The People’s Bank of China (PBoC) is charging full speed ahead with its digital currency plans, hoping to beat Facebook’s Libra to market.
A dedicated team from the central bank’s Digital Currency Research Lab is now developing the system in a closed-door environment, away from the PBoC’s downtown Beijing headquarters, a person close to the bank told CoinDesk.
The team has been working in this separate location since early summer so they could fully concentrate on the project, this person said.
The work has been expedited as Facebook unveiled in June its vision for Libra, a global cryptocurrency to facilitate payments, the source added.
The Libra announcement rattled governments around the world, spurring Congressional hearings in the United States and bold new thinking by central bankers such as Bank of England Governor Mark Carney.
Much about the PBoC’s project remains under wraps, and there have been conflicting accounts about the timetable and the degree of involvement by major Chinese companies.
According to a Sept. 4 report by state-owned media outlet China Daily, “closed-loop testing” has begun for the central bank digital currency (CBDC) to simulate payment scenarios involving “some commercial and non-government institutions.”
If things go well, the project could launch sooner than Libra, which is targeting the first half of 2020 for its debut, China Daily said in an earlier report.
Forbes reported last week that China’s big four state-owned commercial banks, as well as fintech giants Alibaba, Tencent, Union Pay, and an unnamed company, will be the first batch of organizations to receive the CBDC. It could be launched as soon as November, Forbes said
The four commercial banking giants are Bank of China, China Construction Bank, Agricultural Bank of China, and the Industrial and Commercial Bank of China, which is one of the largest banks in the world by total assets.
But hours following Forbes’ report, Chinese publications Tencent News and Sina said the timeline and scope of the eight institutions were “inaccurate speculations,” citing people close to the central bank.
And yet, a second source who is familiar with the PBoC’s CBDC efforts told CoinDesk that organizations mentioned in the Forbes report have indeed participated in the development of the CBDC initiative. But the source would not say whether all or only some of the mentioned institutions will be receiving the state-backed digital yuan upon the launch.
A third person who works for one of the mentioned institutions said there’s such work ongoing inside his organization but it’s unclear what the actual contribution is since the details are confidential due to non-disclosure agreements. The mentioned organizations did not respond to CoinDesk’s request for comment.
Whenever the CBDC launches, the central bank may not roll it out nationwide on Day One.
Chinese state-owned publication Global Times said last week, citing industry sources familiar with the matter, that the system may be launched in Shenzhen first to test the waters. There, local companies including Tencent and state-owned financial institutions are researching technical frameworks to support the development of the CBDC.
The PBoC’s Digital Currency Research Lab previously launched an entity called Shenzhen Fintech Research Institute with Shenzhen’s local government and financial regulator to undertake fintech and digital currency-related projects.
The institute has also been on a hiring spree with job advertisements looking for various technical experts including blockchain architects and cryptography specialists to be based in Shenzhen and Beijing.
The PBoC’s Digital Currency Research Lab has filed more than 50 patent applications to detail the potential design of the state-backed digital yuan.
CoinDesk reported previously that based on the patent filings, the envisioned CBDC may only resemble a cryptocurrency at a surface level as a peer-to-peer transaction system but will strip off most cryptocurrencies’ anonymity and decentralization features.
A year after China banned local fiat on-ramps for crypto exchanges, Chinese traders continue to drive the market forward by using the dollar-pegged stablecoin tether (USDT).
“Crypto trading businesses are restricted from accessing banking services in China, but they are thriving nonetheless,” Dragonfly Capital Partners co-founder Alexander Pack told CoinDesk.
Traders generally work around such banking restrictions by using stablecoins. According to CoinMarketCap, USDT activity reached an all-time high this month with a global market cap exceeding $4 billion. Tether is reportedly used in between 40-80 percent of all transactions on the exchanges Huobi and Binance, the latter of which now offers loans based on USDT collateral.
But since this asset is favored among over-the-counter (OTC) traders, official exchange volumes hardly paint a complete picture.
