The Diplomat author Mercy Kuo regularly engages subject-matter experts, policy practitioners, and strategic thinkers across the globe for their diverse insights into U.S. 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 it strictly prohibited crypto mining and trading at the same time. According to IPRDaily data, Chinese companies have represented about 70 percent of the world’s global blockchain patent applications. The technology is used widely across a range of industries in China, like banking, financial services, public services, healthcare, logistics and smart manufacturing. If blockchain is mainstream anywhere, it’s China.
Similarly, regarding Web3 and metaverse, on one hand, national and provincial governments across China have unveiled plans to begin intensive development in the metaverse. Major Chinese tech companies like 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 prohibits crypto trading and transactions, China’s tech companies will create a “token-less” metaverse ecosystem with unique Chinese characteristics.
China’s State Council’s Financial Stability Committee cracked down on cryptocurrency mining and trading in May 2021. Explain the impact of this action on China’s regulatory influence on the global cryptocurrency industry.
Before China’s State Council’s 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 has suggested that investor protection, carbon neutrality, and financial stability are the three key factors for the new regulations. The crackdown has made significant impact on the global cryptocurrency markets. First, China’s mining crackdown has forced a seismic shift in bitcoin mining patterns, with some mining capacity in China moving overseas and some shutting down. Second, from a cryptocurrency trading perspective, China’s tightened regulations and enforcement have contributed to bitcoin’s price dropping more than 50 percent from its all-time high price within a few months. Finally, China’s new regulatory framework may influence many countries’ cryptocurrency-related regulations going forward.
Analyze the development of “central bank digital currencies” (CBDCs), such as e-CNY, digital ruble, digital rupee, and Britcoin and their countries’ cryptocurrency regulation oversight mechanisms.
Regarding the development of sovereign digital currencies (or CBDCs), China is many years ahead of the U.S. and Europe. China is the first global major economy to test its CBDC (e-CNY) usage 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 has completed a 40-day trial using central bank digital currencies to settle trades with Hong Kong, Thailand, and the United Arab Emirates via a special “bridge” arrangement.
China is poised to lead the development of CBDC. By contrast, the U.S. is way behind in digital dollar development, even with the Biden administration’s executive order this year. China’s digital currency and crypto regulation framework has influenced many countries’ lawmaking in the same fields. For example, India imposes high tax on crypto transactions and starts to develop its digital rupee. Russia takes a similar approach.
Western countries have dissimilar 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 U.K. CBDC (Britcoin)’s launch, citing a variety of concerns from “far-reaching consequences for households, businesses, and the monetary system for decades to come.”
Compare and contrast the U.S. and Chinese regulatory frameworks for stablecoin.
The U.S. and China don’t agree on much these days. But there’s one issue on which both superpowers see eye to eye: the regulation of “stablecoins,” a special type of crypto assets that pegs its value to conventional money.
On July 16, 2021, U.S. 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, especially global stablecoins, as a driver for its research and development of e-CNY.
China has prohibited all crypto transactions, including stablecoins. In the U.S. stablecoins may have room to stay, but given the common focus on stablecoins by the U.S. Treasury, Federal Reserve, the SEC, and Congress, the regulation of stablecoins may emerge soon in the United States.
Assess the regulatory risks and challenges for U.S.-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 U.S. What can be deduced is that the regulatory development in China is giving the U.S. government a sense of urgency, and the same may also be true for many other governments that have been slow to act on the rapid expansion of cryptocurrencies.
While the U.S. congress is still mulling over a regulatory framework for the cryptocurrency market, U.S. federal regulators like the SEC and IRS may create regulatory practices through enforcement actions on current high-profile cryptocurrency cases. For example, the SEC recently charged an ex-Coinbase product manager, along with two other individuals, in a first-of-its-kind crypto insider trading case. The regulatory uncertainty is major challenge to the Web3 cryptocurrency market.