Through a previous article, we have made it clear that no, China does not hate blockchain technology in general and, on the contrary, is interested in putting it to good use as long as it is able to control the end result. This state of affairs may seem ironic in light of the fact that, as explained in an even earlier article, China doesn’t “love” existing blockchain projects such as bitcoin and the various altcoins which exist… on the contrary, its love-hate relationship with them is a lot closer to the latter.
“Stablecoin” is the key term for those serious about understanding how China could benefit from blockchain technology without embracing existing projects such as bitcoin.
As the very first cryptocurrency out there as well as the very first large-scale blockchain application, bitcoin has created a name for itself which revolves around decentralization: nobody “owns” it and while there are many stakeholders involved (from entities in charge of keeping the ecosystem secured, miners, to the average cryptocurrency investor), there is no single entity that can control bitcoin… again, this state of affairs was perhaps the number one “selling point” of the project right from day one.
What came next?
Altcoins, or bitcoin alternatives, as the name suggests. While many of these altcoins claim they are also decentralized, they tend to have professional teams behind them, marketing departments and a wide range of let’s call them tools which make many question (and rightfully so) just how decentralized they actually are. Even the most popular among them, for example Ethereum, have made network rollback decisions in a less than decentralized manner and, as such, it is fairly safe to state that altcoins tend to be at the very least less decentralized than bitcoin or even centralized altogether.
Where do “stablecoins” fit in?
Right from the beginning, we need to make it clear that a stablecoin is a type of altcoin which is “pegged” to a certain currency. The first such stablecoin was Tether, with the team behind it (the same entity in charge of the Bitfinex trading platform) promising to back up each and every USDT created with one USD held in a bank account controlled by them. Why use USDT instead of simply transacting via the dollar? Simply because many cryptocurrency exchanges are considered questionable at best by the banking system and as such, are unable to secure sound banking relationships because most reputable banking institutions want absolutely nothing to do with cryptocurrency-related projects. Indeed, even Bitfinex itself had and still has its share of difficulties finding reliable banking partners and it is therefore not the least bit difficult to understand the appeal of projects such as Tether.
Unfortunately, stablecoins are not without their share of issues. The number one is, you’ve guessed it, extreme centralization. At the end of the day, you as a holder of USDT or any other stablecoin are relying on the fact that the entity behind the stablecoin in question will keep its promise of pegging that cryptocurrency to the USD, EUR or any other currency.
What if that entity is lying?
What if they “print” their own currency recklessly?
What if the bank account(s) of that entity end up being seized by the authorities?
… the list of potential counterparty issues could go on and on. Unfortunately, history has proven that many of these concerns are quite reasonable. Stablecoin operators such as Tether have promised to keep things transparent by conducting reputable audits but have failed to do so and, on the contrary, more than shady dealings of theirs have repeatedly been exposed.
As such, as interesting as the stablecoin may seem, counterparty trustworthiness has been an issue right from day one.
The result? A potential “niche” emerges in the form of sovereign cryptocurrencies.
In other words, what if the central bank of a country created its own cryptocurrency? Right from the beginning, smaller nations like Venezuela have explored the possibility of launching cryptocurrencies backed by anything from local currencies to commodities such as oil in Venezuela’s case. As time passed, the topic appeared on the radar of more larger sovereigns as well, including… of course, China.
As mentioned in the article mentioned at the very beginning of this post, there are quite a few incentives involved for China.
On the one hand, it would be able to grab a significant slice of the worldwide cryptocurrency pie and on the other hand, it could do so without surrendering any kind of control by running its own stablecoin. On the contrary, blockchain technology in the context of a sovereign stablecoin would be a bit of a capital flow control dream cone true for various countries, as tracking movements is multiple orders of magnitude easier than with existing fiat currencies.
Might China stand to gain quite a bit by launching a stablecoin?
Will it do it?
Hard to say but in some capacity, it probably will.
Simply because the pros strongly outweigh the cons. Yes, it is true that this hasn’t really been done before on a large scale and indeed, there are unknowns involved such as whether or not sovereign stablecoins would receive support from the population. At the end of the day, however, it would be a relatively inexpensive project.
Compared to many other projects that sovereign nations spend (waste) money one, running a stablecoin would be a drop in the bucket. In essence, a country such as China has little to lose (because, again, the infrastructure costs pale in comparison with those associated with other projects) and a lot to gain by dipping its toes in these waters: from global recognition as a cutting-edge technology player to the much easier tracking of capital flows, let’s just say this seems like an equation that tends to be asymmetrically in China’s favor.