Blockchain data from CoinMetrics tallying a full year of transactions detected an annual peak in activity on Aug. 7, with 78,100 active wallets for USDT and nearly 21,300 for the ethereum-based counterpart USDTe. In fact, according to data site ETH Gas Station, Tether paid nearly $261,000 in fees to ethereum mines just to run this secondary version of the stablecoin. (Another Tether-issued stablecoin is on the way, this time pegged to the Chinese yuan.)
All things considered, USDT brokers have carved out a lucrative niche in 2019, especially brokers that provide fiat liquidity.
“Tether has truly good liquidity in China,” a Chinese investor speaking on the condition of anonymity told CoinDesk. “One of the primary use-cases is a fiat on- and off-ramp for crypto trading. I did also see some people using tether for legit business use-cases like cross-border trading.”
On the other hand, two different Asian OTC traders, who requested anonymity to protect their businesses, told CoinDesk a significant portion of their traction comes from Chinese clients using USDT to move assets beyond their homeland’s strict capital controls.
“This has always been a significant part of OTC flows in crypto,” one Hong Kong-based trader said. For example, his desk conducted $45 million worth of trades on Aug. 6, with UDST representing more than half the volume.
Experts believe this surge in USDT usage may be driven by enthusiasm for a potential bull market return, rather than any changes in capital flight patterns.
“Tether is the easiest way to hold a relatively stable volume of value at an exchange that doesn’t accept dollars,” the U.S.-based trader said. “It’s much more about that [USDT] network effect than any technology, infrastructure or other advantage.”
In short, OTC traders provide fiat on-ramps to USDT, although this is a gray market within Chinese borders. Then Chinese traders use USDT to liquidate their broader portfolios on global exchanges like Binance, Huobi or OkCoin. This affects the bitcoin market because traders and exchanges generally use the godfather cryptocurrency for fiat liquidity beyond OTC. Exchanges like Kraken and Bitfinex offer such bitcoin trading pairs.
However, the anonymous trader in Hong Kong noted this isn’t the only way Chinese traders are influencing the broader market, adding:
“There are billions of dollars coming out of China that have nothing to do with capital controls.”
For example, the Antigua-based FTX crypto futures market that launched in April now facilitates between $50 million to $300 million in daily volume, according to CEO Sam Bankman-Fried. He told CoinDesk the bulk of those 10,000 FTX users hail from China and are served out of an office in Hong Kong. (Consequently, USDT futures contracts are among the top performers.)
The asset’s relative stability in 2019, oscillating only a few cents in August despite spikes in demand, may seem remarkable given the legal counsel for its namesake issuance company admitted this stablecoin is not backed one-for-one by U.S. dollars. Plus, the issuer’s sister company, Bitfinex, faces legal scrutiny in New York over allegedly misusing USDT to cover company losses.
Yet the anonymous Chinese investor said many traders saw the Bitfinex initial exchange offering this summer as a “bank bailout” to the tune of $1 billion, one which insured the continued reliability of USDT.
“Many users understand that Bitfinex is behind Tether and that’s incredibly important in the industry,” she said. “[Bitfinex] is one of the most non-compliant exchanges out there, but the nature of that tends to attract a lot of support from hardcore bitcoiners.”
Circle CEO Jeremy Allaire says the U.S. lagging behind China’s development of a national digital currency could alter the way Western companies transfer payments.
Speaking on the Global Coin Research podcast this week, Allaire said China is setting the pace in the development of a digital currency equivalent of its fiat currency, the renminbi, and could soon bypass Western rules through direct settlements. Allaire also said Circle continues to be interested in the development of stablecoins, such as its USD Coin.
“[Circle] also believes that the major reserve currencies of the world, the major trade currencies of the world, would become digital currencies,” Allaire said.
“A digital currency version of renminbi that runs on software platforms that can be run over the internet, it really creates an opportunity for China and Chinese companies . . . and bypass the western banking system.”
Earlier this month, the People’s Bank of China announced it was wrapping up a year-long digital currency project.
Allaire said Circle, which launched a U.S. dollar stablecoin in 2018, is keeping its eye on China’s development. A digital renminbi, Allaire said, makes sense in view of the larger global financial picture:
“I think the broader concept of the internationalization of the yuan and the belt and road initiative and the desire to expand China role as a trade counterparty . . . digital currency is a natural path for that to grow.”
