How is China’s economic power affecting the bitCNY stable coin?

October 18, 2018
Richard Reed

Stablecoins come in a variety of flavours, but one of the most interesting ones out there – and one of the oldest – is bitCNY.

The bitCNY token takes advantage of the booming Chinese economy by pegging to the yuan Photo: Shutterstock

Designed to avoid the volatility associated with normal altcoins, stablecoins are – as the name implies – designed to keep volatility to a minimum, and usually pegged against a hard or ‘fiat’ currency. Most are tied to the US dollar, but bitCNY seeks to take advantage of the burgeoning Chinese economy by pegging the token to the Chinese yuan, or renminbi.

BitCNY was set up by BitShares inventor Daniel Larimer and Cardano founder Charles Hoskinson, and initially only available via the opensource BitShares blockchain platform. However, the new bitCNY token issued by OpenLedger is now available on other Ethereum-based trading platforms, including ForkDelta, Ethen and Everbloom.

Market-pegged assets

According to BitShares, bitCNY is not so much an altcoin but rather a ‘market-pegged asset’, designed to offer a stable market price for the asset it is linked to, and will always offer the same purchasing power of the yuan.

It is the latest such asset-token issued by BitShares, following on from BitUSD, BitEUR, BitGOLD and BitSilver.

Stabecoins versus fiat currency

So why not just buy the hard currency itself? There are several advantage to holding crypto tokens rather than a hard currency. Well, you obviously wouldn’t want to stuff a wad of yuan under your mattress – and banks usually charge hefty fees for opening and running foreign currency accounts.

Tokens like bitCNY are better than cash as you don’t have to pay account charges Photo: Shutterstock

In contrast, bitCNY tokens enjoy all the advantages of other digital currencies in that they can be stored indefinitely, usually without charge (there is a small commission when you buy and sell them) and traded on the market at a moment’s notice.

In addition, bitCNY tokens are stored on decentralised exchanges, making them hard to steal. Crypto tokens stored on a conventional, centralised exchange are always at risk of a large-scale hack, whereas with a distributed ledger system spread over multiple servers, it’s only possible to hack one computer at a time.

In fact, your tokens are safe even if BitShares were to go bankrupt. When you buy bitCNY it is automatically collateralised through a smart contract into the BitShares token, BTS. These are locked and cannot be moved or sold.

So do bitCNY tokens represent a good investment?

Chinese economy

Since they are tied one-to-one to the yuan, that depends on the outlook for the Chinese economy. Typically, the yuan doesn’t tend to fluctuate much – China has the economic advantage of being controlled by a non-democratic government that doesn’t have to pitch for re-election every few years. But even the Chinese economy has gone through its highs and lows.

For nearly 10 years, from January 1994 to June 2005, the yuan stayed almost static at almost ¥8.3 to the dollar. But from July 2005 to January 2014 it fell steadily to just over ¥6 to the dollar. The reasons were twofold.

Firstly economic growth was so fast it was at risk of overheating (10.9% in the first half of 2006), and the Chinese government started raising interest rates to dampen things down. Secondly, despite its huge economy, China wasn’t immune to Western economic woes following the 2007-08 financial crash, relying heavily, as it has historically, on exports.

Tump trade war

The start of US President Trump’s trade war on China for dumping goods such as steel and aluminium at below market prices also had an impact, with the yuan falling from just above ¥6.6/$ in November 2017 to a low of ¥6.26 in February 2018.

Trade war uncertainties have seen greater use of the yuan as a global currency Photo: Shutterstock

However, it has since recovered and currently stands at ¥6.93 at the time of writing (18 October) – and ironically, the Trump effect might be the cause. The uncertainties generated by the trade war have seen much greater use of the yuan as a global currency by business and financial institutions.

China is now the world’s third largest bond market, and the value of Chinese government bonds held by overseas investors rose above ¥1trn ($144.1bn) for the first time in August 2018. It marked the 18th consecutive monthly increase in overseas holdings of Chinese government bonds.

Chinese whispers

The irony is not lost on Kay Van Petersen, global macro strategist at Saxo Capital Markets based in Singapore, according to the Hong Kong-based South China Morning Post.

“The unintended consequence of the US fighting across multiple fronts drills home the point that the world needs an alternative to the US dollar for trade and transfers,” he said. “If anything, the trade war will lead to a redoubling of efforts on the structural roll out of the yuan to echo this internationalisation theme.”

Meanwhile the strength of China’s domestic market continues to grow unchecked, with a huge upwardly-mobile middle class for industry to serve.

So if you are looking for a stable long-term investment to hedge against Trump troubles in the US and Brexit jitters in Europe, buying into the Chinese success story via bitCNY might not be a bad way to go.

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