The Chinese government has been closely studying blockchain technology in order to determine whether the immutable distributed ledger can be used to streamline routine business processes.
However, Chinese authorities have expressed concerns regarding the use of cryptocurrencies in financing illicit activities and potentially disrupting the country’s $12 trillion economy by facilitating capital flight.
People’s Bank of China Considering Blockchain-Based Yuan
While China’s government has attempted to restrict transactions involving cryptocurrencies, the People’s Bank of China (PBoC) has reportedly been conducting research to determine the feasibility of launching a blockchain-based Chinese yuan (CNY) since 2014.
This, according to Dovey Wan, a founding partner at Primitive Ventures, a “market cycle agnostic” investment firm which has invested undisclosed amounts into various cryptoasset projects such as ZCash (ZEC) and DFINITY.
Wan, who earned her Masters in Information Systems from Carnegie Mellon University, wrote in a blog post published on CoinDesk on May 17, 2019 that the digital yuan, or Renminbi (RMB), initiative may potentially allow the Chinese government to exercise greater control over the nation’s local and international economy.
M0 Versus M2
As explained by Wan, digital fiat currencies allow financial institutions to more effectively create credit flows which increase M2, the broad money supply. Meanwhile, blockchain-based digital currencies impact a base currency measure, referred to as M0.
Blockchain-enabled digital currencies could potentially allow central banks to “bypass commercial banks” in order to directly control money creation and supply channels. This would structurally centralize the central financial institution’s power and role in formulating monetary policy, Wan argued.
Chinese Government Will Most Likely Use Permissioned Network
According to Wan, the PBoC is looking at various types of network design for a digital, blockchain-powered RMB. She believes that it will most likely be a permissioned network in which the nodes will be managed by major Chinese financial institutions, including the PBoC.
This indicates that transactions involving a digital yuan would only be seen by Chinese banks, and not the nation’s citizens.
Blockchain-Powered Currencies Enable “Better Coordination Paradigm”
One of the main reasons for using blockchain technology, Wan noted, is to take advantage of “a better coordination paradigm” when compared to “traditional currency supply management, which is heavily dependent on bookkeeping,” Wan wrote.
Moreover, Wan thinks blockchain’s immutable nature and private-key cryptography can prohibit users from entering fraudulent transactions and also prevent users from counterfeiting currency notes.
A blockchain-based yuan could also assist the Chinese government in more carefully monitoring the spending history of the nation's residents. This would allow the government to "accurately assess creditworthiness" and detect illegal activities such as money laundering and tax evasion, Wan noted.