail investors lack attractive investment products and easy means to transact overseas. Some of the most popular crypto innovations solve those problems.
Crypto-based financial rails give retail consumers access to faster and cheaper cross-border remittances through services like PayPal, Visa and BitPesa, as well as ready sources of short-term liquidity and secured lending with above-market yields, including Aave, Compound, MakerDAO.
Platforms like OpenSea, Rarible, SuperRare provide clarity in intellectual property ownership through non-fungible tokens (NFTs), and instant transaction settlement, always-accessible wallets and a whole suite of derivative financial products are widely available. As a result, crypto sees billions in daily transaction volume, leading to an industry value of over $2 trillion.
Many of these technologies are already being leveraged to accelerate blockchain use cases that do not involve cryptocurrency and are still mostly in the pilot phase. Hyperledger Besu is the Linux Foundation’s attempt to catch up with the popularity of Ethereum’s infrastructure for blockchain-based applications.
IBM is encouraging digital assets that are not cryptocurrencies to convert into NFTs for faster adoption and the ability to integrate with crypto protocols. Blockchain interoperability and portable digital ID solutions — technologies that are key to the scalability of blockchain networks across the board — are much farther ahead in the crypto ecosystem.
These are all innovations that China wants for its digital yuan and BSN. Di Gang, deputy director of China’s central bank Digital Currency Research Institute, recently cited numerous such features that can be used by the digital yuan for issuance and transactions.
However, Di expressed concerns around scalability and performance, areas that crypto blockchains had been weak on in previous years but have since seen rapid progress.
Earlier in September, China announced the soft launch of its BSN, with pilots underway in Hong Kong and Macao. Many large corporations and governments throughout China and East Asia have signed up for the BSN. However, a developer portal has only just become available — an indicator of the pace at which many non-crypto blockchains deploy.
Because China’s blockchain ambitions need to leverage crypto innovation, how will Beijing reconcile that with its financial stability and market regulation objectives?
First, Beijing should base the digital yuan on blockchain. China can then use its enormous financial leverage to participate in and influence crypto, and leverage the crypto market for the adoption of blockchain technology.
Second, instead of focusing on enforcing a ban on crypto, Beijing should charge its top financial agencies with providing comprehensive legal frameworks that can be applied fairly and consistently so the crypto industry can grow in alignment with the goals of stability and trust.
Should China insist on a paradigm of control, as they have with so much technology, they will undermine the billions in blockchain investment they have contributed ever since President Xi Jinping encouraged the country to adopt blockchain in 2019.
The relevance of China to blockchain and crypto is already diminished, and they are ceding ground to the West for the first time in years.
China’s pattern of bans is self-defeating and unnecessary. Crypto wants regulation. Even crypto maximalists harbor no illusions: it can be and has been used for illegal activity and financial abuses. The market has reached a stage of maturity where it needs regulatory clarity to attract more capital.
Beijing, and other governments cracking down on crypto for that matter, should seize on the opportunity to drive the development of a significant technology for themselves and the people they govern.