The Diplomat writer Mercy Kuo regularly engages scholars, 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 managing director and head of North America office at China Investment Corporation; and author of newly published “Blockchain and Web3: Building the Cryptocurrency, Privacy, and Security Foundations of the Metaverse” (Wiley 2022) – is the 346th in “The 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 has strictly prohibited crypto mining and trading. According to IPRDaily data, Chinese companies accounted for 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.
Similarly, regarding Web3 and 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. But because China bans crypto trading and transactions, China’s tech companies will create a “tokenless” metaverse ecosystem with uniquely Chinese characteristics.
China’s State Council Financial Stability Committee cracked down on cryptocurrency mining and trading in May 2021. Explain the impact of these actions on China’s regulatory influence on the global cryptocurrency industry.
Before China’s State Council Financial Stability Committee vowed to crack down on the cryptocurrency’s 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 suggested that investor protection, carbon neutrality and financial stability are the three key factors for the new regulations. The crackdown has made a significant impact on the global cryptocurrency markets. First, China’s mining crackdown has a seismic shift in bitcoin mining patterns, with some mining capacity in China moving overseas and some being shut down. Second, from a cryptocurrency trading perspective, China’s tightening regulations and enforcement have contributed to bitcoin’s price dropping more than 50 percent from its peak price in a matter of months. Finally, China’s new regulatory framework may affect many countries’ cryptocurrency-related regulations going forward.
Analyzes the development of “central bank digital currencies” (CBDCs), such as e-CNY, digital ruble, digital rupee and Britcoin and their countries’ oversight mechanisms for cryptocurrency regulation.
When it comes to developing sovereign digital currencies (or CBDCs), China is many years ahead of the US and Europe. China is the first global major economy to test its use of CBDC (e-CNY) on a mass scale, with the 2022 Winter Olympics as a major 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 trade with Hong Kong, Thailand and the United Arab Emirates through a special “bridge” arrangement.
China is poised to lead the development of CBDC. In contrast, the US is far behind in digital dollar development, 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 levies high taxes on crypto transactions and starts developing its digital rupee. Russia takes a similar approach.
Western countries have different political and financial systems and views on privacy and central control. For example, in January 2022, the United Kingdom’s House of Lords voted “no” to the UK’s CBDC (Britcoin) launch, citing a variety of concerns about “far-reaching consequences for households, businesses and the monetary system for decades to come.”
Compare and contrast the US and Chinese regulatory frameworks for stablecoin.
The US and China don’t agree on much these days. But there is one issue on which 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 called on 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 its development of China’s digital currency (e-CNY), where the PBOC cited the rapid growth in cryptocurrencies, particularly global stablecoins, as a driver for its research and development of e-CNY.
China has banned all crypto transactions, including stablecoins. In the US, stablecoins may have a place to stay, but given the general focus on stablecoins by the US Treasury, Federal Reserve, the SEC and Congress, regulation of stablecoins may soon emerge in the United States.
Assess the 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 USA. What can be inferred is that the regulatory development in China gives the US government a sense of urgency, and the same may be true for many other governments that have been slow to respond to 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 actions on current high-profile cryptocurrency cases. For example, the SEC recently charged a former Coinbase product manager, along with two other individuals, in a first-of-its-kind crypto insider trading case. The regulatory uncertainty is a major challenge for the Web3 cryptocurrency market.
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