Unchained - Why China Aims to Replace Cash With the Digital Yuan - Ep.146

Episode Date: November 19, 2019

Martin Chorzempa, research fellow the Peterson Institute, and Dovey Wan, founding partner at Primitive Ventures, discuss China's new blockchain push and the forthcoming DCEP. They cover how the blockchain initiative is part of an effort to set global blockchain standards, how it fits into the larger U.S.-China trade war as well as the threat from Facebook's Libra, and why part of the motivation behind the DCEP may stem from the shadow banking system in China. They also talk about how the DCEP might work, why it aims to be like cash, and ways in which a successful digital currency could be used to help internationalize the renminbi, but why other countries will likely still resist becoming more dependent on China's currency. We also explore what "controlled anonymity" will look like in the DCEP, why it might actually be preferable to transacting via WeChat Pay or Alipay and whether or not Chinese people will become interested in Bitcoin due to this exposure to blockchain technology. Thank you to our sponsors!  Kraken: https://kraken.com/ Crypto.com: https://crypto.com/ CipherTrace: http://ciphertrace.com/unchained Episode links:  Martin Chorzempa: https://www.piie.com/experts/senior-research-staff/martin-chorzempa https://twitter.com/ChorzempaMartin Dovey Wan: https://twitter.com/DoveyWan Xi Jinping’s speech: https://www.coindesk.com/president-xi-says-china-should-seize-opportunity-to-adopt-blockchain Cryptography law: https://www.coindesk.com/chinas-congress-passes-cryptography-law-effective-jan-1-2020  China’s 500 enterprise blockchain projects: https://www.coindesk.com/from-banking-giants-to-tech-darlings-china-reveals-over-500-enterprise-blockchain-projects Changchun Mu, the deputy director of the payment and settlement department of the PBOC, on how DC/EP aims to replace the M0 money supply (banknotes and coins): http://www.cf40.org.cn/uploads/newsletter/20190803.pdf Dovey’s article on how the digital yuan will affect the M0 money supply: https://www.coindesk.com/digital-renminbi-a-fiat-coin-to-make-m0-great-again China’s already very digital economy: https://www.piie.com/blogs/realtime-economic-issues-watch/who-likes-facebooks-libra-currency-not-chinese Reaction of Chinese dissident to China’s blockchain push: https://www.coindesk.com/bitcoin-dissident-sees-dark-warnings-in-chinas-blockchain-push Unconfirmed interview with Alex Gladstein of the Human Rights Foundation: https://unchainedpodcast.com/why-the-digital-yuan-could-one-day-be-seen-as-a-blunder/ The commercial entities involved in helping to release the DCEP: https://www.forbes.com/sites/michaeldelcastillo/2019/08/27/alibaba-tencent-five-others-to-recieve-first-chinese-government-cryptocurrency/#95e9d351a516 How they will be involved: https://twitter.com/DoveyWan/status/1191807688570626048?s=20 ”Controlled anonymity“: https://twitter.com/ChorzempaMartin/status/1162071943568338944?s=20 Problems that could arise with the DCEP: https://www.scmp.com/economy/china-economy/article/3035797/blockchain-endorsement-chinas-xi-jinping-could-lead-fraud-and People with poor social credit banned from buying plane and train tickets: https://www.theguardian.com/world/2019/mar/01/china-bans-23m-discredited-citizens-from-buying-travel-tickets-social-credit-system The FT on why China’s currency will not replace the USD: https://ftalphaville.ft.com/2018/09/19/1537329600000/China-s-currency-will-not-replace-the-US-dollar/  2000 speech by Bill Clinton: https://archive.nytimes.com/www.nytimes.com/library/world/asia/030900clinton-china-text.html?mcubz=2&module=inline Change in plans to eliminate the Bitcoin mining industry: https://www.coindesk.com/sichuan-should-work-to-remain-attractive-to-crypto-mining-policy-advisor Learn more about your ad choices. Visit megaphone.fm/adchoices

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Get a metal MCO visa card with up to 5% back on all your spending. Want more? Download the crypto.com app today. The topic today is China's digital currency, DCEP. Here to discuss our Martin Shorzampa Research Fellow at the Peterson Institute and Debbie Wan, founding partner at Primitive Ventures. Welcome, Martin and Debbie. Hi, Laura. Thank you.

Before we dive into the topic at, hand, why don't you each give a little background on yourselves and how you came to understand the financial technology sector in China? Martin, do you want to start? Sure. I arrived in China, moved to Beijing in mid-2013 just at the moment when Ant Financial, you know, Ali Pei launched Yuabao. So I lived in China during the beginnings of its financial technology revolution and also the beginnings of its interest in Bitcoin and then decided to go start a book project writing about fintech in China that I'm almost done with. And Devi, what about you?

Yeah, so I was born and raised in China. And so I did my undergrad, like just bad in Guangzhou. And so I'm a Cantonese. And so that is where the province and state is the headquarters for Tensen, Nettis and Selmy, and then all this like many of other just Chinese tech giants. I moved to U.S. at the age of 20 to get my master's, degree in Carnegie Mountain University and I moved to Bay Area. So right now, so I'm in Bay Area for about almost 10 years. And I spent my first four years in just in eBay as

engineer and product manager. That's when I learned about Subaru as one of the, so as one of the marketplace out there. And so that was back in 2012. And I learned about Supero and then further get into Bitcoin. And that's how I got into crypto and, you know, FinTech, like marketplace, like in general. So like after eBay, so I work as venture capitalists and for like the rest of my life and pretty much cover anything, thin tech, crypto and marketplaces. So I have been doing this like crypto-related investment for like last four or five years and like heavily involving all this community governance and crypto asset investments

and trading mining, etc. Great. Yeah. And you also often break news in the crypto space on your Twitter feed, which I find really funny because sometimes I see some journalists complaining like, hey, we were working on a story on that. And Dove just told everybody on Twitter. Anyway, okay, so why don't we get into all the events that happened around blockchain and China recently? Now, from my perspective, I would say kind of like the frenzy around all this began when Xi Jinping gave a speech on October 24th saying that China should seize blockchain. So why don't you guys just describe for me kind of like, you know, what he said, what you thought the significance was, and then maybe go into what you thought were the other big kind of like pro-blockchain events and initiatives that happened in China afterward.

And you can also give your reaction to each of these. Yeah, sure. So, like, first of all for, this is actually not the first time that Xi Jinping, like, publicly, so, like, publicly promote blockchain. And so I think that's probably, like, not to the knowledge of, like, many, like, Westerners out there. And so in about, I think that's in 2017 or, like, 2018. So he actually promoted blockchain. but during like a smaller scale, just like net,

so like doing like a smaller scale, a public science conference. So I think like this time is like definitely like more significant because it's like a dedicated like long speech. So in a very core CCP meetings, right? And and then just right up the meeting. So like there's all this like public news out there and just like official CCP media outlet talk about it.

And then so have all this. coverages. So the narrative, so if we look into his speech, like the narrative, so like a few things I want to highlight here is, so first of all, so he mentioned that like blockchain is a future and like China cannot lose the blockchain game and China needs to have the leadership position on it. And it also like during his speech and he specifically mentioned, are the major nation states out there across the world? are accelerating blockchain technology development, and we have to do so as well. And then so he also said we need to focus on helping to establish the blockchain standard.

Because I personally, as a investor in all this public blockchain projects, and I have no idea what the standard is because everything is a permission list. And then so everything form a consensus based on the community discussion. But Xi Jinping did mention that to further enhance China's leadership position and we want to making the standard global. And so we want to establish like the blockchain standard whatsoever. So I think these are the few things I want to highlight from his speech. So like the overall narrative is like definitely extremely pro blockchain. But he didn't mention a single word of like Bitcoin or like.

any other, you know, like the actual cryptocurrency out there. So if we read between the lines and then also thinking about like what has happened before, like China's government is pretty good at this top-down planning and like infrastructure investment, like as we can see all the miracle of this like metropolitan development and like high speed railway, etc. So like as the economy grows, like, so like as the economy grows like throws down and And Chinese government needs to further figure out, like, what's the next, like, infrastructure level thing to. So for them to make investment on and potentially to get China onto, like, a leadership petition before, like, any other countries.

So I think, like, technology, like, AI and, like, 5G. So, like, those are the topics for, like, last few years. And, like, this time, so, like, with, like, Xi Jinping's promotion on blockchain. So blockchain as a neutral database management technology is definitely being elevated like onto the priority list. So as the next generation infrastructure technology that like the entire China will allocate resources. So that is my personal take.

Martin, what do you think? Yeah, there's a lot there. So going back to before Xi Jinping's talk, I view one of the most important events. of China's support or at least interest in blockchain as in 2014, when the central bank can be in a group to study digital currency and blockchain to see if there's a way to use it, both for regulation and for government purposes. And then soon after that, the state council, which is sort of the equivalent of China's cabinet, included blockchain and a government plan for technology development. So I view the C remarks as a culmination of,

of a longer process that slowly feeds up the bureaucracy. I think the timing is really interesting, and that especially because there's been a sense that much of the hype around blockchain around the world got a little bit ahead of itself. So, you know, ICO prices have gone down quite significantly. Bitcoin is down quite a lot from its height. And though there have been an enormous amount of enterprise,

prize and other applications that have been announced, there really isn't any that appear to be a breakout success in terms of application for blockchain other than Bitcoin and Ethereum. And even there, you know, there are a lot of issues with how many transactions they can handle, for example. So that makes me wonder, why did, why would this come out now? And I think the result, it's a result of two things. One is the trade war. So if you look at how the trade war has extended into technology. The Chinese have found that the United States controls a lot of very foundational technologies for AI, for example. Many of the chips are produced, U.S. technology. And I think that China fears that if foreign countries, especially the U.S., are the ones designing

the standards or controlling the basic technology for blockchain, even though the applications are, further in the future, they view that as a potential threat to national security. And that's why I think we see the phrasing as a core indigenous innovation technology. That's the phrase that Xi Jinping used near the top. And then the second is as a response to Libra, which is also somewhat related, where China doesn't want an American company like Facebook to be able to create a global blockchain networks that other people then build on, which might get in the way of China's attempts to internationalize the RIM&B and have its tech companies go abroad, for example, in fintech markets all around the world. So they want to be leading the standards and potentially

helping even other countries develop their own blockchain-based digital currencies and other systems, so they don't have to depend on something like Facebook. and can get get, get, hopefully get something out before Facebook succeeds and that might actually work. Yeah. So I want to add on to that.

So I, so from my personal opinion, and I don't think Libra is like significant enough like to actually require like just like, just like this level attention. And it's like a like an hour long talk like during the CCP's a core meeting. And also like Facebook has been like, Facebook has been spending like like three,

four years and just like, like Zuckerberg has been trying to be friendly with all these Chinese government and like officers and like basically trying to make Facebook accessible in China market and like which like didn't pull off. And I think it's just a coincidence like probably so like the timing itself like looks like seems like a response like to Delibre because it's just like second day like after De Zuckerberg. So it's just second day after the Zuckerberg hearing, right? But so, but from my personal opinion, like, the digital REMMB has been developed for like five years and it's actually close to launch. And then CCP happened to have that meeting as well. And then so it has been scheduled long before.

And like, so everything is kind of like a very perfect timing in response to Libra. But I think China, like, previously never responds to any, just like company from private sector for, like, any specific policy out there. So that's just my personal opinion. Martin, what do you think? Because I saw you tweeted something else. I mean, I think in a way, maybe both of you are right. I think this was something that was in the works for a long time. But I'm pretty sure I did while I was doing the research for this show and I'll just have to look for it afterward.

