As the old saying goes, Rome wasn’t built in a day. Neither were China’s plans to lead the world towards a central bank digital currency and launch “the blockchain of blockchains”. It’s been over five years since China’s central bank started researching a digital yuan and things are starting to heat up. As I dive into the recent announcements coming out of China, there’s one key takeaway I want you to walk away with today: Don’t sleep on China.
Slowly at first, then all at once. That’s exactly how China’s efforts to be a leader within the blockchain space are playing out.
Earlier this week, China’s Blockchain Service Network (BSN) had its mainland commercial launch. What is BSN? This thread from one of our subscribers, Matthew Graham, does a great job of providing an overview. Long story short, BSN is attempting to be “a new internet protocol to allow a more efficient way to share data, value and digital assets in a completely transparent and trusted way between anyone who wants to be a node on the network”.
There’s a lot to unpack there, so let’s go piece by piece. At its core, the BSN is an infrastructure play. The network brings together multiple cloud providers and abstracts them away to allow developers to build applications while building on a common ecosystem. The BSN will also interact with public and permissioned blockchains in a limited capacity, opening the door to drive the space forward.
The scale of the BSN should not be discounted. Nodes are already connecting over 100 cities across the country (with 7 nodes being placed outside China in places like Paris, Sydney, Singapore, etc). To be clear, the Blockchain Service Network’s nodes are controlled by state entities. Also, while the whitepaper states the network is open to “anyone who wants to be a node on the network”, the approval process is quite centralized. For instance, while compute and storage can happen on any cloud provider, the government will hold the root access key which has control over the network. (While we may release a more in depth report detailing how the network works as more information is revealed, it is outside the scope of this Delphi Daily). For a better understanding of all the technical components, I’ve included an outline put together by Beijing-based Sino Global Capital to help visualize the network.
Will the BSN be successful? It’s tough to say. The one thing we can be sure about though is that China has dedicated a significant amount of resources to make sure the network is a success. In addition to state-owned banks, China has tapped its most prominent tech giants to start developing blockchain-based applications. As you can see in the table (source: The Block) from ICBC’s recent report below, most of these firms are already experimenting with the technology for a variety of use cases. These span anywhere from financial services to trade settlement to supply chain management. Net, we view the BSN as a positive macro and morale push in China to further the adoption of blockchain technology in the near term.
Furthermore, the launch of BSN goes hand in hand with China’s development of its central bank digital currency (CBDC). This digital currency electronic payment (DCEP) will be backed 1:1 with China’s national currency, the Renminbi (RMB), and intended to be a cash replacement. It’s been developed primarily by the Chinese central bank, the People’s Bank of China. While the official launch date is still unknown, it’s become quite evident that significant progress has been made.
Earlier this month, it was revealed that testing of its CBDC would begin in May. Initially, the digital currency is being tested amongst transportation workers in Suzhou. There are already plans for testing the digital yuan in other cities soon afterwards and all in all, the testing phase is expected to last 6-12 months.
In the meantime, expect a lot more announcements on which companies will be supporting the currency. Apparently, the Chinese government has already declared that all payment providers, like Apple Pay and AliPay, must have the token onboarded. It seems like Apple won’t be the only US company playing by China’s rules. McDonalds, Subway, and Starbucks were all on a list of companies where the token would be accepted as well. These rumors are quite telling at how the pieces are being put in place while the rest of the world doesn’t pay attention.
It’s too early to predict exactly how this launch will go and what its impact on the broader ecosystem will be, but I’ll give it a go.
The best case: China’s blockchain-not-crypto stance ends up introducing billions to the power of the technology and helps onboard a new wave of developers and users. Given the platform aims to integrate with other protocols, interoperability improvements could help create a seamless transition from China’s walled garden to the open ecosystem we all champion.
The worst case: The launch goes as well as China’s government hopes, and bolsters their ability to censor, confiscate, spy on and overall eliminate Chinese national’s sovereignty. If adopted globally, their CBDC could expand the global influence of the RMB and be a direct challenge to the dollar’s dominance.
In a way, it’s quite ironic. The technology that has garnered a community centered around the ethos of personal sovereignty and privacy may be used for the exact opposite purpose – to bolster big brother. Either way, like I mentioned before – it’s too early to tell. While we’ve received a lot of news since Xi’s call to arms for China to seize the opportunity of blockchain, there’s still a lot left unanswered. That being said, I’m overall optimistic the crypto-not-blockchain space will prevail from this. If anything, China’s blockchain efforts could be the gateway drug to crypto we need.