What China's Cashless Revolution Can Teach the West About Crypto

To the average American, China's system seems no different from Venmo or Paypal, just more pervasive.

As Andreessen Horowitz partner Connie Chan told me during a fireside chat at the HYTSA conference at Stanford a week ago, the real benefits of China's cashless revolution lie in how this new, software-based system of value exchange has become a platform on which new business models can be built.

The relevance in this for CoinDesk readers, with their interest in cryptocurrency and blockchain technology, starts with the fact that this dream of a seamless, micropayments-enabled system of hitherto impossible new services is one that's often cited by crypto enthusiasts.

Does China prove that you don't need a blockchain to build a new Internet of Value, powered by device-to-device exchanges in an Internet of Things economy?

Although some U.S.-based providers are now creating services for Chinese tourists so they can buy things in America with their WeChat Pay or Alipay accounts, most of the activity on these networks happens in China.

The reason for that is that unlike cryptocurrency systems, the Chinese digital payments system is entirely built on the rails of the Chinese banking system, which deals almost exclusively in the Chinese currency.

Here's the thing: the Chinese banking system is essentially an instrument of Chinese policymaking.

The People's Bank of China sets a ceiling for deposit rates - often below inflation - and can get away with that because it imposes capital controls on savers to prevent them fleeing low rates for higher-earning currencies.

Their own financial profits are very much enabled by the same interest rate policy framework that a wider state-run Chinese banking system is compelled to accept.

If China were also to allow more private and foreign investment into the banks, would those institutions continue to subsidize the digital payments economy? Maybe, maybe not.