Will China’s State-Backed Digital Currency Drive Bitcoin’s Next Bull Run?

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After Facebook introduced its Libra cryptocurrency, Mu Changchun, the deputy director of the People’s Bank of China (PBoC) payments department, announced at the China Finance 40 Forum that the PBoC is very close to launching its own central bank digital currency (CBDC). 

Many have seen the announcement as a Chinese response to the challenges that might be posed by Libra, if it takes off. In the announcement, Mu revealed some details about China’s CBDC plans: 

1. Digital currency is being viewed as an alternative to M0 (cash in circulation), with the expectation that it will have to support retail scenarios like brick-and-mortar purchases.

2. The central bank has designated several organizations to carry out the technical research and development of the digital currency (DC) and electronic payment systems (EP) in different directions, with the intention of adopting whichever solution proves best.

3. The DC/EP will adopt a “two-tier” operating system where CBDC is issued by the PBoC to banks, and from banks to consumers, sticking to a centralized management model. But it will also have individual user accounts not linked to traditional bank accounts and allow for value transfer directly from user to user, with no bank intermediary involvement.

China’s CBDC plan actually looks a lot like Libra, in that it will be a fiat-pegged cryptocurrency that’s entirely backed by bank reserves. The only major difference may be that CBDC can support retail purchasing. 

There’s no real technical roadmap for China’s CBDC yet, so we don’t actually know whether this currency will use blockchain technology. However, the use of a blockchain-like framework seems likely. 

The PBoC will likely be the sole issuer of this CBDC there will be no “mining” — but transfers between individual accounts will be possible without bank involvement. In the current banking system, the basic operating model of banks is custody. Traditionally, people deposit their money into banks as fiat currency — banks are responsible for opening bank accounts for each individual and hosting their money. 

Almost all existing payment infrastructure flows through these bank accounts, whether you are making payments with bank cards or third-party platforms (such as Apple Pay and WeChat Pay). 

Of course, banks do pay interest to account holders for the privilege of holding their money (though generally not very much). On the other hand, CBDC enables the transfer of value without bank accounts, and the public-private key system employed by blockchains can facilitate that with a security that was previously possible only through banks. 

In a public-private key system, a user’s digital currencies are stored on an “address.” The individual has the private key, and thus complete control over his or her own digital currency holdings. This allows for a value transfer that’s similar to passing cash, and totally decoupled from the bank account system.

The PBoC is likely to design the technical standard of the underlying infrastructure, such as the core encryption algorithms and the public-private key system, while banks and other operating agencies can develop applications with more functions (such as wallets) on top of the underlying architecture.

Mu Changchun stated that the currency will be capable of controllable anonymity. The PBoC will be able to see the real identities of all parties in all transactions, but other institutions or users won’t be able to see any private data, and users will have total control of the CBDC that’s held in their wallet address. This suggests that it will adopt a public-private key encryption system similar to those used on blockchains.

If this proves correct and China’s CBDC does adopt blockchain’s public-private key system, it could be a great bullish signal for the crypto market. In some ways, CBDC can be regarded as a stablecoin, which means that it might replace USDT if it were integrated into the crypto exchanges that Chinese traders frequent. Because of China’s government restrictions, there's no fiat trading available to most Chinese crypto traders, so they generally use USDT as a fiat replacement. But given the concerns some have about USDT not being backed by actual dollars, they might jump at the chance to replace it with CBDC.

Moreover, the goal of CBDC is to function as a common payment method. If it achieves that goal, its widespread use may help highlight the attributes of existing digital currencies with stronger consensus (like Bitcoin). As more people become used to paying with CBDC, a cryptocurrency, it’s likely that they’ll become aware of the value that’s offered by other cryptocurrencies. 

Bitcoin, currently the dominant player in the crypto market, seems best positioned to take advantage of this. It’s not hard to imagine how people using CBDC for everyday payments might also decide to use digital currency as a store of value or an investment vehicle. CBDC doesn’t offer much value for those purposes, but Bitcoin clearly does, and it certainly stands to benefit as people begin to realize that.

Regulation and Society adoption

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