China in Blockchain, Web3, and the Metaverse

The Diplomat author Mercy Kuo regularly engages subject matter experts, policy practitioners, and strategic thinkers from around the world to elicit their diverse views on US policy in Asia. This conversation with Winston Ma Adjunct Professor, NYU Law School; former managing director and head of the North American office at China Investment Corporation; and author of the recently published “Blockchain and Web3: Building the Cryptocurrency, Privacy, and Security Foundations of the Metaverse” (Wiley 2022) is the 346 in “The Trans-Pacific View Insight Series”.

Describe China’s role in blockchain, Web3, and the metaverse.

The government of China has actively promoted blockchain digital technology and used it for its sovereign digital currency, but at the same time strictly prohibited cryptocurrency mining and trading. According to data from IPRDaily, Chinese companies have accounted for about 70 percent of the world’s global blockchain patent applications. The technology is widely used in a variety of industries in China, such as banking, financial services, public services, healthcare, logistics, and smart manufacturing. If blockchain is mainstream anywhere, it’s in China.

Similarly, regarding Web3 and the metaverse, on the one hand, China’s national and provincial governments have revealed plans to begin intensive development on the metaverse. Major Chinese tech companies like Tencent, Baidu, and Alibaba have also recently announced plans to start developing the technologies that will potentially make them key players in the metaverse. But because China bans crypto trading and transactions, Chinese tech companies will create a “tokenless” metaverse ecosystem with unique Chinese characteristics.

China’s State Council 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.

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Before China’s State Council Financial Stability Committee vowed to crack down on cryptocurrency mining and trading activities in May 2021, few people, even among global financial professionals, realized that China represents more 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 drivers of the new regulations. The crackdown has had a significant impact on global cryptocurrency markets. First, the crackdown on mining in China has forced seismic shift in bitcoin mining patterns, with some mining capacity in China moving abroad and some closures. Second, from a cryptocurrency trading perspective, China’s stricter regulations and enforcement have contributed to the bitcoin price falling more than 50 percent from its highest price in just a few months. Finally, China’s new regulatory framework may influence cryptocurrency-related regulations in many countries in the future.

Analyze the development of “Central Bank Digital Currencies” (CBDCs) such as e-CNY, Digital Ruble, Digital Rupee, and Britcoin and their countries’ cryptocurrency regulatory oversight mechanisms.

When it comes to the development of digital sovereign currencies (or CBDCs), China is many years ahead of the US and Europe. China is the first major global economy to test its use of CBDC (e-CNY) on a large scale, with the 2022 Winter Olympics a major milestone for China to test e-CNY with international users. Recently, China reportedly completed a 40-day trial using central bank digital currencies to settle trades with Hong Kong, Thailand, and the United Arab Emirates through a special “bridge” arrangement.

China is ready to lead the development of CBDCs. By contrast, the US is far behind in developing the digital dollar, even with the Biden administration’s executive order this year. China’s cryptocurrency and digital currency regulatory framework has influenced legislation in many countries in the same fields. For example, India imposes high taxes on crypto transactions and begins to develop 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 UK House of Lords voted “no” to the launch of the UK CBDC (Britcoin), citing a variety of concerns of “far-reaching consequences for households, businesses and the monetary system.” during decades”. to come.”

Compare and contrast the US and Chinese regulatory frameworks for stablecoins.

The United States and China don’t agree on much these days. But there is one issue on which both superpowers agree: the regulation of “stablecoins”, a special type of crypto asset that pegs its value to conventional money.

On July 16, 2021, US Treasury Secretary Janet Yellen urged 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, the central bank of China) issued a white paper on its development of China’s digital currency (e-CNY), where the PBOC cited the rapid growth of cryptocurrencies, especially global stablecoins, as a driver for its e-CNY research and development.

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China has banned all crypto transactions, including stablecoins. In the US, stablecoins may have room to stay, but given the common focus on stablecoins by the US Treasury, Federal Reserve, SEC, and Congress, regulation of stablecoins stablecoins may soon emerge in the United States.

Assess the risks and regulatory challenges for cryptocurrency competition between the US and China.

Last year China was the big elephant in the room making big moves on crypto regulation; this year, it’s going to be the US. What can be deduced is that regulatory developments in China are giving the US government a sense of urgency, and the same may be true for many other governments that have been slow to act expansion of cryptocurrencies.

While the US Congress is still mulling over a regulatory framework for the cryptocurrency market, US federal regulators like the SEC and IRS can create regulatory practices through enforcement actions in current cases. of high-profile cryptocurrencies. For example, the SEC recently indicted a former Coinbase product manager, along with two other people, in a crypto insider trading case, the first of its kind. Regulatory uncertainty is a major challenge for the Web3 cryptocurrency market.

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