I do think that there was some statements saying that Libra spurred them to kind of like hurry it up a little bit. Like they, you know, had been working on this for a while. But then when they realized that Libra, you know, came out with its white paper and that this might launch next year, then they kind of, it just made them hurry up a little bit more. And I think maybe actually where I disagree with you, Dovey, is that the reason why I think they might pay attention to this, even though they might not pay attention to other, you know, move. by companies is that, you know, Facebook's user base is bigger than the Chinese population. And it's literally, I was trying to figure this out. I think it might be one of the only entities on

earth where they can say that. So, but anyway, actually, both, I wanted to go back to a previous point you both made, which both of you basically said that you felt that China essentially wanted other countries or, you know, technology groups, whether it's like, you know, companies or organizations or perhaps even some of these decentralized networks to follow their blockchain standards. Do you really think that that's like a realistic expectation on their part that people might do that? And why do you think that is their motivation? So it's potentially realistic because you can imagine a world in which, if China launches a digital currency that works well and it's successful,

and if they have, for example, you know, like 10 cents system working with tax authorities to deal with better tracking of invoices, if you have these domestic systems that actually work really well, then there's a sense in which China's trading partners especially, but also maybe some of the financing destinations along the Belt and Road and others who do investments in China might want. want to make sure their systems are interoperable with the Chinese systems, which are, say, proven to work. And I can see that happening, at least in some limited scenarios,

there are some real questions around to what extent they will actually be willing to decentralize and allow some of the anonymity, or at least pseudonymity, that has been the feature of blockchain-based systems in other applications. But that's really an open question. I'm a bit skeptical about their ability to either promote RIMB internationalization or get others to sign up on its standards. But I know that in other areas, like, for example, in 5G, Chinese companies have been extremely active in promoting standards. And I think that Huawei, for example, is part of many international 5G standards, notwithstanding the security concerns that many governments. especially the U.S. have voiced about it.

Yeah, actually, let's keep talking about the standards issue because this actually leads to some other questions that I had, like about the significance of the cryptography law. You know, I was kind of curious, like, what that said and, like, you know, why they have this cryptography law, but I'm assuming that it has to do with standards. And then I happen to notice also this news about how they have these 500 different enterprise blockchain projects going. And CoinDesk reported that the biggest categories of the projects

are trade finance, asset management, cross-border payments, and supply chain financing. And I kind of thought, oh, you know, they have like this major role in global trade. So is this like, you know, part of their attempt to get companies and organizations outside of their own borders to use, to either use their technology or to actually use their blockchains that they're creating. Just add on to what like Martin has said, when we think about blockchain standard, and I think there are like a few different, so there are like a few different layers. And like the most fundamental layers are going to be what's the specific difference in like hashing algorithm, right? And when you build a specific blockchain protocol, and so that is the consensus layer, so that is the consensus algorithm layer.

So I have no idea how Chinese government can actually push that as like one singular standard. And so because I just assisting either public or I send my public or just private blockchains out there and using different consensus algorithms. And it seems to me that's impossible. And if we move to the upper layer, and the upper layer is going to be just like at the application layer, right? So at the application layer, I'm not too short about what is the specific standard. Is it on like identity? Is it on like account, whatever?

So it might be on account-based identity. And then many other just like a crowd. block chain, just like Curtis Ristis out there. And so it seems to me also it's hard to push out a specific standard out there. But like one thing, I think they might be able to like leverage this. If like consider we have like a China chain, right? So it's like a China whatever blockchain. And so all the other major scale internet company like Tencent, Alibaba, Huawei.

So they all adhere to that specific blockchain. protocol. And so they have been developing application on top of that. And then also it would allow third party to develop their own applications. Which means all the other blockchain developers can

instantly tap into this massive user base. And I think that can be a huge traction. So there can be a huge traction to other third party like blockchain developers. And so either Chinese developer or just

foreign developers. Because the current problem of all this public blockchain is that there's just a no adoption. The primary use case right now is trading. And all the exchanges, like they're like just, so their

daily after users is on the low end of say like 100,000. So that's like definitely not internet scale. And if you have this share platform and So that will allow you to tap into the internet scale traffic. And so that will be a huge add-on.

And so if they want to push for specific standards and the protocols out there. So I guess like the one thing that I'm wondering is with the current internet in China is this, you know, like closed wall, what do they call it, a closed wall garden? So why would Why would the Chinese want I guess like I guess my thinking is basically that if they make things interoperable

they also risk then kind of like losing a little bit of control. No no. So like the underlying infrastructure is not going to be interoperable. Just I think about WeChat, right? WeChat is a closed source operating system. And then so you as a

third-party developer and you can develop all this like WeChat enable a program. So like was considered as like a micro program. And so like, like, um, WeChat has its own ecosystem, like just like Apple and WeChat has its own like app store, right? But the thing is that we chat as a messenger app or like as a operating system like cannot be interoperate with like Facebook messengers, like, say for instance. Because like you as a developer, you have to adopt the same portal. code's like underlying like the so like the so like just like right now so all these are ethereum like defy application so can only work on ethereum right and so like there's no bitcoin defy yet right and so that is actually the same thing because the underlying chain and just like the underlying

blockchain infrastructure like the tech layer like has to be like has to be cohesive and like there's no like just like cross-chain thing among the other public blockchain. And so like the, so like the third-party developer is basically purely adopt the same consensus algorithm and like the same and like just at the same blockchain infrastructure and then building application on top of it. And so that's a very like a typical thing even right now. So even right now in the public blockchain domain. Okay. So yeah, this is. leads me to a question about censorship, but I actually feel like, because we haven't actually discussed the digital you on yet, why don't we just dive into some of the details on that,

because that is obviously the biggest news. So why don't you guys describe for me your understanding of what this aims to be, this DCEP, which stands for digital currency electronic payment, what does it aim to be? How will it be structured? When and how do you think it'll roll allow, why do you think China wants to launch it? Just kind of give me everything that you understand so far about it. So a lot of the elements of it are pretty unclear at the moment because we have to rely on a few speeches, many of them in private who have had their transcripts leaked to know what's going on. So far, the plan seems to be at least at the beginning to replace cash, to at least a piece of cash, and create a system that allows a cash-like digital currency

