China Has Many Strategic Reasons To Invest in Blockchain

Byrne Hobart, a CoinDesk columnist, is an investor, consultant and writer in New York. His newsletter, The Diff (diff.substack.com) covers inflection points in finance and technology.

In October, China’s President Xi Jinping said China should “seize the opportunity” to use the blockchain. To cryptocurrency advocates, this is exciting – and confusing. Why would a deeply centralized country want to use an intrinsically decentralized technology? Why would a country that exercises tight control over its currency want to try a new, un-tested currency system?

The paradoxical answer is that Xi Jinping isn’t thinking like an engineer (although Xi himself has a BS in chemical engineering from Tsinghua). He’s actually in a different mindset entirely: somewhere between corporate blockchain consultant and ICO scammer.

Like many technological abstractions, blockchains are useful in certain domains where their tradeoffs make sense: If you need a system with no trusted third party, at the cost of lower throughput, it’s great. If you’re fine with trusted third-parties (as most consumers of financial services are) and need to handle lots of concurrent transactions (as existing payment platforms do), it’s not so great.

But blockchain is also a social technology – a way to make otherwise-boring issues exciting. The biggest impact blockchain has had on traditional banks is that it briefly convinced them that back-office functions like clearing were trendy and worth investing in. Since back-office functions were the first to be automated, they run on fairly creaky technology, generally designed by people who are now retired or dead. (The remaining COBOL Cowboys do very well under this arrangement.)

They can redirect that hype towards other goals.

Officials at the Chinese Communist Party know that blockchain is a popular technology, and they probably know the applications are presently limited. But they can redirect that hype towards other goals.

It’s atypical for…

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