In November 2018, the People's Bank of China (PBOC) released a pivotal research paper titled “Blockchain Can Do What, Cannot Do What?”—a comprehensive economic analysis of blockchain technology’s potential and limitations. This document, grounded in rigorous academic inquiry, offers essential insights for policymakers, developers, and investors navigating the evolving landscape of digital finance.
The paper dissects blockchain through an economic lens, focusing on its core components: Token, smart contracts, and consensus algorithms. It introduces what it calls the “Token paradigm”—a framework that underpins most mainstream blockchain systems—and evaluates how this model performs across various real-world applications.
Key Takeaways: What Blockchain Can—and Cannot—Achieve
1. Don’t Overestimate Blockchain’s Disruptive Power
“To date, no technological innovation has ever had a disruptive impact on the financial system. Blockchain will be no exception.”
This bold statement anchors the paper’s central argument. While blockchain has generated immense hype, especially in financial circles, the PBOC emphasizes that true societal impact remains limited. Most blockchain projects have yet to deliver scalable, sustainable solutions.
Modern financial systems are inherently adaptive, absorbing innovations that improve efficiency, security, and convenience. However, disruption is rare. The paper argues that blockchain does not represent a paradigm shift in this regard.
Notably:
- Cryptocurrencies lack intrinsic value and sovereign backing, making them unsuitable as replacements for fiat money.
- Their fixed or algorithmic supply mechanisms offer little flexibility compared to central bank-managed monetary policy.
- The anonymity feature complicates compliance with anti-money laundering (AML) and know-your-customer (KYC) regulations.
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Despite these constraints, the report acknowledges specific use cases where blockchain could add value—particularly in contexts like China’s fragmented bill market, where a digital bill trading platform might enhance transparency and reduce risk.
2. Technology Can’t Replace Institutions—or Trust
One of the most thought-provoking insights is the idea that technology alone cannot substitute institutional trust. Many blockchain initiatives aim to eliminate intermediaries by relying on code and decentralization. But in practice, this ideal often fails.
For example:
- Data from the real world must be written onto blockchains via oracles or trusted third parties.
- Fully decentralized systems struggle with governance, scalability, and legal enforceability.
As the paper notes:
“Using technology to replace制度 (institutions) and trust is extremely difficult—and in many scenarios, simply utopian.”
Moreover, pure decentralization is rare in practice. Most successful blockchain implementations incorporate some degree of centralization to ensure functionality, compliance, and sustainability.
3. Speculative Bubbles and Regulatory Risks in Token Markets
The PBOC raises serious concerns about the speculative nature of current blockchain financing, particularly around public Token offerings. Issues such as:
- Market manipulation
- Fraudulent fundraising
- Regulatory arbitrage
…are widespread. The report calls for stronger oversight, especially concerning publicly traded Tokens, to mitigate systemic financial risks.
This aligns with broader global regulatory trends emphasizing investor protection and market integrity.
Four Main Blockchain Application Directions
The paper outlines four primary application models based on the Token paradigm:
1. Permissioned (Non-Cryptocurrency) Blockchains
These systems operate without Tokens and are typically used within closed networks (e.g., enterprise supply chains). They prioritize efficiency and control over decentralization.
2. Asset-Backed Tokens (Non-Public Issuance)
Tokens represent off-chain assets (like invoices or real estate) and streamline ownership transfer and verification. This model shows promise in reducing settlement times and counterparty risk.
3. Publicly Traded Tokens as Financial Instruments
While these enable new forms of investment and liquidity, they rely heavily on off-chain legal frameworks for enforcement and dispute resolution—highlighting the limits of pure on-chain governance.
4. Decentralized Autonomous Organizations (DAOs)
Ambitious but largely experimental, DAOs attempt to govern organizations via smart contracts. However, they face major hurdles in accountability, adaptability, and integration with existing legal systems.