to be transacted. So that means, you'll have a digital wallet. The idea is to maintain what they call the two-tiered system now, which is that the central bank manages the currency. But in terms of what actually touches consumers, they're going to be interacting with and buying these at the commercial banks in the country. Maybe also Ali Pay and Tencent. That part is unclear, but at least it's going to be like the banks. You come in with one rem and B, and you can buy a unit of this special digital rem and B, and you're probably going to use some sort of digital wallet. What's really important about this is that it appears that the central bank will not actually be providing direct central bank access like accounts to consumers. That's one of the biggest

question marks in central bank digital currencies going forward. because that would totally change the way the financial system functions if you can go right to central bank because most of the money is actually created at the moment in our financial systems at the commercial banks. So they're saying, well, you know, we're not going to touch any of that. We're just going to replace cash. We don't want to compete with Alipay balances, UBow. We don't want to compete with bank deposits, which would disrupt the financial system, only cash, which is already a liability of the central bank.

So like cash, they've talked about having it quite limited and difficult to use in a sense. So you have a limit in the amount of money you can have in the wallet and a limited amount of transactions you can make to kind of make sure that it mimics the fact that cash, especially in China, you know, the largest bill is 100 men be, which is worth something like between $15 and $20, much smaller than most countries. They made it on purpose difficult to use cash so that it's harder to use it for corruption. You know, officials get arrested in China for corruption, and sometimes we find entire apartments full of bills, and the amount of money actually isn't even that much in the grand scheme of things because the individual bills are worth so little. One of the key features of it is what they call controllable anonymity. So you can use cash at the moment without any trace whatsoever, pretty much. you know, there's no, if you pay at a restaurant in cash, then they have no idea who you are, you've told them nothing about you, and there's no record of that transaction generated digitally

anywhere. But now the way that Chinese interact and have financial transactions is generally through Ali Pay and WeChat Pay, which are tracking all of those transactions and also feeding that into questions about how they evaluate you for credit and what they want to mark. market to you and all this. So the central bank is coming to people and saying we're going to provide a more anonymous version of currency than what people are transacting with Ali Pay and WeChat Pay, but of course we still want to get some underlying visibility into the system so that people can't use it to launder money and get up to nefarious uses. That's another critical question about this. How much access is the central bank going to get? There are a lot of

concerns that this could be used to actually increase the amount of control that the central bank and the government have over the economy by being able to view these transactions individually. Whether it will use something like smart contracts is that I don't think it will start that way, but they have talked about potentially adding it. You could potentially automate payment of taxes. You could change transaction fees for different types of transactions to encourage or discourage them. You could have new kinds of monetary policy tools, a lot of possibilities are open. So I'll turn it over to Davy to see what she thinks of this.

Yeah, so from my perspective, and I think there's a very important prerequisite for this digital Reming Bee, is that the Chinese society has been cashless for long enough, and which no other countries in the world is so advanced on getting rid of physical cash. So like there will be little problem in, you know, use the education, digital currency distribution, and like payment interface integration, et cetera. So from my understanding, like the most intense or just a detailed literature about the design of this digital RamingB was first published in about 2016. So that's in a internal journal from just from, just from, PBOC. They have like a few chapters about what they think about this digital reming B.

Like fast forward to you now and I think there are probably over like 100 patterns, like over 100 patterns under PBOC specifically about digital Reming B. And like talking about the timeline. So like there, I think there are like rumors like floating around saying so it might be launched by. November. So it might be launched by so by probably like mid this month and but I think that's probably just a too rush. So realistically speaking and I think the earliest it can launch any just a very smaller scale experiment like going to be by the end of this year and so I'm not too optimistic about it and most likely so like the child going to launch like early last year and from what I heard it can be in Shenjin or like Hongzhou like the full rollout

and I think at least it will take another 12 months and because there's a lot of like coordination and just the infrastructure change is massive and like talking about like the bigger picture just like Martin has said like the biggest question right now is whether PBOC like wants to use this new median, like this new median of like cash because it is not physical cash. So like unlike physical cash, like it can be fully anonymous. And so like people have like just like when people turn out with a physical cash and it can have like pretty much actual like pretty much actual privacy. But if we look at the current major problem of the China's financial situation is the shadow banking is actually what makes the economic, just as over-economic,

like on the verge of like expulsion. And China right now has more than 10 trillion like shadow banking asset. And then all of this is actually out of the, so like all of this is outside of the visibility of PBOC. If we look at the empty monetary supply of China, close to 30% of monetary supply is actually under the sector of like shadow banking. Shadow banking basically are peer-to-peer lending and all this like wealth management products, like things like that. These are all outside the regular commercial bank's balance. So I think from my perspective, one of the most important purpose for this digital remand-be, at least domestically, is right now, like commercial bank has much, like has much more power, like when it comes to monetary supply.

And it also like monetary policy and then also issuance. And I think this can be a major monetary experiment as like it will be the first time. So it would be the first time to make central bank like PBOC in this case with like direct inference on the monetary supply and daily economic activities. And I think also it would make it possible to have. a, so I think it will make it possible to make the monetary policy so to probably enable PBOC, like they'll be able to program like the monetary policy. So, like, Siferson, so like Siferson, if the Chinese government, like, wants to cool down, like,

the various market, they can simply do so by subtracting the monetary flow into that specific sector. Like, if we consider everything will be back to M0. So if we consider a large portion of the monitor supply going to be full resource based, I think that might be the bigger picture that like PBOC, like has been thinking. Okay. We need to dive a little bit more into that, but we're going to have to do that after this short break so we can hear from the sponsors who make this show possible. Crypto.com sees the future of cryptocurrency in every wallet. Have you seen the MCO visa card? A metal card powered by crypto. Loaded with perks, including up to 5% back on all your spending and unlimited airport lounge access. They pay for your Spotify and Netflix too. What's not to love? With crypto.com, not only can you spend your crypto, but you can grow it too. Earn up to 6% per year on the most popular coins like BTC, XRP, LTC, and up to 12% per year on stable coins like Pax or TUSD. Just a few taps before you start receiving interest every week.