Telecommunications giant Huawei’s chief executive has said that the time is ripe for China’s government to preempt Facebook’s Libra.
Speaking in an interview with Italian media outlet L’economia, CEO Ren Zhengfei remarked that China has the capability to pursue such an undertaking. He was asked a question about U.S. global hegemony and Facebook’s issuance of an international currency specifically.
Ren was quoted as saying (according to a translation):
“Even China is able to issue such currencies, why wait for Libra? The strength of a state is greater than that of an Internet company.”
Ren was not necessarily looking to take his company toe-to-toe with the social media giant. Though his firm has made significant inroads in the blockchain space – including joining the Hyperledger consortium and releasing a blockchain-backed cloud service – he instead pointed to the advancements in blockchain technology made by the Chinese nation-state.
In May, the People’s Bank of China hired blockchain experts in a move to widen its distributed network investments, useful for “large scale transactions,” bank representatives said at the time.
Additionally, while some members of China’s central bank have said that Libra’s deployment could negatively impact the country’ economy, Wang Xin, head of the research bureau at the People’s Bank of China, said the competition could propel the country to issue its own national cryptocurrency.
In fact, a few weeks after Libra was announced, searches on the China’s web search giant Weibo skyrocketed. This is in spite of the fact that Facebook has been banned in the country since 2009.
The cash-counting machines were softly buzzing in an office with floor-to-ceiling windows overlooking Moscow’s landmarks.
“Hear that sound?” asked the head of an over-the-counter (OTC) cryptocurrency trading desk — let’s call him ‘Oleg’ — who requested his real name and company be withheld. “You can hear it 24/7 in here.”
Business is brisk thanks to a constant flow of Chinese merchants who come in daily with heavy bags of cash. Oleg said his OTC desk sells about $3 million worth of crypto every day. Most of it usually goes to China. But what’s perhaps most surprising is which crypto.
Only 20 percent of Oleg’s sales are in bitcoin, the oldest cryptocurrency with the largest market capitalization. The other 80 percent is in the dollar-pegged token known as tether, or USDT.
Tether’s best-known application is allowing crypto traders to move money between exchanges quickly to take advantage of arbitrage opportunities. But according to several Moscow OTC traders, it has at least one real-world use case – as the go-to remittance service for local Chinese importers.
The total volume of USDT purchased by Chinese businesses can reach $10 million to $30 million daily, these traders said.
“They accumulate a lot of cash in Moscow and need tether to transfer it to China,” said Maya Shakhnazarova, head of OTC trading at Huobi Russia, the Moscow office serving high-roller clients of Singapore-based exchange Huobi Global.
It’s a simple process.
“A client comes with cash, we register the price at exchanges, when we agree on a price, we make a deal,” Shakhnazarova told CoinDesk. “The client hands over cash and a wallet address, the seller sends USDT to the wallet.”
Why tether? It has the usual advantages of crypto – no limits on how much money can be sent or where – without the volatility that makes most coins infeasible for moving millions across the border daily.
Despite longstanding questions about USDT’s purported dollar backing, exacerbated by the New York State Attorney General (NYAG) court case against the issuing company Tether, the stablecoin usually trades around $1.
The tether-for-rubles purchases often take place in offices like Huobi’s in the steel-and-glass skyscraper district of Moscow City.
“There are a lot of OTCs here in Moscow City, a bunch of offices in every building, and the volumes for them all can reach several dozens of millions of dollars a day. It’s all paid for in cash,” Shakhnazarova said.
Tether’s killer app
Chinese grey-market importers used to rely on bitcoin before the 2018 bear market, another OTC dealer, Roman Dobrynin, told CoinDesk. As the price was ever-growing, merchants and the intermediaries helping them buy crypto could make some extra money along the way.
But since the beginning of 2018, hoping that your bitcoin will still be worth the same or more at the end of the transfer became too risky.
“As the price was going down, tether became much more convenient to use,” said Dobrynin. “China is totally reliant on USDT, they trust in it a lot, plus it’s very liquid.” His own clients are mostly Chinese, and they usually find him by word of mouth, connecting via Telegram.
