Crypto currencies, and the blockchain technology which underpins them, give the Chinese government a golden opportunity to leverage this new asset class and position the renminbi (RMB) as the leading international currency. How, you may ask? - By becoming the first government to issue a government backed crypto currency – ‘crypto RMB’.

The concept of a ‘digital’ currency is not new, but digital cash currently issued by central banks is largely limited to the wholesale banking market, whereas physical cash is used elsewhere in the economy. This new ‘crypto’ digital currency differs from current forms of digital cash in one fundamental way – it is protected by cryptography – and this means it is more secure and can be used more widely. For many of us, the first time we came across Cryptographic security was with Bitcoin. Bitcoin was revolutionary as it solved one of the biggest problems so far in the digital currency space - the double spending issue - the risk that a digital currency can be spent twice. Bitcoin requires that all transactions be included in a shared public transaction log known as a "blockchain." This mechanism ensures that the party using the bitcoins really has that right, and also prevents double-counting and certain other frauds.

So why would the Chinese government want to issue their own crypto RMB?

To date, cryptocurrencies have not been issued by any G20 central authority. In fact, their growing popularity and user adoption rates exist because they are a decentralised, censor-ship resistant, borderless system of exchange. But rather than trying to shut them down – as China recently attempted to do with an outright ban on crypto currency exchanges and token sales – the Chinese government could instead harness this new technology to create a secure, controlled, RMB backed digital currency. This new tool would potentially give the People’s Bank of China (PBOC) greater control over capital flows, transparency of transactions and overall monetary policy.

In fact, the RMB already rivals the use of the US dollar as it relates to trade finance, reflecting the enormous volumes of international trade conducted with China. China has also made no secret of its mission to have a freely convertible currency and fully internationalise the RMB. Arguably crypto RMB would help increase the use of RMB/crypto RMB as an international settlement and reserve currency which would decrease the need for people to use US dollars.

‘How’ you may ask?

The issuance and adoption of crypto RMB would enable importers and exporters to utilise payment systems outside of the traditional banking system.

Suppose for example that Chinese and other international businesses no longer needed to make trade payments in dollars – they could hold Crypto RMB in corporate wallets and make OTC crypto payments and receipts directly with suppliers and customers. This would enable immediate settlement of funds and not be dependent upon traditional banking systems’ “opening hours” in specific time zones. If disintermediated trade settlement solutions become possible, other businesses and countries could quickly follow suit – because Crypto settlement is borderless……this would further weaken the US dollars usage as “the” international settlement currency and potentially strengthen the importance and value of this new crypto RMB. Since that would be linked to normal RMB, this would also strengthen the role and standing of RMB for international business.

For example:

If you are a businessman involved in international trade in China, the current system is dominated by the world’s reserve currency, the US dollar. This domination of the US dollar and other G7 currencies, means that the businessman or woman in China will have to settle transactions through the interbank market and incur costs and charges.

From the US perspective, imagine you are the CFO of a major retailer in the US importing goods from all around the world, including China. If you were able to settle transactions directly with suppliers in China without going via a banking system and incurring banking settlement charges, wouldn’t that be attractive? (there are charges associated with crypto, but these should/could be lower).

I think the answer is ‘yes’ and a crypto RMB may be one answer. More specifically, government-issued crypto RMB could be linked 1:1 to the underlying fiat currency and thus be fully interchangeable. For every crypto RMB issued, the Chinese government could withdraw the equivalent amount of RMB from the “non-crypto” money supply to ensure parity.

The crypto RMB could be managed on a private, controlled block chain. Alternatively it could be on a central ledger, but perhaps a privately controlled blockchain is more likely. As crypto assets are borderless when used by the community at large, for the mechanism to work the Chinese government would need to make the RMB fully convertible and relax all currency restrictions. However, this is more than just a possibility.

The Chinese government could also choose to involve select Chinese banks as the issuers of crypto RMB rather than centralise operations solely through the PBOC. This way they could help only partially disintermediate the banking system…but let’s see.

Arguably, China is best positioned on the world stage to make this game-changing move as it has advanced technology-enabled infrastructure and technology already plays a vital role in the way the economy is run (i.e. China is already a cashless society today in many respects). Should other governments choose to follow suit and issue their own centralised crypto currencies, China would have first-mover advantage, and in this respect, would lead the way in this new digital world.