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and the central bank wanted to cool it down a little bit, They could just stop the flow of money. I don't even understand how that is possible. So right now it is not possible because most of the inventory, so most inventory of the monetary supply, so it's actually in the control of the commercial banks. And so PBOC has no direct like control, right? Right, right. But I'm saying if, yeah, with this central bank digital credit, how would they do that?

Yeah, like, so assuming everything. everything is like, so assuming the entire GDP and the entire monitor supply is on this digital reming B, right? So like, they can be a very extreme case. But let's assume that. And all the commercial bank, and they will have their account, like, so they will have their, like, just a note or like whatever. So they will have their account, like, with the PBOC because like all the commercial bank will be the distributor off this, so like off this digital reming B. So they have to basically ask for the approval of issuance and then like ask the approval of like any circulation

of this digital RemingB, right? And then like the entire ledger are going to be on the private cloud like of PBOC. And so like that's why PBOC will have the overall visibility on like what's going on. Like Siferson, so if like this much of the Reming B is actually issued by China Merchant like, say, for instance, and like to a specific endpoint.

So if like that endpoint going to be as a real estate company or like a local, or like a local major China real estate, so or like a real estate like developer. So they can actually make specific endpoints. So that is not feasible or like that is or like that is not accessible to getting into this monetary flow. And so if everything is on the same ledger, so that will be possible. Because right now there's like a disconnection. So there's like a disconnection. So when all the commercial ban like talking with their own clients,

so the disconnection here is the PBOC cannot get involved or like just interfere. Whenever commercial bank is. So whenever all the local commercial banks are interacting. with their own clients and then like with like any potential monetary output. So like that can be a very like extreme case. But I think if partial of the monetary supply and like M0 going to be on this like blockchain rail, so there's a lot of things that can be creative. Yeah, yeah.

I mean, and I obviously we're getting a little bit into speculative territory here because, you know, it's not like the whole entire money supply will be. in this digital currency. But I do take your point that the central bank definitely will have more control over the money supply and possibly over credit creation. So I just, yeah, when I was reading a little bit about that, it did make me wonder if that could, if the rollout of this DCEP could affect kind of the growth of the economy, which frankly probably has been fueled by a lot of this M2 activity. Do you guys have an opinion on that? Yeah, I want to add a little bit to this context that the Dovee was mentioning, which is that there's generally a perception that Chinese companies

are tools of the state. You know, if you talk to people in Washington, D.C., for example, and assume that the Chinese government can get access to whatever data it wants on anyone at any time. And my research into the financial sector shows just how wrong that is in many cases. The people at the central bank have been frustrated for years about their inability to get Ali Pay and Tencent Pay to share data with them on the transactions that are occurring. And if you look back at the aftermath of the financial crisis in China, they tried to clamp down on the bank's lending. but there was so much pressure from other actors like local governments to keep the credit taps flowing that the banks just move everything off their balance sheet and started using all the shadow lending, and the authorities just kind of let it happen.

So there's an enormous amount of activity that occurs in China, which the government can't really see. And despite all the surveillance cameras and other things that have grabbed a lot of headlines, in many cases, Chinese private companies are able to stand up to the government. and they have their own powerful political backing and play sometimes, the bigger they are, the more they have to play in these factional political battles that might, you know, make a Chinese entrepreneur sometimes much more powerful than a Chinese government official, depending on, you know, how highly ranked they are. And one of the things that could change with that is, you know, the Chinese government has made it clear that they want more control and more. ability to access data. And there's a big question as to, as all these new infrastructures are built, will the company's ability to resist data requests continue to exist in China? And I think that's a big question. That's really important.

Yeah, that's a really nuanced picture that I feel like we don't normally, you know, I feel like you're right that the conception is that the big Chinese companies are kind of just like an extension of the Chinese government. But I actually want to go back now that we've kind of discussed the structure of the DCEP to talk a little bit more about some of the themes that were coming up earlier in the conversation, like about whether or not China could use this digital R&B to internationalize the currency and help it gain adoption abroad. You know, there's a lot of talk when you read some of the materials online about how they have this Belt and Road initiative and how that, you know, will connect 65 countries in Asia, Africa, and Europe.

And I just wondered, like, you know, is that one way where they could kind of leverage, you know, this network that they're creating and push the digital currency? And, you know, if not, like, or, you know, whether or not you think so. Like, I'm just curious, how likely is it do you think that either companies or people in other countries will want to use a Chinese currency? So there's like a trend just over the world. And so there's a trend of just say the dollarization. And so if we look at the global reserve of like US dollar asset, like it has been shrinking like over like past few years. And R&B is actually picking up as one of the alternative reserve like in some of these central bankers like out there in the world. And so I think most of this the other nation states has to like, has to make their own decision. But the ultimate goal is always to diversify their own, like, reserve, like, portfolio.

So they have to ask them, so they have to ask themselves the question, like, would they prefer, like, their current dependency on, like, US Federal Reserve? Or, like, they might be adding onto more dependency on just on the PBOC, right? So I think it will be a very open question to many central bankers out there. But just fly with the trend of reducing U.S. dollar asset. So in like foreign exchange reserve. And then also given China has bigger and bigger cloud along this Belt and Roe initiative. So because right now, so if you go to some of this local Africa countries and like you can see massive like infrastructure. investment coming from this state-owned enterprises.

And there's already just a good enough and, like, huge amount of, like, trade between Chinese company and, like, local garments and just, and then also local private sectors. And so I think the digital rimingby itself, like, can actually facilitate that trade, like, become, like, more smooth. And because, like, so because it will actually make the inter-bent settlement, so potentially easier. And then also, if we think even further, so PBOC might be able to export this, so this digital VR infrastructure and then helping the other, like,

underdeveloped country, and then basically to help them to refraud, like, the credit base or like the traditional base, like, banking system out there. And then so the entire Africa country, so some, So, say for instance, it can be like Uganda or like whatever. So they can actually like a leafrock and then to have the same level of like advancement as what the, so as what the China society has. I think like if I'm CCP and that's definitely in place in my favor. So I have a much more skeptical view. I think that might be possible in the very long term.

