Say Hello to Renminbitcoin
Will the release of its digital currency be China’s next salvo in its bid for world domination?
One of the biggest developments in global finance has recently occurred, but not enough people are talking about it. It features technology, money and a battle between global superpowers. China has made an abrupt U-turn on digital currency and, if I read the tea leaves correctly, will soon issue a new kind of money that we all must use if we wish to continue dealing with the world’s second largest economy. In so doing, we have to allow the Middle Kingdom to track what we buy, sell and invest in.
Now, the Chinese have a long history of being innovative with money. When the human race first started trading, they simply bartered stuff: I will swap my ass for your abacus and a bowl of your wanton dumplings.
Then, the Chinese introduced metal coins to the ancient world. A thousand years later, China introduced paper money to Europe. Soon, we will come to the third big Chinese financial innovation: digital money. I believe that China will be the world’s first country to issue a state-backed digital currency. And that will set the stage for world domination.
Why digital money is different
Existing currencies can be used for electronic payments, but they exist in physical form. Digital money exists only in electronic form. The most famous and widely used example is Bitcoin. Another is Libra, which a group of companies led by Facebook announced in June.
Digital money is great because one can move vast amounts of it easily and instantly, and it is harder to steal. But the best thing (for governments) is that it can be used to keep a permanent, public ledger of every transaction using a network of computers through blockchain technology, whereas transactions in existing currencies (also called “fiat currencies”) are largely anonymous.
The digital money that has been in the news is cryptocurrency. You get it by “mining”: when people use powerful computers to keep the blockchain working, they are rewarded by being given cryptocurrency in exchange.
Now, crypto-mining has a lot of potential in China. Profitable mining needs three things: cheap energy, a smart workforce and a stable technological infrastructure. China has the trifecta.
China is so good at mining cryptocurrency that two Chinese cryptocurrency mining giants, Bitmain and Canaan Creative, have separately filed for IPOs with the US Securities and Exchange Commission late this year.
China’s big U-turn
But only half a year ago, in April 2019, Beijing signalled that it planned to discourage crypto-mining by provisionally listing it as an industry to be eliminated. Observers assumed that China, like the US and the rest of the world’s governments, saw cryptocurrency as a threat to national sovereignty and was taking steps to discourage it.
Surprisingly, in October, Beijing quietly reversed its position, removing crypto-mining from the list. That low-key move coincided with Chinese President Xi Jinping’s high-key public statements supporting blockchain technology, just weeks ago.
Around that time, netizens in China began noticing something else. Posts criticising blockchain, or claiming it to be a scam, were being removed. A big policy shift was in the air.
Then, recently, Xinhua News Agency published a pro-Bitcoin article, giving detailed and objective coverage of cryptocurrency. That news agency is the biggest media organisation in China (and perhaps the world) and is the highest-ranking state media organ in the country alongside the People’s Daily. You can bet your little red book that the article and attitude were endorsed at the highest levels of Chinese government.
This gigantic U-turn could mean that China is on the verge of releasing its own digital money. If so, China would be the first nation in the world to do so.
What would this new Chinese digital currency look like? Based on President Xi’s public statements, I’m predicting that it would be a kind of state-controlled digital currency that uses blockchain. You could call it a crypto-communist cryptocurrency.
Digital money with Chinese characteristics
This may become the new face of the renminbi, which I call the Renminbitcoin, or RM? for short.
Will the RM? be just another cryptocurrency, with Chinese characteristics, with limited usage? Or will it cause a hundred flowers to bloom for the Chinese economy?
Let us look at the obvious benefits to introducing a state-backed digital currency.
It will help China track how its citizens and corporations are spending and investing, giving the Chinese authorities a wealth of information about its economy.
It also strengthens state control. China has introduced many ways to nudge its people in its desired direction. For example, its social credit system is designed to separate the nice from the naughty. Marry that to a digital currency and you can punish bad guys by literally withholding their pocket money.
But all that is nickel-and-dime stuff compared to this: world domination.
Want to buy goods made in China, enjoy infrastructure investments through its Belt and Road Initiative or obtain its foreign aid or loans? Transact in RM? or the deal is off.
Hence, it is quite possible that we are witnessing a historic event: China is readying a global currency to rival – and replace – the US dollar. It may be the fruition of China’s dream to create a digital currency that countries will use, not just to trade with China, but with each other.
So far, the US has used its economic power to implement policy far beyond its shores, because many other countries have the US dollar as their main foreign reserve currency. Oil and many other commodities are also quoted in US dollars.
This makes it easy for the US to control many things in the world, simply because it controls the US dollar. The US can impose sanctions, and target individuals, companies and countries, simply by outlawing the flow of its currency to those entities. Americans have weaponised their own currency.
China wants some of that power. Its dream could be for oil, gold, securities, basically anything to be quoted in RM? as the default currency. If that were to happen, then most transactions would be visible to, and maybe even controlled by, China. It too could use its RM? to effect sanctions on individuals, corporates and even nations, leading to Beijing and Washington competing on a more equal footing.
But if China requires those who buy stuff on Alibaba, for instance, to use the RM?, the US could react by passing laws and regulations to restrict the use of RM? by its citizens and companies. And banks and financial institutions that have anything to do with the US would be caught in the middle. A new front will open in the trade war.
What should the rest of us, who do not live in China or the US, do?
Coming to grips with digital money
Governments around the world have to stop vilifying cryptocurrency. Maybe they ought to take the cue from Singapore. Earlier this year, its authorities waived sales tax on digital payment tokens. And just recently, the MAS signalled an intention to regulate the trading of cryptocurrency futures.
This is in stark contrast to the attitude of other regulators. For example, Hong Kong’s Securities and Futures Commission said earlier this month that exchanges allowing trading of bitcoin futures “may well be conducting an illegal activity”.
Singapore’s central bank is taking a bold step, but a necessary one. If China intends to issue RM?, then it will happen. It would not be a long march at all, rather, it will be a great leap forward. As consumers and trading partners, we have to be ready to transact in cryptocurrency.
We also have to realise that, if and when we start to use the RM?, transactions will be logged into a server in Beijing and monitored by ?? (Big Brother). Money becomes data. If other governments follow suit and issue their own digital money, then that will enable them to monitor transactions done in that digital currency.
Welcome, then, to the third great Chinese financial innovation. As with metal money, and paper money, which China introduced and the rest of the world adopted, China’s new digital money will be the way of the future. Massive changes in the way we transact are afoot – you can bank on that.
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