Normally, whenever someone mentions Bitcoin, people automatically think of two things: decentralized currency and high-risk investment. While the former is certainly a core element of the concept, the latter was a largely unintended consequence that ended up being the primary attraction of the cryptocurrency world.
The Appeal of Cryptocurrency
As far as the core concept goes, it offers several main advantages over not just mainstream fiat currencies, but also financial services in general. For starters, it is anonymous. Or at least pseudonymous, as in the case of Bitcoin. This means that your financial transactions aren’t tied to your bank account, your name, your credit history, and overall your entire financial identity. You can create and operate multiple crypto wallets that are completely disconnected from your real-world identity and financial history.
Despite government regulation to remedy that by putting pressure on mainstream exchanges, there are still dozens of “over-the-counter” exchanges out there that don’t verify your identity at the time of purchase or sale of cryptocurrency. Of course, these regulations are in place to deter money laundering efforts, but they also rob us of one of the main benefits of cryptocurrency: privacy. Besides, there’s nothing stopping you from buying or selling cryptocurrency on the street, directly with someone who has or wants some, with zero paper trail.
The second major benefit of cryptocurrency is the complete removal of bureaucracy from finance. No banks or payment gateways to worry about getting deplatformed from. No geopolitical regulations to get in your way. You can, on the fly, switch your money from one cryptocurrency to another if, for example, the store you’re shopping at only accepts a particular one.
You can send or receive money over the internet within minutes or even milliseconds (depending on the blockchain technology in use by the cryptocurrency in question), regardless of where the two parties are currently located in the world, what they do for a living, or their race, gender, nationality, economic or social standing. A simple transaction from point A to point B, without hopping through any of the middlemen we currently have to deal with that take a cut simply for making the transfer possible.
Finally, we have decentralization. The idea that our financial system is controlled by the government and a few banks is really troubling to a lot of people, and for good reason. Not only are all your financial activities known and traced by the government, but they can also be used against you for tax purposes as well as in criminal investigations. Bitcoin came to change all that. With no central authority controlling or even monitoring the flow of money between people, businesses, and institutions, comes a newfound freedom that we’ve lost somewhere along the way, as we allowed banks to become so powerful.
The Volatility
The potential downside to decentralization and this lack of centralized control is the extremely high volatility of cryptocurrencies, which has made a lot of people rather iffy to get on board. On the flip side, however, the high volatility introduced an entirely new segment of investment, and along with it an entirely new type of investor: the crypto trader.
Trading currencies for profit is nothing new. What changed with cryptocurrencies is just how much money one stands to gain (or, of course, lose) in a relatively short period of time. This has attracted all sorts of people who had never before tried their hand at investing, looking to turn a quick profit. This explosive demand also opened the floodgates to get-rich-quick scams in the form of cryptocurrencies. A lot of hardcore Bitcoiners believe that all “altcoins” (that is, cryptocurrencies beyond Bitcoin) are scams or otherwise are doomed to fail. At the very least, Ethereum has already proven them wrong, along with other highly popular cryptocurrencies like Monero and Dash.
China’s DCEP
Obviously, all three of these advantages are massive, and they all come with trade-offs. So what happens if we remove two of them and only focus on one?
That’s what China is doing. While governments around the world have been rumored for years now to be working on their own cryptocurrencies, I guess it comes as no surprise that China is the first to actually bring it to market. After six years of working on the project, China is now piloting their new DCEP currency in four cities. DCEP stands for Digital Currency Electronic Payment. That’s right, no mention of crypto or blockchain. Because DCEP uses neither set of technologies.
There is no blockchain, and in typical Chinese fashion, the DCEP is completely centralized. They describe it as a “One Coin, Two Addresses, Three Centers”. The one coin being the digital currency itself. The “Two Addresses” refers to the data centers running the infrastructure of this not-a-blockchain financial system, based in the People’s Bank of China (PBoC) and the Commercial Bank. They act as an intermediary between the DCEP’s central ledger and the economy at large. Finally, the “Three Centers” are three newly created institutions. The Identification Center, which is responsible for the onboarding and profiling of individual users, as well as matching them to Know-Your-Customer systems. The Record Center, which records the issuance, transfer, and settlement of all transactions. Last but not least, we, of course, have the Big Data Analytics Center.
Clearly, this is a very different approach to anything we currently understand as “crypto”, and that’s no accident. The PBoC has been adamant from the start that they merely picked up the aspects of Bitcoin that appealed to them, like peer-to-peer transactions, traceability, and the inability to tamper with the network. They insist on being “technologically agnostic”, as to keep their minds open to whatever they may find useful to implement in the future.
Can DCEP Succeed?
Now, even though DCEP is meant to replace cash, the government isn’t mandating its use just yet. And of course, fintech giants like WeChat Pay and Alipay are in no rush to implement it, as it is a direct threat to their ability to sit in the middle and charge a commission on every transaction. While DCEP is neither decentralized nor anonymous (not to any degree that would inspire confidence, at least), it focuses entirely on removing bureaucracy and middlemen to facilitate transactions – even internationally. And that, at least in theory, it seems very capable of doing a good job at.
So despite my initial misgivings, I no longer see DCEP as a scam. I see the utility in it. Would I personally use it if I lived in China? Yes. It’s not any more Orwellian than how things were before it. Would I use it as someone who doesn’t live in China? No, but I’m happy it exists. The Chinese government has always had full control of everything – it’s just more direct now. And on the flip side, it does enhance one’s freedom by facilitating capitalism and the exchange of goods and services.
Is the US likely to develop something similar? I doubt it. The banks and financial institutions have far too much control. Ironically, we’ve strayed so far that we’ve reached a stage where, in many ways, China is actually closer to true capitalism than the US is. On the bright side, this is definitely a good thing. Despite dropping two of the three core tenets of cryptocurrency, China will be essentially bringing the concept of bureaucracy-free finance to the world and making it a reality.
Why DCEP is Good
Of course, most people, myself included, will not be signing up for it. But the mainstream adoption of anything this closely resembling crypto is good for the future of crypto. If nothing else, it’s a proof of concept of just one of the massive benefits of crypto. Once China proves to the world that this kind of financial system is not only feasible but even superior to the old paradigm, it’ll only be a matter of time before real crypto projects pick up steam.
I love Bitcoin. I hate Bitcoiners. I anxiously look forward to the day when cryptocurrency revolutionizes finance, instead of just being looked at as a quick and cheap investment opportunity. I want to live in a science fiction universe where I can play poker knowing that if I win, I instantly get the credits transferred somewhere safe that only I have access to. I also don’t need to bury the cash somewhere to avoid having to explain to the tax man how I got it.