Digital assets must be part of financial architecture

The proceedings of the third plenum of the 20th Communist Party of China Central Committee makes the future shape of China's financial infrastructure clearer. The policies that are now being put in place are probably the most concerted response by any country to ameliorate the negative effects of blatant capitalism that we see today in the West.

Even in the United States, unbridled capitalism has resulted in greater disparities that are tearing apart the fiber of its own society. China is determined to find a more constructive way, by not taking the easy path of pumping excess liquidity into the market.

The relationship between the different pillars of capital markets is being redefined today, not just in the US but in other major markets around the world as well. Blatant capitalism in the US has seen the country's stock market favor selected frontier technologies at the expense of almost everything else.

Ordinary companies, which are part of the real economy, are not able to raise capital in the US as they used to. Private capital is being taken to task by the Federal Trade Commission for creating monopolies and raising prices of everything from medicines to entertainment ticketing systems. China is probably the only other economy that can attempt to find an alternative and sustainable course.

One factor that has to be included into China's efforts to build a sustainable financial system is that the US is totally capable of changing the rules to conveniently resolve an existing crisis. They have done it routinely in the past and will do it again in future. In 1971, when the US could no longer afford to peg its own currency to the price of gold, it abruptly de-pegged its own currency, ostensibly for a temporary period, but which has become an integral part of the global financial system and world economy today.

The US executed the plan despite keeping on insisting since the Bretton Woods Conference in 1944 that a currency peg was crucial to managing economies. Today, almost every country in the world has been forced to accept a floating currency regime as the preferred norm, just because the US says so.

Countries such as China can insist on a managed mechanism, because they have a huge domestic market as well as inflow of foreign exchange to steer its economy without foreign influence.

Since 2013, the US Bureau of Economic Analysis has been redefining the composition of GDP to include non-tangible assets, such as intellectual property, entertainment, software development and increasingly digital assets. It is a matter of time before the definition of GDP will become so esoteric that the world's largest manufacturing country will look smaller than it really is because it does not have enough intangible assets in its economy.

For this reason, countries such as China will have to race to add assets from their digital assets that contribute to the overall definition of its GDP.

As finance becomes increasingly digitalized, we will find that anything that can be digitalized can be "financialized". The successful launch of Black Myth: Wukong video game is an example of a digital product that can grow at multiple levels, from licensing to movies, and from collectibles and events to become digital assets that do not exist in the real world, but still count toward the composition of GDP in the future.

Digital assets of all kinds can in the future be bought, sold and traded on new digital markets of all kinds.

This is both a good and a bad thing. The good thing is that people in the real economy can also put up assets to be traded digitally by tokenizing them. The entire supply chain in the climate-related bonds can be captured and traded in digitized form.

The "productivity gains" from digital activities are viewed as superior to real world activities, because they have much lower costs. Also, the valuation of digital assets can be much more volatile because they are easily created and destroyed. It becomes increasingly more difficult to manage an economy of that nature.

Finally, anything that can be financialized can also be personalized. This means that traditional financial institutions will have to reengineer the roles they play in financial intermediation. We already see this in the launch of the digital yuan, so that interest rate alone will not be enough for customers to leave their deposits with the bank. If the deposit business is tokenized in the future, banks will be competing with each other to provide greater functionality on their tokens.

These are very exciting times for China to build an all-inclusive financial architecture that is digital while creating one that is sustainable at the same time.

The author is the founder of The Asian Banker and author of The Great Transition — The Personalization of Finance is Here, which is available in both Chinese and English.

The views don't necessarily reflect those of China Daily.

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