But although, you know, I haven't seen this. data on dollar reserves going down, but I did see that actual international use of the RIMANB has actually declined. And if we look back to a few years ago when there was this exchange rate reform in China, which also was corresponding at the same time with much tighter capital controls that made the RIMB harder to use, since then RIMB internationalization has pretty much not advanced at all. So I think about payment systems usually in the context of network effects. You need, and also the ecosystem, you need to be able to plug into lots of other countries.

And the ecosystem here is like financial infrastructure. Are there ways for people who are trading different currency pairs, especially your currency, to be able to borrow in it, to be able to freely use it, to be able to hedge risk with financial instruments? Are the markets liquid to buy and sell? And so far, even though the REM&B is part of this existing financial infrastructure with a network that all of the central banks and financial players around the world are plugged into, people are not demanding to use the REM&B more. And I think that's an important sign because if you have a digital currency that runs on some unique architecture and requires a duplication or a completely separate set of infrastructure, to be built around it, to be able to use it. I mean, they're going to have this DCEP, but nobody else is going to have anything analogous to it for a long time. And that means, I just don't see how that makes it easier to internationalize than using the existing infrastructure,

especially when much of this is unproven. And we consider that one of the main reasons it hasn't internationalize is because China's government hasn't been willing to release some of the control, capital controls and free usability of the rem and B. So unless this digital rem and B has different characteristics and is not as tightly controlled, I don't see how other countries would want to use it. I mean, they don't want their countries to rem and BIs anymore than they want it to dollarize. I can imagine that they might work together to develop a digital currency from their own home currency. But many of these countries, even if they're getting large investment from China, still want to protect their sovereignty and be very careful about maintaining their own domestic currency.

So I kind of feel like the RIMB internationalization piece, there's a lot of demand for a separate architecture than what exists, which gives the United States enormous leverage. There's talk about alternatives to SWIFT, which is the messaging system that's used for most global cross-border payments. but I'm not convinced that digital currency is the, at least in the short and medium term, the way that this is going to get fixed. Yeah, so I just pulled the data out. And so I looked at the global dollar share of the reserves versus the remaining share of the reserve. And actually starting from like 17, so starting from like 2017, so the dollar share of reserve actually declined from about 66% right. now to 61%. And like the Reming B share of the reserve actually increased from 1.1% to close to 2%. Like even though it's a single digit percentage, but like if we think from just like growth perspective,

so that's almost like 100% growth. So I think all the central banker around the world and so whatever so they want to do like to diversify their like so to diversify their. reserve portfolio and other than dollar and so other than dollar Japanese yen and so all this as your suspects and Remembe is definitely like probably the most promising like candidates so they can potentially have on their reserve portfolio and also add on to this payment has never effect and so I totally agree on that. I think from just as a strategic, PG planning, like Ali pay and WeChat pay can potentially ask the children horse. So for this digital fee or currency or like digital reming B and then to be widely used, like,

in the just outside China. And so it's all about usability. And then so it's all about how many offline merchants so can actually accept this payment. And I think if like PBOC can actually facilitated that from happening just I have. So potentially have a better policy when it comes to a foreign exchange settlement, things like that. So that can actually drive the adoption really fast. That's my two cents. All right. So we have so many topics. I'm going to have to move you guys along a little bit more quickly. In the backdrop of all this discussion, especially around what currencies it is that some of the other countries, like smaller countries, especially will want to hold as their reserve currencies, is the Lieber question.

But before we get to the Libre question, I actually want to ask about one other aspect of the digital currency, the digital yuan that Martin brought up earlier, which was this controlled anonymity aspect, because I wonder if this also will play into whether or not other countries will want to use the digital yuan. And, you know, here, and granted, I have no idea. literally the only stuff I know about China is like what I read in the Western media. And apparently, you know, there were these stories around the social credit system that then later other reports said like Chinese people were saying like this is overblown. However, you know, one report that I saw did say that by the end of 2018, people who had poor social credit were barred from purchasing plane and train tickets 23 million times, which. Okay, granted, it's a huge country, but still, that sounds quite alarming to, to like, I think anybody who grew up in a place like the U.S. that just feels kind of crazy.

So I just wonder, like, you know, how do you think this controlled anonymity will work? How much surveillance do you think it actually, you know, has? And how do you think that will affect, you know, other countries wanting to use the currency? Something quick on, on that social credit. what you're talking about is a blacklist. Like if you borrow a lot of money and then default on your loan and refuse to pay it back and the court and a Chinese court judges that you can, could pay it back, but you're maliciously not paying it back or you're refusing to comply with the court judgment, then they put you on this travel blacklist. It doesn't happen from not visiting your parents enough

or like not writing enough positive things about the party online, you know, or any of that stuff. So, you know, there's an element in which there's a score that Alibaba creates with Sesame Credit. That's a totally separate thing that got mixed up. There isn't like some number that if it falls below, you're barred from it. So I want to just make that clear. But in the controlled anonymity part, that's an area where there's probably a lot of debate and disagreement, even within the central bank about what ultimately this will look like because they really have to do a balancing act here.

If there's too much government surveillance of it, I don't think people will use it both internationally and even in China. If the Chinese people know that someone at the party is going to be able to watch every transaction they make, they're not going to use it unless you force them to, I would think. But my sense is what they'll do is allow you, you to transact anonymously with very small amounts. And then as amounts get higher that you're transacting and the risks of money laundering get higher, then they will impose more identity

verification. And that's a similar system that they've used for digital payments, where they require more pieces of identity, for example. And much of it is about just being able to transact without giving any information about yourself to a merchant that you're paying. And also, without giving it to the big tech giants. So you might want to buy your booze, your Baijio, and cigarettes with a DCEP instead of AliP because you might have your Sesame score get lowered a little bit and have a little bit harder to get a loan from Alibaba. But so far, it's really hard to know where they're going to come down on the amount of privacy they will allow. Okay, so let's actually just turn to Libra since, as I mentioned this, I feel like this has been part of the conversation, even though we haven't really been discussing it.