To buy or sell USDT for dollars from Tether itself, a trader must be verified through the company’s know-your-customer (KYC) process. However, since the token runs on top of public blockchain networks (bitcoin, ethereum and tron), anyone can receive or send it, and secondary trades are unrestricted.
Tether did not respond to requests for comment by press time.
Back in China, the merchants can exchange USDT for fiat easily, even though the People’s Bank of China banned fiat-to-crypto spot trading in September 2017, forcing the exchanges to move out of the country and limiting trading to crypto-to-crypto pairs.
Chinese traders who need to liquidate crypto assets into Chinese yuan can still go to an OTC market maker, such as those registered on exchanges like Huobi and OKEx, to get matched with buyers and send them crypto after receiving a wire transfer via a bank, AliPay or WeChat Pay.
Critics of Tether have long questioned whether the stablecoin was fully backed 1:1 with dollars, as the company long insisted. The NYAG case revealed that Tether had loaned a big chunk of its capital reserves to Bitfinex, an exchange with overlapping management and owners, leaving the coin only 74 percent collateralized by cash and equivalents.
None of this seems to faze the Moscow traders or their Chinese clients.
“Nobody actually cares if tether is backed or not,” says Konstantin Plavnik, chief operating officer of Moscow-based crypto derivatives exchange Xena. Confidence in Tether’s solvency relies on long-time habit and convenience: this market needs tether, so tether is trusted.
OTC traders also point out that USDT’s daily volume exceeds its supply in circulation several times over, which indicates that people turn the token around multiple times during the day. For example, according to CoinMarketCap, on July 29, the 24-hour volume of USDT was recorded at $17.5 billion, while the total supply was just around $4 billion.
The turnaround of tether is fast, so for the merchants using the token for remittances, whether it’s worth something or not matters only within one day. Large batches of USDT get transferred to China overnight and then exchanged for yuan, crypto entrepreneurs in Moscow told CoinDesk.
“USDT will stay propped by the power of habit and trust of its users,” said Vladislav Bulochnikov, the head of product at crypto wallet app provider Chatex. “Even if it loses half of its backing — it’ll still be out there.”
Skirting capital controls
Stepping back, the Chinese government maintains strict capital controls, limiting the amount of foreign currency anyone can buy or sell to $50,000 a year. People can apply for an additional quota, but still the amount of currency they can buy and sell will be limited. In this situation, some Chinese have opted to use crypto to move money across the border, Bloomberg reported in 2017.
The fact that Chinese merchants bringing cheap goods to Moscow’s shopping malls use crypto to move money around was all but officially recognized by the Russian authorities last year.
Several large malls in the city account for around $9.5 billion of unregulated cash flow monthly, and most of the merchants are from China, said Yuri Polupanov, the Bank of Russia’s head of financial monitoring and currency control, during an event hosted by Thomson Reuters in Moscow in April 2018.
These malls, located inside huge warehouses on the outskirts of Moscow, host multiple retail stands, selling mostly clothing, usually for cheap and for cash. They are shopping Meccas for people who can’t afford to spend much on their wardrobes and avoid even mass-market chain stores.
“We see most of the revenue turned into cryptocurrency, which is not reported in any way at the moment,” Polupanov said at the Thomson Reuters event, according to the RBK news agency. “We see simultaneous transfers of that cryptocurrency via email to the homeland of those merchants and producers, and the following exchange of it for the local currency there.”
According to a March 2019 report in the Russian newspaper Novaya Gazeta, cash would be received at places like a hotel called “Druzhba” (“Friendship” in Russian), located next to the shopping mall named “Moscow.” Then this cash would be swapped for crypto and sent to Hong Kong.
The wholesale trade offices at Druzhba could be turning around $10 million to $12 million daily, Novaya Gazeta’s sources estimated.
The operations were ceased for a short time after police raided the hotel, along with the malls mentioned by the Bank of Russia, in March of this year.
Small crypto desks are still functioning at those malls, OTC trader Dobrynin believes, though they likely don’t provide the volumes merchants need.
Outside traders are often afraid to go to those areas to make deals as things can get dangerous there, he said, explaining: