Digital currency can be an valuable experiment – a comment from People’s Daily in China

CN Regulation

People’s Daily, the official newspaper of Chinese Communist Party and the most authoritative official media in China, has released a commentary on digital currency on April 16th. The commentary is written by the assistant of the director of Chinese Academy of Social Sciences and he thinks that digital currency can be a valuable experiment for the financial system.

Does this show a sign of deregulation? To get a conclusion, let’s take a look at the whole article first.

Here is the translation of the original article:

The price of digital Cryptocurrencies have been fluctuating dramatically in recent weeks. Bitcoin, for example, has plummeted all the way from its all-time high of USD 20,000 to USD 7,000, then it somehow went up 11% in a single day. As the market has been volatile all the time, attitudes toward digital currency vary significantly among different governments. Certain government has declared that they will launch the first fiat digital currency, showing a sign of strong support, while most of other governments are processing with caution, prioritizing on the research and guidance of digital currency.

There could be five reasons for this divided attitudes.

First, each country has seen a unique feature in digital currency, and their focuses are different. For example, the Petro released by Venezuela government, it’s more like digital debt than digital currency.

Second, X factors are involved, such as domestic politics and international competition.

Third, the influences of digital currency use cases vary from country to country, some can be positive, some are negative such as black market transaction and money laundry.

Fourth, the regulation and law on digital currency are different from country to country.

Fifth, different angle of perspectives on digital currency from different countries. Some are interested in its currency property, while others are inclined to treat it as assets and commodities.

Due to all these factors, we have to clarify certain vague concepts before we start exploring the fundamental of digital currency. These concepts are like is it a fiat digital currency controlled by central bank? Or is it an illegal project issued by individuals? It is cryptocurrency? Or is it just a digitalized currency? And is it just a scam?

The emergence of new technology has indeed made the boundary of currency vague. Theoretically, New Monetary Economics has pointed out the possibility of disappearance of currency. Historically, despite that the dominance of fiat currency has always been solid, certain private currency did manager to succeed in some districts. For example, Wara is a private currency appeared in 1920s in Germany. Now, digital currency with decentralized features will make private currency even more competitive and promising.

Actually, private currencies, no matter in traditional form or in an upgrade version of Bitcoin, will inflict huge impacts on the currency authority of every government. However, in a technical point of view, it will cost too much to implement a complete prohibition on digital currency for regulators, therefore, most authorities are focusing on bottom line regulation and investor protections and actions are onto AML and market manipulation.

Generally speaking, currency digitalization will bring a profound impact to the existing currency system, as it will directly influence the statistics of money supply, monetary transmission mechanism and the efficiency of payment and settlement. The advent of digital age has increased the amount of near-currency assets, which weakened the relevance and linkage between policy and indices of money supply.

If we specifically look into Bitcoin, its property as a currency is actually not so highlighted. Bitcoin is more like an asset and a commodity nowadays. Therefore, the impacts Bitcoin made are not in currency level, the impacts are more in financial market.

The existing currency and financial system is not a result of natural evolution, it’s a selection of regulations from laws and governments. Despite that digital currency system is flawed for the moment, it still can be a valuable experiment, especially for an exploration on super-sovereign currency.

Digital currency is fundamentally different from metal and credit currency, it is an attempt to explore the trade consensus in the age of Big Data. Of course, if digital currency is trapped in the struggle of price volatility, speculation and deflation for too long, and the function to act as a payment method cannot implemented, it will gradually stray far away from a valuable experiment. What will it be then? Maybe a digital asset, may it will just disappear in the history.

Our take: Does this show a sign of deregulation? Well, just like the attitudes from previous statements and actions, Chinese authority is positive on the potentials of blockchain and digital currency and willing to tap into the development of blockchain. However, you can never be too cautious, especially for a highly volatile asset which individuals can get involved.

So, I don’t think it’s a sign of deregulation on cryptocurrency, but it has pointed out a direction for blockchain projects in China. Since regulators know clearly that there is no way to prohibit cryptocurrency, they will focus more on the guidance. The ultimate goal would be using good cryptocurrency to drive out the bad ones.

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Zarc Gin is an analyst for Warp Speed Fintech, a Fintech, especially InsurTech-focused Venture Capital based in China.

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