The informal/black economy means it is difficult for the Chinese government to collect the correct taxes due, it also creates inequality in society, and is thought to be one of the ways that Chinese citizens take money out of the country. "The major business for most underground banks is now contra payments, leading to huge capital outflows and great damage to society. It's the major target of our crackdown," according to a recent notice issued by China's Supreme People's Procuratorate and reported in the South China Morning Post. The black economy arguably is responsible for China being such a huge producer of counterfeit products (reportedly accounting for over 50% of all counterfeit goods manufactured globally), which often rely on cash transactions, so once again avoiding the collection of taxes.

The above illustration is calculated by Transparancy.Org (a not-for-profit organisation located in Berlin), which studies 180 countries to create the “Corruption Perception” scale. Based on the latest data, from 2017, China is ranked 77^th. One of the reasons that this type of analysis is important is that foreign investors are less likely to invest in a country that has high levels of corruption. Less foreign investment leads to fewer jobs being created and slower economic growth.

In the past, while the Chinese economy was growing at 8% to 10% a year, it seemed that China turned a ‘blind eye’ to its black economy. However, as the economy slows and China’s once-massive trade surplus potentially turns to a negative, Chinese authorities are looking at ways that it can better control money in its economy.

China’s central bank, the People’s Bank of China (PBOC), has the dual mandate of maintaining price stability while promoting growth, using a selection of monetary policies. One of the ways that the PBOC is hoping it can assert greater control over its economy is by launching its Digital Currency.

China's current-account surplus has been shrinking rapidly, to less than $50 billion in 2018 from more than $300 billion in 2015, and this trend is expected to continue. After rising to nearly $60 billion in 2019, it will fall to about $20 billion in 2021, according to forecasts by the International Monetary Fund. The trade war between China and the USA shows no signs of ending. In 2018, China exported $539.5 billion worth of goods to the U.S., 4.5 times more than the U.S.’s $120.3 billion worth of shipments to China. However, China’s goods trade surplus is around $400 billion p.a., while its trade deficit in services continues to grow. Once you then add in the impact of “shopping sprees”, the United Nations World Tourism Organisation calculates that Chinese tourists overseas spent $277.3bn in 2018, compared to Americans, who only spent $144 billion!  It is not difficult to see where the money is going.

In the light of the huge amounts of cash that is “sloshing around” the Chinese economy, the PBOC believes that by issuing a Digital Currency, it can hopefully take control back. The crux of the proposal is to initially replace cash with a Digital Currency, not bank deposits. The Digital Currency is more like a stablecoin (as opposed to Bitcoin), as it will be backed up by PBOC.

It is intended that the Digital Currency will offer “controllable privacy”, which, like cash, will be able to transact without handing over personal details by being “loosely coupled” with an account. However, to minimise the risk of tax evasion and other illegal activities, the central bank will be able to view transactions.

The PBOC will be able to influence/control the Digital Currency, as outlined by Fan Vice Governor at the POBC, who said “there will be variable transaction fees, as well as daily and annual transaction limits to give the central bank more tools to control the velocity of money and its supply when interest rates cease to be a viable channel for intervention”.

It is also hoped that a Digital Currency, backed up by the PBOC and with the same legal status as a banknote will lower the cost of financial transactions, thereby helping to make financial services more widely available. This could be especially significant in China, where millions of people are still “unbanked”. A Digital Currency should also be cheaper to operate and is anticipated to reduce fraud and counterfeiting.

Given the booming Chinese online digital economy - thanks to the success of Alibaba, WeChat, etc - a Digital Currency would give the Chinese government greater control of digital transactions. From a macro-economic standpoint, such a currency would enable real-time insight, which would be enormously valuable to policymakers. And finally, it might facilitate cross-border transactions, as well as the greater use of the Renminbi outside of China, because the currency would be easier to obtain. In effect, the plan allows China’s government to use a Digital Currency to increase control, reducing the use of cash, which is virtually untraceable and can be transacted with no records.

Another reason why the PBOC wishes to have more control over the amount of cash in its economy is that we can see a global economic slowdown against a backdrop of the Chinese debt.

President Xi Jinping has not been afraid to make changes, purging members of the country’s top leadership as well as tens of thousands of low-level bureaucrats. Recently, in the fight against corruption, the Chinese government has turned its attention to China’s $1 trillion “Belt and Road” project. This ambitious project intends to connect China to Latin America, Africa and into the heart of Europe, and now China wishes to tackle corruption as it builds bridges, railways, ports and roads across some of the poorest parts of the world.

Once again, as we have heard from other governments, Digital Currencies are being seen as a way to tackle/reduce fraud and corruption in economies, cut the cost of financial transactions, embrace the unbanked and wrestle back control in the increasingly digital world.

Indeed, Stephen McKeon who is an Associate Professor of Finance at the University of Oregon believes that tokenisation will transform capital markets, and has identified in his Security Token Thesis, eight reasons why.