So do you agree with Facebook's pitch to the U.S. government that Libra is its best strategy for countering kind of like the threat from China? And also, do you think that Facebook is being genuine about saying that since, as Debbie mentioned, you know, not too long ago, Mark was like trying to court the Chinese communist party. And Dove even had this tweet where he had a book by Shuzhen Ping on his desk. Yeah. So, yeah, so I think like the Libre thing, if we look at just like back in the history on like why Facebook wants to have this project initially. And I think Facebook is being very opportunistic and like Zuckerberg being, you know, so Zagreb being as a businessman and so I have like no problem of him just like being shaky on a lot of things and just like talking about one story in front of the CCP and then like the other story.

So like opposite story just when it comes to like the US Congress, right? And I have like no problem with that. But I think LeBard itself, like the Libre itself is like after five years of like David Marcus with Facebook and as a head of the messenger. like it has been trying really hard just so basically to like push out something similar as like we chat pay but like so I think they didn't just do a good job right so like the like the in-app payment a transaction just like didn't just like just so they are not able to like put it off and so like the whole Libra project uh I think started about one and a half years ago and it's kind

of in a rush. And I think, like, Facebook actually use this, like, to formal the, just simply to formal the U.S. government. And, like, because we are in, like, this geopolitical tension and trade with, like, China. And, like, this can be, like, court world, like, 2.0. And so, like, so to be honest, like, the best way. So, like, to be honest, like, to think from U.S. perspective in order to make the digital version U.S. dollar leading the game. And I think the easiest way is just to have the fat. So I think the easiest way is that the fat should just allow all this private sector, no matter it's Libra, no matter it is corn base, no matter it's tetar.

And then as long as there's enough like stable corn, one-on-one backed by like U.S. dollar. And then like those that stable U.S. dollar coin can be the interface. And then so they can compete with each other. And then so to better use adoption, better use experience. And but as long as like the backhand is all packing to U.S. dollar. So that is how the U.S. dollar can actually have the, so like have the leading position of this digitization of the money game. Like it doesn't have to be Libra.

Like, even though I agree, Libra has a very massive, like, user access. And so I think, like, the other thing is Libra wants to bypass the current U.S. commercial banking system. So, like, that's why at the very beginning, like the 27 Genesis No, or like you said, the Genesis partners, and none of them are actually commercial bank. And I think the U.S. government should also support major commercial banks like J.P. Morgan. and like the other, like, actual commercial banks out there and then allow them to have to own just like digital US dollar coin, so their own version because at the back end is actually still dollar. And so in that way, they can actually further enhance the dollar position,

like in the whole digital world. And they don't have to align or just like being extremely supportive on any of this party from the private sectors. Martin, what do you think? So I would say there's a grain of truth in what Zuckerberg has said, because if you look at WeChat's attempts to expand abroad, they've pretty much all failed, mainly because Facebook and WhatsApp already dominated communications and chat in all those countries. And that was the basis for Wechats, you know, that was a spearhead for their ability to create a super

app in China and compete with AliPay. They use this advantage. in chat. And Facebook's user base is enormous. It's all around the world. So you can imagine that this would be a great way to head off Chinese fintech companies and Chinese financial institutions ability to expand their success in China abroad. And that's what some of the Chinese have explicitly said that a PBOC official noted that ultimately it could be that if, Libra succeeds, it's just going to be the dollar that ends up winning. But I don't necessarily see that geopolitical potential advantage to the U.S. as a reason to just allow Libra to go forward because there are so many unanswered questions about how this will work. And it's really

unclear whether the existing regulatory system around the world could handle the potential challenge that could result if there are over 2 billion Facebook users suddenly immediately find it easy to use Libra in their existing apps if it just gets pushed out to them. You could imagine that, let's say, in countries like middle-income countries or places like Venezuela or Turkey, where there's a lot of inflation, that people might dump all of their domestic currency for Libra. and that could be extremely destabilizing for those currencies. I don't expect that it would have much impact on the advanced economies.

But China is really afraid of a scenario where, you know, it's easy for China to ban Libra and have it not be a threat to China specifically. But if it catches on and becomes a unit of account and important for the digital economy all around the world except in China, they don't want to find themselves in a scenario where they're isolated, or find themselves having to let Facebook in to avoid being isolated. Yeah, yeah, one thing. And this actually goes back to earlier when I was saying that I thought that I had read that one of the officials involved in Libra,

sorry, in the DCEP did cite Libra as like a motivation. And yeah, I see here, Mu Chang Chun, who is the head of the PBOC's Digital Currency Research Institute, said, quote, if Libra is accepted by everyone and becomes a widely used payment tool, then after some time, it is entirely possible that it will develop into a global super sovereign currency. We need to plan ahead to protect our monetary sovereignty. So I do think for this reason, actually, that the possibility that Libra might instead be released as different stable coins peg to a bunch of different fiat currencies, that that could kind of mitigate that fear that the Chinese have and frankly, increase the potential that the digital yuan does end up having more power globally

than U.S. lawmakers might like. So we're running out of time, but I actually really just want to ask a question about Bitcoin. Alex Gladstein of the Human Rights Foundation came on my other podcast, Unconfirmed. And he said that he thought that all of this will end up being a blunder for Xi Jinping because he basically said that, you know, to learn about blockchain, you end up learning about Bitcoin. And the Chinese will be more attracted to Bitcoin than they will to the digital yuan. And, you know, I kind of brought up, oh, well, you know, in the past people had said that they thought that the internet would open up China. And obviously that hasn't really happened. And you read these articles where Chinese people are just like, I'm happy with the internet I have. They're like, who cares about Google and Facebook and, you know, whatever? So, you know, do you think, but Alex was saying that money is a different thing. So do you agree with Alex that this could end up being kind of like a gateway to Bitcoin? And if so, like, do you think that that will have some kind of effect on the power that the Chinese Communist Party has on China? So I think this blockchain blessing from C definitely help like just this generic, just a Bitcoin awareness. Because blockchain and Bitcoin, these are two concepts. they're like interrelated and it's very hard to isolate one from each other. And like we can see from all this recent educational material released by CCP.

