What if China releases a government-backed cryptocurrency?

China intends to lead the way in blockchain technology by releasing a national digital currency. But would a centralised cryptocurrency change the market as we know it?

Chinese flag
Source: Bloomberg

Once a dominant market for bitcoin – accounting for 95% of global trading volume – China has since cracked down on all things crypto as part of a plan to cleanse risk from financial markets. In September 2017, the Chinese government ordered the closure of all cryptocurrency exchanges, and tightened restrictions on initial coin offerings (ICOs). This caused a 6% decline in the value of bitcoin.

Despite its restrictive stance on foreign cryptocurrencies, the Chinese government has been keen to improve the blockchain technology behind many cryptos. Major existing Chinese cryptocurrencies such as NEO, Qtum and VeChain have all received a lot of attention on the back of the increased investment in blockchain, alongside native blockchain start-ups.

The government has also taken steps toward incorporating digital currencies into its own monetary policy.

China to introduce a national cryptocurrency

In a contradictory move to banning bitcoin, the People’s Bank of China (PBoC) initiated plans to create its own official digital currency.

There has been no official statement regarding the national cryptocurrency’s name or launch date, which makes it difficult to prepare for. It would likely be introduced alongside China’s primary currency, the yuan, with the intention of catering to the millions of citizens who lack access to standard banking services.

The PBoC’s vision for its own cryptocurrency is based on taking back control of the finance sector. It has argued that without government control, a cryptocurrency could become a tool for drug dealers and terrorists.

Some have argued that a government-backed digital currency is against the entire premise of cryptocurrencies, which were developed specifically to be decentralised. But what if a centralised cryptocurrency is successful?

Will a government-backed cryptocurrency challenge bitcoin?

After China’s ban on cryptocurrencies, bitcoin’s price fell by $300 on 5 September 2017, causing speculation about the damage China’s new cryptocurrency could do to existing markets. It is unlikely that any government-backed cryptocurrency would kill off bitcoin or other large cryptos completely, but some of the smaller alt-coins could have a tougher time of it.

The PBoC have stated that only the digital currency issued by them will be recognised nationally, excluding other coins such as bitcoin or ether. As foreign cryptos are already banned in China, the government would essentially force mining operations to switch to the national crypto. This could impact global mining communities, and reduce the value of bitcoin as it becomes less popular. A government endorsement could see the crypto gain popularity worldwide, as it becomes seen as credible in the eyes of the public.

However, as China would keep their cryptocurrency strictly regulated, it wouldn’t directly compete with existing cryptos, such as bitcoin, litecoin or ether. In a bid to prevent risk, the features that make digital currencies so popular would be stripped away – including volatility and anonymity – so other cryptos would not be made redundant.

Could other national cryptocurrencies emerge?

As the hype around cryptocurrencies emerged, it was only a matter of time before countries began to think about releasing their own national digital currencies. Although China was the first to reach the prototype stage, other countries have also hinted at cryptocurrency-related plans, including Russia and Japan.

If China’s cryptocurrency is successful, it could set a global trend that sees other major economies standardising cryptocurrencies. If this were to happen, regulated cryptos could alter the global economic system and forex market as we know it, changing the way we trade and even challenging the dollar as the world’s dominant currency.

What if…

China creating its own cryptocurrency is just one of the thousands of ‘what if’ scenarios that could influence our political systems, economic relationships and even the way we interact on a social level. The difficult part for traders is assessing the likelihood of each event occurring, and predicting how markets might react if it does.

Discover more about the impact of a Chinese cryptocurrency, as well as a range of other 'what if' scenarios that could impact your trading or political betting, including a North Korean missile hitting the US, Trump winning a second term and Tesla filing for bankruptcy.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.