Cryptocurrency gobbledygook with Chinese characteristics

Cryptocurrency is an extra-special, super-powerful technology. Nothing else invented in recent memory has quite the same ability to hash commonsense into boosterish nonsense. That’s not to say there isn’t some brilliance in the code that facilitates Bitcoin and other distributed-ledger systems. But it’s just math. It doesn’t obviate the need to think clearly about what it can and cannot do.

Case in point: the People’s Bank of China’s efforts to create a Digital Currency Electronic Payment (DCEP). Check out this nonsense from Fortune:

It (DCEP) would also be highly centralized and tightly controlled—a totally different beast from the decentralized, utopian founding visions of cryptocurrencies like Bitcoin (both are digital currencies, but the DCEP is not a cryptocurrency).

Right then, so DCEP is a highly centralized, tightly-controlled currency which isn’t a cryptocurrency. Sound familiar? Yep, it’s just like a fiat currency issued by a central bank. I.e. what we have today. Or this:

It would also function as a safeguard against a border-hopping Libra, which lies outside government regulation and which would struggle to gain traction if the PBOC currency, “DCEP” (digital currency electronic payment), was already in widespread use.

Which is nonsense on high stilts, for reasons which should be obvious, but if not, they’ll become clear in a second.

This piece from Nikkei is better, but does not dig into the problems with the PBC’s “vision”. So I thought I’d lay it out.

Bottom line, I think the official reasoning goes not make any sense, and DCEP will turn out to be a ridiculous waste of time. Alternatively, the PBC is throwing up a lot of smoke and – ambitiously - sees DCEP as a means to monitor everyone’s transactions in real time.

Let’s start with the basics: what makes something, be it cowry shells, bits of paper, gold coins or digits in cyberspace, attractive as money?

For most people, cash and its digital equivalent in your bank account, is perfectly fine. It’s easy to transact with, it’s an OK store of wealth and it’s a good way of communicating prices.

Some folk worry though that central banks will print too much money and inflate the value of cash away. Depending on how much you worry about this, you might become what’s known as a ‘gold bug’. A mild case of gold buggery will mean you buy some gold; worst cases result in you calling for a return of the gold standard. You’ll be required to inject the word “Zimbabwe” into most conversations (but you’ll never visit).

The attraction of Bitcoin is the guaranteed limited supply. Unlike even gold (and just about every other cryptocurrency, I think), there is only ever going to be a certain number of Bitcoin, and so once you’ve got buy-in from the end-of-world ‘Preppers’ (and those who are not sure), you’ve got a truly scarce asset, even scarcer than gold, that people want to hold as a store of wealth.

Bitcoin is ridiculously hard to transact in, though, so it’s not for ordinary people, but given you can own it anonymously, that’s a hurdle drug dealers, hacker-blackmailers, Liaoning People’s Congress delegates etc. are happy to deal with. They use it as a secret way to get paid and hold their ill-gotten gains.

Then you have things like Alipay wallet – which is just Renminbi, RMB, but in electronic format on your phone. This is primarily used as a means to pay for stuff, since it is super-easy to move from your bank account and pay people. You can even sweep it in to a money market fund or buy a wealth management product, and get paid interest. At the very least, you get convenience and you can store some wealth in it too. But it’ just RMB – so it’s value will inflate away like holding cash.

And now we have the PBC’s DCEP idea. This, as far as I can tell, is just electronic RMB with different plumbing from Alipay etc. If I understand the PBC’s thinking, it will ‘issue’ DCEP to the banks, who’ll then pass it on to you. Exactly how this will differ from the electronic RMB they currently issue to the banks, who then pass it on to you, I don’t know. Maybe it will be the equivalent of CNH and CNY - exactly the same thing, but just in different places.

Can DCEP be a store of wealth? Nope - it’s just RMB, so it can be issued digitally as much as the PBC wants. Is it secret? Certainly not – the PBC should able to see who’s got what. Is it convenient? Well, that depends on the infrastructure the PBC builds around it. But it’s hard to think they’ll beat Alipay in a fair fight. (Expect Party members to get told to download the DCEP app in a few years time.) Will it encourage others outside of China to use RMB? Well, I can’t see why it would. There would be no difference from holding RMB in your bank account and given its RMB, it’ll have to be subject to all the same capital controls.

So what is the PBC thinking? There is some suggestion that the DCEP can be Beijing’s rival to Facebook’s Libra, as Fortune claimed above.

Ha! The thing with Libra is that it’s designed as an electronic basket of “hard currencies” (i.e. currencies which people/central banks actually want to own). So for a China-based buyer it’s the equivalent of buying some US dollars, Euro and Yen – which a lot of people would like to do, but are currently unable to do much of because of capital controls.

So if Libra ever gets off the ground, then PBC will almost surely just ban it as they’ve done Bitcoin. And if the RMB ever becomes a “hard currency”, with a credible central bank and an open capital account, then holding it in a normal bank account will do just fine.

So, having dispensed with all the official silliness, could the PBC really have a more nefarious motive? Well, in theory I guess. The PBC has decided to build a ‘centralised’ system, rather than a decentralized one (which defeats the point of distributed-ledger systems like Bitcoin), where trust resides in the community. In theory, that would give them - and them alone - all the access they needed to the data. Depending on how well they set up the systems, they should be able to see all transactions in real time, and be able to link RMB savings at the banks directly to an ID number. But that’s an awful lot of infrastructure to build and data to crunch. Sounds to me like cyber-pie in the dystopian-sky.

More practically, if all your savings at the bank are in DCEP and the money on your phone is DCEP and everyone you buy stuff from takes DCEP, then cash can be effectively banned. So I guess that means no more officials being found with pallets of RMB cash in their fifth apartment’s fourth bedroom, or packing it in suitcases and private-jetting it down to Manila for conversion into US dollars.

Alternatively, given the top leadership has decided they need to “do” crypto even while they’re trying their damndest to shut down all cryptocurrency onshore, maybe some bright spark at the PBC just sees an opportunity to gain favor with the bosses. Let’s make DCEP! It’s electronic! Maybe the real point is to talk a lot about it at conferences around the country, and get paid lots of fat envelopes of very unelectronic RMB cash.