Dovey Wan is a partner at Primitive Ventures, a crypto asset investment fund.
Contrary to what many think, China does not oppose blockchain technology.
Rather, it takes issue with bitcoin and other privately issued cryptocurrencies, which it fears may facilitate financial fraud and capital flight. The People’s Bank of China (PBOC) has, in fact, had an initiative for issuing a blockchain-based digital renminbi (RMB) since 2014. The project has already generated 71 patents and has initiated a trial operation for an interbank digital check and billing platform.
If successful, this digital RMB project could expand the central bank’s influence over both the domestic and international economy. It has broad implications for the geopolitics of money and for the future of private cryptocurrencies such as bitcoin. To understand the PBOC’s motives, we must first distinguish between the digitalization of fiat currency and digital fiat currency. They are not the same thing. Each has a very different impact on the money supply and on the power balance between central banks and commercial banks.
The digitization of currency, which stems from the advent of electronic payment/clearance and mature interbank IT systems, allows commercial banks to more efficiently and independently generate the credit flows that expand broad
money supply, or M2. By contrast, digital fiat currency, enabled by blockchain technology, affects the base currency measure known as M0.
Traditionally, central banks directly control base money creation/destruction but have only indirect power over the broader, credit flow-driven monetary supply. Now, with digital fiat currency, they have the potential to bypass commercial banks and regain control of currency creation/supply end to end, thereby structurally centralizing their power in policymaking.