And so they actually have to refer. So like, so they actually have to refer to the history of like blockchain and then actually mention Bitcoin. Because traditionally, like in the past few years, like the narrative around Bitcoin amount Just like average Chinese is like Bitcoin is a scam and like crypto is a scam. And I think at least like this kind of a narrative like can be eliminated. But like we have to keep in mind that the average Chinese citizen. So and then I also buy Chinese culture is very prompt to authoritarian statement.

So I think if the message from like the Chinese Communist Party is, okay, blockchain is good. digital remaining beer is good. I think most of the average citizen will just prompt into this Chinese version digital currency, but probably not Bitcoin. And it might be in the very long term when the Chinese economy probably meltdown and then people are not happy with their current living just a situation, things like that. I think whenever there's a potential sovereign Fiat crisis, I think that can be a just a cognitive, like, awake moment, like, for the local Chinese. And so they might be considered, okay, so probably Bitcoin is actually the plan B. Like, the other thing to keep in mind is Bitcoin is already very expensive, like, in the eyes of, like,

any newcomer of this site. So just like any Chinese citizen, so like who's new to digital currency or like cryptocurrency, like the average annual household income back in China is about, so it's about $10,000 US dollar every year. So whoever is new to Bitcoin in China and I think 99.9% of the chance that like he or she will not think, so like he or she will basically think Bitcoin is already too expensive and then it is too volatile. And so what I should buy into Bitcoin and then just instead of like,

so instead of like probably buy into stock and just like probably stick with my current, just a daily Reming Bee activity, right? And so I think there's a huge gap and just like there's a huge leeway before the Chinese citizen eventually considered Bitcoin as like a store. value. Yeah, I think that's right. And there's also the fact that China's government has cracked down so much on cryptocurrency exchanges, made it difficult to buy Bitcoin in China. You can still do it through some peer-to-peer methods, but it's not terribly easy, and many of the ways to buy it might appear quite shady for an average Chinese person. But I think it could actually, you know,

this push to blockchain might actually backfire in another way, which is that this is a very new technology that is mostly unproven for most of the applications. And if there's too much investment in it and too much of an idea that the top leader has said we need to apply it, so we're going to apply it, whether it makes sense or not, it could actually lower Chinese growth and make things less efficient by trying to jam blockchain into areas where it doesn't make sense, especially if they're not willing to decentralize and use it as the technology was originally intended. So it's very hard now to be in China and be a blockchain skeptic, which I think is an important viewpoint that needs to be there in these discussions. But no one,

that kind of article would now get censored because you're, you're disagreeing with the top leader. And I think that's a big problem. I would definitely agree with that. Oh, my gosh. That's a hugely important point. Anyway, okay, so we've covered so much, but just one last quick question. I wanted to hear from each of you on what your prediction was on how this global digital currency space race will play out. So I think my prediction is giving all this resource allocation, and I think China will be the first one to launch a nationwide scale, just digital via currency. like the U.S. on the other hand, because they don't have, like, strong enough, like, incentive, like, given, like, the current U.S. dollars leading position in, like, so in our global economy, I think U.S. is going to be behind. And so there will be probably second-tier, so second-tier nation states, if, for instance, potentially Canada or, potentially Singapore, I think they will also catch up to the game as well.

That is my prediction. Do you think Libra will be a player or no? I think Libra, they have to be U.S. dollar pack. And so if they can be a hundred percent U.S. dollar pack, but like not a basket of like the other currencies. And I think they have a chance to, so basically to like get the approval from like U.S. So from so from the U.S. government, I think that's like a big if. Okay. And Martin? Yeah, I would tend to agree. I think that generally the way that blockchain is developing in the U.S., there's so much regulatory uncertainty that I don't think most of the, you know, I think it's going to be held back there compared to places like Singapore.

Libra is a big question mark. I would actually think that some of the smaller countries and smaller central banks are going to be the first to issue central bank digital currencies. before China. Like maybe Sweden will do it before China. And actually, countries like Uruguay have already done pilots where they've put central bank digital currency in the hands of, they've actually done pilots where regular people can use it. So China, if it comes out with a pilot, won't be the first to do so. But it might be the, I think it'll be the first major economy to end up doing so. But I think Libra has more of a shot. in the short and medium term to be successful internationally. Okay, great.

All right. Well, we will check back in on how you guys did. Thank you both so much for coming on Unchained. Oh, no, no, no. Sorry, I'm sorry. Actually, before that, where can people learn more about each of you? So just for all the audience out there, you can follow me on Twitter at W1 or just send so probably also send email to me at Davy at primitive dot ventures.

And for me, I am at Chorzempa Martin on Facebook. It's a long name, but it's not too scary. C-H-O-R-Z-E-M-P-A, Martin. And then my profile with all of my work is on the Peterson Institute website. If you just search for my last name and P-I-I-E, that'll come up. And then you can read all of my blogs and policy breach and other stuff, including writing on central bank digital currency. Okay, great. All right. Well, thank you both so much for coming on Unchained. Thank you, Laura. Thank you.

Thanks so much for joining us today. To learn more about Martin, Debbie, and the China DCEP, check out the show notes inside your podcast player. If you're not yet subscribed to my other show, Unconfirmed, which is shorter, a bit newsier, and now features a short news recap. be sure to check that out. Also, find out what I think are the top crypto stories each week by signing up from my email newsletter at Unchainedpodcast.com. Unchained is produced by me, Laura Shin, with help from Factal Recording, Anthony Yoon, Daniel Nuss, and Josh Durham. Thanks for listening.