China’s rapid economic growth and leadership of many global technologies have significant implications for emerging digital and DeFi technologies, which are almost certainly the bedrock of modern global commerce. Aside from these two critical factors, there are others that inform our understanding of the potential direction of digital fiat and cryptocurrencies within the country. 

Firstly, like much of the rest of the world, the Chinese are becoming increasingly intolerant of the banking system’s failure to preserve fiat’s asset value or to offer a commercial return. Secondly, while digitalization has been a global phenomenon, China has been leading the field — having already trialled digital wallets and created the necessary infrastructure for a digital yuan. Both have been facilitated by the success of integrated and customizable payment solutions within the country, resulting in a high degree of normalcy and comfort with the technologies.

James Gillingham, Finxflo

DeFi as a natural evolution in China’s economic development 

Put simply, decentralized finance (DeFi) is the next logical step for China on a number of fronts but largely because it meets rising cultural and commercial expectations and offers both security and privacy. As the doorway to cryptocurrencies, this opens many entrepreneurial avenues, including bitcoin farming, collateralized loans, real rates of return and new forms of wealth creation outside previous parameters, to name but a few. Above all it offers the potential for asset protection in an increasingly volatile world which makes it particularly attractive.

See related article: Conflux’s Open DeFi project aims to bridge East and West — with its own cryptocurrency in China

The draw of DeFi is that it removes a lot of commercial activity from the clutches of the traditional banking system and towards a myriad of more progressive opportunities, for example, those represented by the growing number of advanced trading options.

Roadblocks to DeFi’s adoption in China

The evolution of this commercial revolution — like its earlier industrial namesake — is one that constantly runs into difficulties that demand innovative solutions. Perhaps the most pressing is reflected in the number of challenges facing Ethereum, such as inflated gas fees and long settlement times. These issues are not only problematic but suggest protocols that are unfit for the purpose. A structure unable to handle billions of dollars is going to fail miserably in any attempt to match the trillions turned over in wider commerce. While competitors such as TRX are entering the market, they will need to prove that their platforms are truly scalable in order to succeed.

Secondly, there are roadblocks for individual investors. Top of the list is hacking. To invest in DeFi requires smart contracts, but these are too new to have gone through all the rigors necessary to ensure universal inviolability. Next is a lack of ecosystem understanding, especially as regards yield farming. Critical here are issues of sophistication, security and utility. Only once these are aligned can tokens present the sustained asset security necessary for effective trading. 

Thirdly, we must ask where China as a country fits into the evolution of fiat digital finance and whether it can play a key role in decentralized global finance. 

China, Shanghai, finance
China’s global role in finance may be shaped by its position on emerging crypto and DeFi industries. Photo: Edward He

These are critical issues and the crux of the acute dilemma facing the country’s political decision makers. While China enthusiastically supports reducing global dependence upon the U.S. dollar — including the rise of cryptocurrencies as a means of creating an alternative form of debt settlement — crypto technologies prove inherently problematic to the country’s underlying political philosophy. 

Achieving DeFi’s holy grail in China

Significant advancements are needed if an effective bridge dynamic is to be created between DeFi and traditional finance, and software engineers globally are working hard toward technology and protocol solutions that achieve this.  What sets Chinese efforts apart is their willingness to undertake more lateral innovations and allow for higher risks in the hope that DeFi’s potential will be realized and yield an aggressive circle of growth.

These advances must be understood as the flip side of China’s investor landscape — young, plugged-in, connected, well informed, confident, bullish, average-averse and enthusiastic. While anecdotal experience suggests that the Sino attitude is more attuned, engaged and avant garde than its European and North American counterparts, investment behavior shows this to be a reality. Investment dynamics in the Middle Kingdom are more relationship centered, connected, and based on collective agreement — decisions will be made and followed through. Under the right circumstances, an investment choice can become a tidal wave. Both culture and politics favor behavior that are smart, pragmatic and driven with “new era” energy. Chinese millennials are at the forefront of enjoying the challenges represented by seemingly complex and intractable problems.

The prevailing direction of commercial activity is very favorable to China’s continued participation. For example, the Shanghai Science and Technology Committee’s support of a new global DeFi association connecting Eastern and Western DeFi markets.  

In conclusion, access to the cryptocurrency market will not only be maintained in the People’s Republic but accelerate — as long as it does not become so large as to significantly reduce the government’s ability to eliminate fraud and tax evasion. A tipping point may come in the future. Yet when it does, China may have acquired such a commanding role in the global DeFI system that it outweighs other considerations.