Although many think China opposes blockchain technology, this may not be the case. Actually, the Chinese government has an issue with privately issued cryptos such as bitcoin as it believes that they may enable fraud.
The PBOC, the People’s Bank of China, already has an initiative for the issue of digital RMB (renminbi) based on blockchain, which was set up in 2014. There are already 71 issued patents for the project, and there's a trial operation with a billing platform and interbank digital check underway too.
If it is successful, the RMB digital project might grow the influence that the central bank has over the domestic as well as the international economy. There are widespread implications for the money geopolitics as well as private cryptocurrencies’ future, like bitcoin. If we are to comprehend the bank’s motives, we need to distinguish first between the fiat currency digitalization and the digital fiat currency too. They are not the same. They both have different impacts on the balance of power and money supply between the commercial and central banks.
The arrival of electronic clearance and payments and mature IT systems between banks has caused the digitization of currencies, which allows the commercial banks to generate credit flows and grow M2 or broad money supply more independently and efficiently. In contrast, the digital fiat currency, which is enabled by its blockchain tech, affects M0, the base currency measure.
The base money is traditionally controlled directly by the central banks, but these only have indirect power over the money supply that's driven by credit flow. With the digitized fiat currency, there is now the potential to sidestep the commercial banks and gain control over the supply and creation of the currency, thus centralizing the power in making policies structurally.
The interest shown in this solution by the PBOC comes at the same time that digital payment systems such as WeChat and Alipay have created cardless and cashless economies. This is a way of digitizing currency that’s built on a commercial bank account network, which operates at the M2 supply level of money. But, a digital RMB looks to be united with M0, which restores influence and control to the PBOC.
Fan Yifei, the PBOC’s Vice President, said in an interview: “With the help of technology innovation, we can gradually transit into issuance and circulation of digital RMB and impose effective supervision of in the private sector.”
China needs a new financial system, and this is what is intended with the creation of digital RMB. It's a way of giving financial control back to the PBOC in the hope of financial stability.
While the bank is considering the possibilities for the network's design, it seems that it will become a permission network of nodes controlled by the PYOB as well as other major Chinese banks. This implied that all transactions will be overseen by the government and other banks, but away from the public eye.
Eventually, a digital RMB will make coinage and cash obsolete. This is already apparent in the country. It will also make it easier to control M2 and commercial banks, meaning the PBOC could manage as well as regulate the debt market that's already stretched beyond its means. It will also become more challenging to hide banking services and products from the books, thanks to the programmability and traceability of blockchain.
The overseas influence could be strengthened too. China is also Venezuela’s biggest creditor as well as holding the sovereign debt of more than 14% of African countries.
What’s certain is that change is afoot.