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China Plans to Launch Its Own Digital Currency: Good News or Bad?

China Plans to Launch Its Own Digital Currency: Good News or Bad?
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All eyes are on China this week, from protests in Hong Kong and US-China trade tensions to the latest announcement that China will launch its own digital currency. Here is our brief review of the latest news and their impact on the cryptocurrency space.

Economy

As China’s industrial production is falling, its economy is slowing down. US trade war with China is exacerbating this situation with economists predicting a further slowdown in economic activity over the coming year.

Cryptocurrency in China

China has had a complicated relationship with cryptocurrency over the last few years. While China hosts a large share of Bitcoin mining and trading, China’s cryptocurrency industry has been significantly constrained by the regulatory suppression. People in China can hold cryptocurrency but cannot legally exchange it for fiat money via trading platforms. Cryptocurrency exchanges were banned in 2017 and in early 2019 China’s NRDC proposed rules that would lead to the closure of the country’s crypto mining facilities.

The Winds of Change

Yet, the Chinese government may be shifting its stance on bitcoin and cryptocurrencies. Earlier this summer China’s courts ruled that cryptocurrency should be considered as digital property. This ruling is seen as a sign that the local government will soon ease regulatory pressure on Bitcoin and cryptocurrency in general. The latest news is that China is working on its own sovereign digital currency in response to US social media giant Facebook’s announcement that it is launching its cryptocurrency called Libra, which has the potential to become the new global currency.

What Does This Mean?

China looks to shore up its currency and make it more versatile in times of growing economic and political concerns. As the second largest economy in the world with 1.4 billion people, China is a significant player on the world’s financial stage. The country has already vastly adopted digital payments – a $17 trillion industry in 2018. If China throws its weight behind cryptocurrency, this could be a major step towards mainstreaming cryptocurrency adoption. China’s new project will also put pressure on large companies and countries to come out with their own digital currency projects.

But

The new digital currency that the People’s Bank of China and the local commercial banks controlled by the state plan to issue is expected to have characteristics that make it more of a centralized digital cash with extra surveillance capabilities, rather than a true cryptocurrency. The currency issuance will be very centralized. It will be governed by the same mechanisms as those existing for fiat currencies and may lack a blockchain component. What is clear is that the new currency will allow for data on financial transactions to be stored to maintain state control.

Maria Birger