China in Blockchain, Web3 and Metaverse – The Diplomat
Diplomat author Mercy Kuo regularly engages subject matter experts, policy practitioners and strategic thinkers around the world for their diverse insights into US Asia policy. This conversation with Winston Ma – adjunct professor at NYU School of Law; former CEO and head of the North America office of China Investment Corporation; and author of the recently published “Blockchain and Web3: Building the Cryptocurrency, Privacy, and Security Foundations of the Metaverse” (Wiley 2022) – is the 346th inn “Trans-Pacific View Insight Series.”
Describe China’s role in blockchain, Web3 and the metaverse.
China’s government has actively promoted the digital technology of blockchain and used it for its sovereign digital currency, but at the same time it banned crypto mining and trading. According to IPRDaily data, Chinese companies have represented about 70 percent of the world’s global blockchain patent applications. The technology is widely used across a range of industries in China, such as banking, financial services, public services, healthcare, logistics and smart manufacturing. If blockchain is mainstream anywhere, it’s China.
Likewise, regarding Web3 and the metaverse, on the one hand, national and provincial governments across China have unveiled plans to begin intensive development in the metaverse. Major Chinese tech companies such as Tencent, Baidu, and Alibaba have also recently announced plans to begin developing the technologies that will potentially make them key players in the metaverse. However, because China bans crypto trading and transactions, China’s tech companies will create a “token-free” metaverse ecosystem with uniquely Chinese characteristics.
China’s Cabinet Finance Committee for Financial Stability cracked down on cryptocurrency mining and trading in May 2021. Explain the impact of this action on China’s regulatory influence on the global cryptocurrency industry.
Before China’s Cabinet Financial Stability Committee promised to crack down on cryptocurrency mining and trading activities in May 2021, few people—even among global financial professionals—realized that China accounts for more than 70 percent of the world’s supply of bitcoin and other cryptocurrencies.
The Chinese government has indicated that investor protection, carbon neutrality and financial stability are the three key factors for the new regulations. The crash has had a significant impact on the global cryptocurrency markets. First, China’s mining operations have forced a seismic shift in bitcoin mining patterns, with some mining capacity in China moving overseas and some closing. Second, from a cryptocurrency trading perspective, China’s tightening regulations and enforcement have contributed to bitcoin’s price falling more than 50 percent from its all-time high in a matter of months. Finally, China’s new regulations may affect many countries’ cryptocurrency-related regulations going forward.
Analyze the development of “central bank digital currencies” (CBDCs), such as e-CNY, digital ruble, digital rupee and Britcoin and their countries’ monitoring mechanisms for cryptocurrency regulation.
When it comes to sovereign digital currency (or CBDC) development, China is years ahead of the US and Europe. China is the first global major economy to test the use of CBDC (e-CNY) on a mass scale, with the 2022 Winter Olympics as an important milestone for China to test e-CNY with international users. Recently, China reportedly completed a 40-day trial period using central bank digital currencies to settle trades with Hong Kong, Thailand and the United Arab Emirates via a special “bridging” arrangement.
China is poised to lead the development of CBDC. In contrast, the US is far behind in the development of digital dollars, even with the Biden administration’s executive order this year. China’s digital currency and crypto regulatory framework has influenced many countries’ legislation in the same fields. For example, India is placing high taxes on crypto transactions and is starting to develop its digital rupee. Russia has a similar approach.
Western countries have different political and economic systems and views on privacy and central control. In January 2022, for example, the United Kingdom’s House of Lords voted “no” to the launch of the British CBDC (Britcoin), citing a number of concerns from “far-reaching consequences for households, businesses and the monetary system for decades to come.”
Compare and contrast US and Chinese stablecoin regulations.
The US and China don’t agree on much these days. But there is one issue that both superpowers see eye to eye: the regulation of “stablecoins,” a special type of crypto-asset that ties its value to conventional money.
On July 16, 2021, US Treasury Secretary Janet Yellen asked the President’s Working Group (PWG) to develop a regulatory framework for cryptocurrencies.
It may be a coincidence, but on the same July 16, the People’s Bank of China (PBOC, China’s central bank) issued a white paper on the development of China’s digital currency (e-CNY), where the PBOC cited the rapid growth of cryptocurrencies, particularly global stablecoins, as a driver for the research and development of e-CNY.
China has banned all crypto transactions, including stablecoins. In the US, stablecoins may have a place to live, but given the usual focus on stablecoins from the US Treasury, Federal Reserve, SEC and Congress, the regulation of stablecoins may soon appear in the US.
Assess regulatory risks and challenges for US-China cryptocurrency competition.
Last year China was the big elephant in the room making big moves on crypto regulation; this year it’s going to be the United States. What can be inferred is that regulatory developments in China are giving the US government a sense of urgency, and the same may be true of many other governments that have been slow to act on the rapid expansion of cryptocurrencies.
While the US Congress is still mulling over a regulatory framework for the cryptocurrency market, US federal regulators such as the SEC and IRS can create regulatory practices through enforcement of current high-profile cryptocurrency cases. For example, the SEC recently charged a former Coinbase product manager, along with two other people, in a first-of-its-kind crypto insider trading case. The regulatory uncertainty is a major challenge for the Web3 cryptocurrency market.