• ·         24/7 Markets: Traditional bond and equity markets are not open 24/7 and some commodity markets, like copper, only trade 5 hours a day 5 days a week. Trading Security Tokens 24/7/365 is possible.

  ·         Fractionalization: The fractional ownership of particularly illiquid assets, such as cars, art, property, etc will allow retail investors access to these asset classes. As we see more of the smaller investors buying and selling, this ought to increase the liquidity and save investors’ money when they need to sell their investments in a hurry.

  ·         Rapid settlement: Traditional exchanges can execute trades in microseconds. However, the settlement can take days. Blockchain technology can potentially offer “real-time” settlement.

  ·         Cost reduction throughout the life-cycle of security: Blockchain technology uses one database/ledger, so offers the opportunity to reduce the number of intermediaries that need to be involved in buying and selling of Security Tokens.

  ·         Increased liquidity and market depth: The majority of private assets are illiquid, which means the ownership interests are costly and difficult to trade. Secondary markets, however, enable security tokens to “lock in the capital without locking in the investors”, as explained by Harbor CEO Josh Stein.

  ·         Automated compliance: Security Tokens can have compliance controls built-in. This means that regulatory compliance can be pre-programmed and algorithmically enforced before a Security Token trading. This ought to lead to lower compliance costs, minimal reliance on human interaction, less likelihood of regulated firms being fined and therefore, lower professional indemnity insurance premiums.

  ·         Asset interoperability: Nowadays, most asset ownerships are already represented digitally. The real problem is that the data is not “structured”, and so it is hard for existing systems to be able to monitor and control the data. Structured data on a Blockchain, in conjunction with other technologies - like Artificial Intelligence (AI), Smart Contracts, Internet of things (IoT), etc - overcomes many of these challenges. It will enable the ability to compliantly trade assets with different systems, therefore allowing them to operate in an interoperable manner.

  ·         Expansion of the design space for security contracts: Security tokens allow us to build in contractual features that have previously been unfeasible, thus enabling the economic concept of complete contracts.

The use of Blockchain technology to create Security Tokens oughts to enable the buying and selling of many types of assets, those becoming more efficient, compliant, cheaper, faster and secure. It also ought to make capital markets easier to trade, be more inclusive and democratic, as well as be more relevant for tomorrow’s investors – millennials. Such investors are increasingly demanding to be able to trade using mobile devices 24/7, and not to have to use financial advisors, broker-dealers, who they often see as unnecessary commission-hungry intermediaries.

At the event, a leading barrister Jeremy Barnett spoke about how he believed Blockchain technology can add tremendous value for the owners of Real Estate.” Take as an example a new shopping centre. If all the critical information about the project was held on a Blockchain, the landlord would know at every stage during the construction of the building who had done what and why. This would create a time-stamped and immutable record which could be used for a variety of requirements -insurance, bank financing, paying contractors and even potential litigation if this were to occur at a future date. This data could even be used to help in the fractionalization/tokenization of outlets within the shopping centre, to identify who is to receive an ongoing rental income. Therefore, having “Structured data”, one can add value to an asset such as a property”.

The suitability and safety of a building is an important issue, especially in the UK, where there are potentially corporate manslaughter charges that could be bought against company directors. Company directors are potentially personally liable in the event of an accident and are at even greater risk if an employee’s life is lost while at work e.g. shop or office workers, or potentially tenants (in the case of a property company).

If data on a building is held in a structured and digitised manner, it would be possible for Smart Contracts to be used to identify when maintenance checks need to be carried out -automatically notifying when health and safety checks are required i.e. inspections on lifts, fire extinguishers, etc.

On a more sober note, the barrister Barnett said that “If such a system had been used in Grenfell Tower, we would not only know who had made critical decisions about design and materials but also it would be possible to automate many of the processes that take place, such as monitoring of fire alarms and sprinklers, to make the buildings safer. Using such a system, all those who design, build, operate and own new buildings will be able to comply with the onerous rules that will be introduced by the new Fire Safety Regulator.”

In a recent report from Harvard Business Review, which looked at How Blockchain Will Change Construction, it cited several examples of how the technology is being applied in the property sector. According to Propulsion Consulting founder Marc Minnee, who is advising on a large project in Amsterdam, “Blockchain provides a platform for clearly cascading work products down the chain and holding everyone accountable for completing key tasks,”. Meanwhile, the risk consultants at Aon, believe that 95% of building construction data currently gets lost on handover to the first owner.

Briq, a California-based Blockchain firm, is using a Blockchain-powered platform to create a “living ledger” of everything about a building - from the initial sod of earth being dug to the latest safety inspections and those potentially minimising risks for those who own and insure the property.

It is possible, in conjunction with Artificial Intelligence (AI) and Internet of Things (IoT), that  Blockchain technology can store data in a very collaborative manner by sharing relevant data with those entities which need access to it. A combination of Blockchain, AI and IoT would be able to identify potential risks and alert relevant parties when maintenance and inspection specialists are required. This would greatly minimise potential liabilities and so reduce the costs of owning and managing Real Estate.