The Race is on: China Plans to Gain “New Industrial Advantages” via Blockchain Technology
February 12, 2020
The Chamber of Digital Commerce reveals the text of 84 New Chinese Blockchain Patents Applications, Translated in English
By: Perianne Boring, Founder and President, Chamber of Digital Commerce
Last fall, the President of the People’s Republic of China Xi Jinping addressed China’s most powerful political body on the critical importance of blockchain technology:
“It is necessary to strengthen basic research, enhance the original innovation ability, and strive to let China take the leading position in the emerging field of blockchain, occupy the commanding heights of innovation, and gain new industrial advantages.”
President Xi Jinping’s talk has been described as a Sputnik moment. It is clear China is taking a leading role in the development of blockchain technology.
Money is power. But what is money?
Throughout most of recorded history the great civilizations, such as the Roman and British Empires, used gold, silver or both as money. Until, that is, 1971 when the world monetary and financial system moved to a fiduciary currency system. Currency became backed not by a guarantee of convertibility into a precious metal but by “the full faith and credit” of the United States. The power to regulate the value of the dollar became managed in the discretion of the Federal Reserve System rather than set, as stipulated in the Constitution, by the U.S. Congress.
The dollar — even as a pure fiduciary currency no longer legally convertible to a defined weight of gold — remains the world reserve currency. Yet, the hegemony of the dollar is not unchallenged.
Bank of England governor Mark Carney called for a global replacement to the U.S. dollar last year. His sentiment was echoed by one of the most influential thought leaders in China, Chen Gong, who wrote: “The “excessive privileges” of the dollar are increasingly incompatible with the current needs of international trade and financial transactions. For this, the world has a real need and reason to get rid of the dollar.”
Money is technology. Technology is power.
There is a new space race. It is the cyberspace race of building and controlling the systems and governance that will power the digital economy. As China’s president pointedly observed this race includes other advanced technologies — AI, Big Data and the IoT — but the pivotal challenge will be blockchain.
China has made developing blockchain technology one of its highest national priorities. China is not the only nation-state taking blockchain technology seriously. About 80 percent of central banks globally are interested in or already pursuing central bank-issued digital currency. The Federal Reserve, however, is not taking a leading role. At a House Financial Service hearing in December 2019, U.S. Treasury Secretary Mnuchin, said “[Federal Reserve] Chair Powell and I have discussed this. We both agree that in the near future, in the next five years, we see no need for the Fed to issue a digital currency.”
While U.S. policymakers and regulators have taken a skeptical view and innovation-discouraging stances, China is aggressively pursuing blockchain dominance. Blockchain development is part of China’s “13th Five-Year Plan”. This is not just an aspirational plan; China is well on its way to implement robust blockchain technology networks that will have far-reaching implications.
The People’s Bank of China (PBoC) has moved from the development phase to internal testing of the Digital Currency Electronic Payment (DC/EP) platform, according to local sources. Detailed technology specifications have not been publicly made available regarding this digital currency project, however the PBoC has filed more than 80 digital currency related patents.
The People Bank of China’s digital currency platform aims to replace the M0 money supply in China through a digital renminbi. M0 includes cash, coins, notes and other assets that are easily convertible into cash, China is a “cash-light society.” AliPay and WeChat Pay account for 96 percent of the mobile payment market in China. They “are running a very systematically important payment system,” per Mu Changchun, Director-General of the Institute of Digital Currency at the PBoC.
The PBoC is “trying to provide a redundancy to our very advanced electronic payment systems,” said Changchun. In other words, the government wants to run these systems, at the least in parallel. According to the filed patent applications, the DC/EP platform would not allow for anonymous transactions, only “managed anonymity”. Conventional bank account information will be used for identification and authorization.
Users will be publicly pseudonymous, but Chinese regulators will have the ability to track all transaction information, including the identity of the transacting parties, location of the digital currency, and process the transaction data in various ways. Circulation of the digital currency will be managed by the PBoC, with the ability to delete wallets and manage digital currency supply.
Chinese digital currency is intended to become tightly integrated into its existing banking systems.
For example, the patent applications indicate that digital currency wallets will be bound to conventional bank accounts in a dynamic manner. Payments and deposits will be processed through commercial banks. The patent applications also indicate circulation of the digital currency will be streamlined by allowing the banks to use various settlement mechanisms that increase efficiency. These efficiencies could speed up and lower costs for interbank clearing and cross border payments.
The PBoC blockchain patent portfolio is extraordinarily comprehensive. This allows some provisional inferences about China’s future course to be made. In the spirit of open source, we have translated the patent applications to English and is sharing the data freely to allow others to review and analyze this information.
It is critically important for American and western policymakers to understand how serious China and other nations are taking digital currencies and blockchain technology. It is crucial to become conscious as to what we can expect to see from those who seek dominance in the space, implications for the international monetary and financial system, and, more pointedly, for the U.S. dollar as the world’s hegemonic currency and America’s international preeminence are existential.