Alibaba, Tencent, and Five Others to Receive First Chinese Government Cryptocurrency

According to Paul Schulte, former global head of financial strategy for China Construction bank, China’s Central Bank will launch a state-backed cryptocurrency and issue it to seven institutions in the coming months. (Michael del Castillo, Forbes). Mu Changchun, deputy director of the Paying Division of the People’s Bank of China and the new head of China’s cryptocurrency research lab, described this as a “two-tiered” system wherein the central bank would create the cryptocurrency and a small group of trusted commercial businesses would “pay the central bank 100% in full” to be allowed to distribute it. (Id.) The cryptocurrency will initially be dispersed to the 1.3 billion people and entities doing business with renminbi, China’s fiat currency, but the Central Bank hopes the currency will eventually be made available to spenders in the United States and elsewhere through relationships with correspondent banks in the west. (Id.)

More than a decade after the first bitcoin transaction in 2009, some governments and financial institutions want to harness the advantages these new forms of currency offer. (Matt Hougan, Forbes). A cryptocurrency is a digital asset that is stored, transferred, and recorded on blockchain, a software that creates a shared ledger. (Id.) The peer-to-peer ledger that blockchain software utilizes has been touted by supporters for increasing transparency and reducing the possibility of fraud. Additionally, blockchain software allows users to transfer funds securely without the use of traditional financial institutions or standardized currency. (Jonathan Levin, Bloomberg) Despite these advantages, some individuals such as Chris Hughes, a Facebook co-founder, worry that cryptocurrencies could threaten the ability of emerging market governments to control their monetary supply, the local means of exchange, and, in some cases, their ability to impose capital controls. (Tylor Hatmaker, The Daily Beast). Moreover, lawmakers and central bankers have expressed concerns regarding potential privacy violations concerning consumer data. (Ksenia Semenova, Stratfor). Government concerns about cryptocurrencies are understandable as they are a new form of currency that is not controlled by central banks or limited by national borders. 

In 2018, Venezuela was the first country to introduce a state-backed cyptocurrency, El Petro. (Francisco Memoria, CCN). El Petro is an oil-backed cryptocurrency, designed at an October 2017 meeting at the Venezuelan Central Bank. (Id.) Venezuela’s traditional currency had become practically worthless as the country continued to spiral downward economically, and El Petro was meant to serve as a means for Venezuela to circumvent western sanctions. (Jonathan Levin, Bloomberg). Despite this effort, it has been difficult to value El Petro because it does not appear on most international exchanges as a result of a U.S. embargo. (Id.) Due to the cost of extraction and low quality of oil in Venezuela, some have speculated that El Petro was a fraudulent inflated currency, but Bloomberg’s Aaron Brown believes that the theory behind El Petro is sound. (Aaron Brown, Bloomberg). An oil-backed currency allows the government to offer loans without being limited by its currency reserves, and the investment return is largely insulated from oil price fluctuations because revenues and expenses are both denominated in oil. (Id.)

In response to blockchain platforms becoming more abundant, the U.S. Department of the Treasury’s Office of Foreign Assets Control issued guidance on cryptocurrencies, sending a clear message that they are no longer a “fringe technology that offers shelter from government sanctions.” (Francisco Memoria, CCN). In 2018, cryptocurrency received significant regulatory attention, as the SEC continued to reject exchange-traded fund requests and took action against unregistered and fraudulent initial coin offerings (“ICO”). (Aaron Brown, Bloomberg). An ICO is a mechanism utilized to raise funds for new cryptocurrencies. (Benjamin Sherry, Investopedia) Internationally, the Financial Stability Board updated its commentary on cryptocurrency markets and potential implications for traditional finance while Japan operationalized their reporting system for suspicious cryptocurrency activity. (Id.) 

Despite the touted benefits of blockchain platforms, some are concerned by the challenges presented by blockchain in regard to regulatory oversight. (Olga Kharif, Bloomberg). In response, the Financial Action Task Force, a multi-government effort that combats money laundering and financing of terrorism, is addressing the issue of how participating nations should oversee virtual assets. (Id.) These new guidelines will require companies utilizing blockchain software to collect information about customers initiating transactions over a certain amount. (Id.) Additionally, the new requirements will be costly and present logistical issues for many of the participating companies. (Id.) The increased compliance costs could be fatal to many emerging blockchain platforms. Although early, it is likely that government regulatory agencies will step-up and play a larger role in blockchain transactions.

Regulatory agencies have three overarching goals when regulating financial assets such as cryptocurrencies. (Raphael Auer, Bis) These goals are: (1) combating the use of funds for illicit activities; (2) protecting consumers and investors against fraud and other abuses; and (3) ensuring the integrity of markets and payment systems, and overall financial stability. As the world looks for new ways to facilitate commercial transactions and enhance market efficiency, it will be interesting to see if the benefits of innovative monetary systems such as cryptocurrencies outweigh the costs imposed by regulatory oversight. (Michael del Castillo, Forbes).