China Is Preparing Its Own Bitcoin Alternative

Mish Shedlock |

Photo via Michael Wuensch & LoggaWiggler

Bitcoin hit an all-time high of $1,172.09. Traders are happy because the SEC is expected to rule on a Bitcoin ETF by March 11. Meanwhile, Bloomberg reports China Is Developing its Own Digital Currency.



After assembling a research team in 2014, the People’s Bank of China has done trial runs of its prototype cryptocurrency. That’s taking it a step closer to becoming one of the first major central banks to issue digital money that can be used for anything from buying noodles to purchasing a car.
At the same time as it builds up its own capabilities, the PBOC is increasing scrutiny of bitcoin and other private digital tenders. It doesn’t want a bitcoin bubble to blow up. And since currencies have historically been issued by the state, not private players, it doesn’t want to cede the cryptocurrency space to companies it has no control over.
Chinese people have embraced online payments for just about everything. To buy a can of Coke, thirsty commuters scan QR codes on their smartphones rather than feed coins into a vending machine. At Lunar New Year gatherings, money is exchanged via a few presses on a smartphone instead of crisp notes handed over in red envelopes.
All of that poses a challenge to the PBOC’s status as the central bank of both the digital and physical realms. So if you can’t beat them, join them.
“Getting to know more precisely how much banks lend, where the money goes and the pace of credit creation is key to curbing money laundering and making monetary policy more effective,” said Duan Xinxing, vice president of Beijing-based OKCoin Co., one of the country’s biggest bitcoin exchanges. Issuing digital currency will make it easier for the PBOC to monitor risk in the financial system and track transactions economy-wide, he said.
OKCoin is among cryptocurrency exchanges that has recently taken steps to halt bitcoin withdrawals amid efforts to clamp down on capital outflows.
In January 2016, the PBOC said it will have its own cryptocurrency “soon,” but there has still been no formal start date announced. In the meantime, there’s been strong advocacy from senior officials, including Fan Yifei, one of the PBOC’s deputy governors.
“Cutting costs is an obvious benefit, but the impact of shifting to blockchain-based digital money from the current payment structure goes beyond that,” said Larry Cao, director of content at the CFA Institute in Hong Kong. “There’s a potential you can pay anybody in the system, any bank, and any merchant directly. Blockchain will change the whole infrastructure. This is revolutionary.”
Real-time data
For the PBOC, using blockchain, the technology that underpins the digital currency bitcoin, will allow it to trace transactions and collect “real-time, complete and authentic” data to compile precise monetary indicators such as money supply growth, OKCoin’s Duan said.
“The transparency of economic activities in every corner in the country will significantly improve,” Duan said. “The central bank will have unprecedented knowledge of how the economy runs.”
So instead of relying on monthly surveys of businesses, or collations of spending from the statistics authority, the PBOC and therefore the government would have real-time readings on the pulse of consumers. Policies could then be fine tuned on a day-to-day, even hour-to-hour basis, giving an unprecedented level of precision to monetary management.

Capital Flight

Bitcoin is a primary means of capital flight out of China. How long will that last?

Here’s one key thought on bitcoin from the article: “OKCoin is among cryptocurrency exchanges that has recently taken steps to halt bitcoin withdrawals amid efforts to clamp down on capital outflows.

When China launches its own cryptocurrency, will it ban Bitcoin transactions?

If so, what happens to the price of Bitcoin?

Contrary Indicators

The launch of a Bitcoin ETF reminds me of those waiting for the launch of JDSU Leap Options in 2000 so they could “load the boat”.

During the 1990s, JDS Uniphase stock was a high-flyer tech stock investor favorite. Its stock price doubled three times and three stock splits of 2:1 occurred roughly every 90 days during the last half of 1999 through early 2000, making millionaires of many employees who were stock option holders, and further enabling JDS Uniphase to go on an acquisition and merger binge. After the telecom downturn, JDS Uniphase announced in late July 2001 the largest (up to then) write-down of goodwill. Employment soon dropped as part of the Global Realignment Program from nearly 29,000 to approximately 5,300, many of its factories and facilities were closed around the world, and the stock price dropped from $153 per share to less than $2 per share.

Blockchain Technology

I like the blockchain technology behind digital currencies like Bitcoin. Blockchain is perfectly suited for recording mortgages, deeds, autos, etc.

Title insurance companies will cease to exist, at least as stand alone title companies.

Scalability

Every transaction is recorded on the blockchain so the requirement of resources to process and store the information continually grows.

This poses a scalability issue for high volume transactions. Recording every payment would certainly constitute high volume.

Scalability Articles

  1. The Real Blockchain Scalability Challenge
  2. Waves Platform Implements New Blockchain Scalability Approaches
  3. Blockchain scalability

If blockchain can scale to the point where governments can ban cash and record every transaction, expect instant tax collection and loss of privacy.

Digital Downside

  1. The government will know where every penny is at every second.
  2. The government will know every monetary transaction in real time.
  3. You will no longer be able to give the babysitter, gardener, bartender, a friend, or anyone else an extra penny without the government knowing.
  4. Sales tax collection and VAT tax collection will be instantaneous.
  5. Governments can impose negative interest rates and other confiscation schemes at will.

If cash is banned, the blockchain will record every penny you spend, and who you gave it to.

Money laundering will become much more difficult, but the cost will be a loss of privacy, threats of negative interest rates, and other cash confiscation schemes.

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