Illustration: Luo Xuan/GT

Top Chinese leadership's endorsement of blockchain technology last week is set to put China ahead of global peers in aligning innovation with an evolving paradigm for blockchain, redefining the international monetary landscape. 

The outbreak of the 2008 financial crisis was largely attributed to the drawbacks of modern monetary systems and their operation - an excess supply of money, overrunning credit and aggravating risks. As a consequence, the financial market was hit by an unprecedented crisis. Accordingly, skepticism about modern monetary systems has again surfaced among market participants, following previous doubts in the 1970s when stagflation occurred, and again after the 1997 Asian financial crisis.

The creation of the bitcoin network in January 2009, nevertheless, heralded the dawn of a new era. In economic terms, trade lies at the core of economic and financial activity, and trade is essentially about credit. Blockchain, the underlying technology of bitcoin, is tantamount to a machine revolving around trust. It allows users participating in the bitcoin system to trade in a decentralized, intermediary-free, public and transparent manner, thereby creating credit. Since 2009, bitcoin has found its way into various user scenarios including payment, money transfer, securities and almost every other aspect of life. A multitude of bitcoin spinoffs such as Ripple and Litecoin have also come into existence. Investment in blockchain technological innovation and applications has seen exponential growth in many countries, and competition has also intensified.

Competition between countries in the blockchain arena centers on digital currencies and cross-border payments and settlements. Over the past few years, central banks across the globe have been competing to get ahead in fiat digital currencies. Many central banks have plans to explore blockchain technology and fiat digital currency. Six countries including Ecuador, Venezuela, Uruguay and the Marshall Islands have already launched their fiat digital currencies as they attempt to undercut the US dollar in their economies and reduce the cost of making fiat money.

Most countries are pushing for digital currencies and blockchain technology applications. Take the UK and China, both of which began research into digital currencies and blockchain technology applications in 2014. 

After extensive efforts, the Bank of England joined hands with the Bank of Canada and the Monetary Authority of Singapore in November 2018 to reveal the potential in the area and their interest in blockchain-based payments.

China, taking into account the yuan's internationalization and the Belt and Road Initiative, has spent roughly five years exploring, researching and verifying issues with digital currency. News then broke in October that the digital currency of China's central bank, which will reportedly be called digital currency electronic payment (DCEP), will soon be rolled out. DCEP is expected to be controllable and anonymous, and requires 100 percent provisions. Its technical arrangements, integrating digital currency and blockchain-based smart contract technology, put China ahead of its global peers in researching and applying blockchain and digital currency.  

As for the US, the possibility of the Federal Reserve's Fedcoin, which would help address global de-dollarization risks and solidify the US' existing monetary and financial advantage, is affected by certain challenges. Some of these challenges come in the form of national cryptocurrency technology from countries including China, the UK, Sweden and Venezuela, as well technology giants on the US' home turf that have their own alternatives to rival the Fedcoin - notably Facebook's Libra.

It is worth pointing out that, along with the growing interest in digital currency, the use of such technology in unlawful scenarios such as money laundering and fundraising for terrorism is a concern. 

Stricter oversight, nevertheless, has allowed for global market participants to deal with blockchain innovation in a rational fashion. 

Innovation and risk are always the two ends of a seesaw. With the blockchain paradigm evolving from digital currencies to smart contracts and interconnectedness, it is anticipated that the blockchain seesaw will tilt increasingly toward innovation. It is believed that the endorsement of blockchain technology and innovation by China's top leadership will add weight to this seesaw and usher in a new era where China leads global innovation in the blockchain arena.

The author is executive president of the Hande Fintech Research Institute and a senior research fellow with the Fintech Institute of Renmin University of China. bizopinion@globaltimes.com.cn