Critical Economic Challenges in Blockchain Systems
Beyond applications, the paper explores deeper structural issues:
🔹 Stablecoins: Fragility Behind the Stability
Stablecoins aim to peg digital assets to fiat currencies. Two models dominate:
- Reserve-backed stablecoins (e.g., Tether): Operate like currency boards—1:1 backed by USD reserves.
- Algorithmic stablecoins: Mimic central banks by adjusting supply via algorithmic rules.
However, the latter are vulnerable to speculative attacks. When confidence drops, bond-like instruments used to absorb supply trade at steep discounts—undermining stabilization efforts. As Eichengreen (2018) observed, algorithmic central banks lack credibility during crises.
💡 Important distinction: Central Bank Digital Currencies (CBDCs) differ fundamentally from stablecoins. CBDCs are legal tender issued directly by central banks—not reliant on private reserves or algorithms.
🔹 Cryptocurrency & AML: The Three-Stage Money Laundering Risk
Regulators must focus on the fiat-crypto on-ramp, where illicit funds enter the system. The laundering process typically follows three stages:
- Placement: Converting illegal cash into crypto via unregulated exchanges.
- Layering: Obscuring trails using mixers, CoinJoin, or tumblers.
- Integration: Converting “clean” crypto back into usable fiat or goods.
Privacy coins like ZCash, Dash, and Monero—using zero-knowledge proofs or ring signatures—pose significant challenges for tracking transactions. Cross-border operations further complicate enforcement due to fragmented global regulations.
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🔹 Governance Gaps in Token-Based Systems
Several structural weaknesses hinder long-term viability:
- Volatility undermines incentive alignment: Fluctuating Token prices distort participant behavior.
- Smart contracts can’t replicate complex legal agreements: They lack flexibility for renegotiation or exception handling.
- Fast Token liquidity weakens investor commitment: Early exits disrupt project continuity.
- On-chain vs. off-chain governance mismatch: Anonymous voting lacks accountability; reputational incentives vanish without identity.
The integration of both governance types remains an open question.
🔹 Economic Security Limits of Public Blockchains
Citing Budish (2018), the paper warns that the higher a blockchain’s economic value, the greater its attack risk. In proof-of-work systems like Bitcoin, attackers could theoretically profit by double-spending if they control enough hash power—especially if market caps grow large (e.g., rivaling gold).
Thus, for high-stakes applications, private or hybrid systems may offer better cost-performance ratios than public blockchains.
Frequently Asked Questions (FAQ)
Q: Can blockchain replace traditional banking systems?
A: Not currently. While blockchain improves certain processes (like settlement speed), it lacks the scalability, regulatory compliance, and monetary flexibility required for full-scale replacement.
Q: Are stablecoins safe alternatives to fiat?
A: Reserve-backed stablecoins are relatively reliable if audited regularly. Algorithmic versions carry higher risks due to their dependence on market confidence.
Q: Is decentralization always better?
A: No. Decentralization trades efficiency for resilience. Most practical applications blend centralized oversight with distributed architecture.
Q: What’s the difference between CBDCs and cryptocurrencies?
A: CBDCs are state-issued digital currencies with legal tender status. Cryptocurrencies are private assets without sovereign backing.
Q: Why is KYC/AML harder with blockchain?
A: Pseudonymity and cross-border transaction capabilities make tracing funds more complex—especially when privacy-enhancing tools are used.
Q: Should governments regulate blockchain?
A: Yes—especially around public Token sales and exchanges—to prevent fraud, protect investors, and maintain financial stability.
Final Thoughts: A Call for Pragmatism
The PBOC paper delivers a sobering yet constructive message: blockchain is a tool—not a revolution. Its success depends not on ideology but on practical fit, economic soundness, and institutional compatibility.
While innovation should continue through experimentation, stakeholders must:
- Avoid technological utopianism
- Respect regulatory boundaries
- Prioritize real-world utility over speculative gains
As we move toward a more digitized financial future, balanced assessment—not blind faith—will determine which blockchain applications endure.
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