Why China Is Playing a Dangerous Game With Its Future
Is going all-in on fiat currency really a good idea in the modern era?
So, for the umpteenth time in several years, I find myself writing the words “China has banned Bitcoin” yet again.
Each time I usually add something along the lines of “and this time they mean it” just to emphasize the point.
This time, however, they really, truly do.
What we know
Last Friday, multiple news outlets started reporting Beijing's announcement and it appeared to be a strong, unambiguous one. A total of ten of the country’s top agencies — including the central bank and financial and foreign exchange regulators — jointly supported the announcement which was worded in a way that we have come to know as typical of the ruling party.
The key objective, so it is claimed, is to root out “illegal” cryptocurrency activity. The way this will be done is to ensure that ALL cryptocurrency transactions are made illegal, apparently with immediate effect.
The rules are also far reaching, even covering any service that facilitates crypto trading outside of China. The PBOC (The People’s Bank of China) made it very clear that cryptocurrencies must not be allowed to circulate within the borders and thus any financial institution, payment company or internet firm that facilitates that activity must no longer provide those services to Chinese nationals.
So, even if you were a remote employee in China for an exchange that is based outside the Chinese borders and therefore out of the direct reach of the ruling party’s jurisdiction, it’ll still be illegal for you to continue to provide those services.
As usual, the reasoning behind these actions implies it is for the good of the people as this line from the PBOC statement makes clear:
… resolutely clamp down on virtual currency speculation … to safeguard people’s properties and maintain economic, financial and social order
At the same time another agency, the National Development and Reform Commission, announced it is working to cut off all support (and even electricity supplies) for any remaining mining activity in the country, citing ESG concerns. In reality, this is almost certainly less about the environment and more about control of the money supply, but the effect will ultimately be the same — mining in China is no longer a viable option.
The new laws effectively close some of the loopholes left open by previous legislation banning Bitcoin mining, ICOs and exchanges and introduces serious penalties for trying to use it in any form.
Interestingly, the PBOC also stated that personal transactions using crypto would no longer be offered legal protection status, thereby implying, probably incorrectly, that it had been at some point previously. This was possibly as a result of years-old court rulings describing crypto assets as “virtual property”, but this is a speculative conclusion and is now a moot point anyway.
The bottom line is that if you’re involved in any dispute or are a victim of fraud due to personal transactions involving cryptocurrency you can no longer bring any sort of legal case.
However, given the disdain that the Chinese authorities have for it, I'm not sure this was ever a wise idea.
It’s a serious, unambiguous law, but could it ever really be effective and what does it mean for this huge economy as we move into the digital age?
The immediate impact
The market, broadly, yawned on the news, although a small drop in Bitcoin was observed on the day of the announcement. Some mining firms also saw their stock lose value, mirroring exactly what happens to gold mining companies when the gold price takes a tumble.
My Twitter feed was, for the most part, entirely unmoved by the announcement since this was something that was not only expected, but has become indicative of China’s increasing desire to cut itself off from external influences.
Many people are unaware of the laws that are being quietly passed to stop the population at large communicating with the outside world or, more specifically, allowing money to flow out of the country.
In July, for example, The Chinese Ministry of Education suddenly announced that all teachers must only be Chinese, effectively wiping out the hugely successful online teaching programs and companies that existed round the world. Now, only a few remain, and those appear to be on borrowed time.
Back in the world of cryptocurrency, the immediate effects (other than price) were predictable.
When exchanges were made illegal back in 2017, two of the biggest names used by the Chinese population, Huobi Global and OKEx, simply moved offshore to circumvent the ban. However, the new laws prevent interaction with these companies and both have already stopped new registrations for people with a mainland Chinese address.
Others will surely follow, if they haven't already and, of course, any of the global development that is happening around the world with cryptocurrencies (eg Paypal, Strike etc) will give China a wide berth. We can expect all financial institutions within the country to comply fully and immediately.
Because you simply don't take a chance with the Chinese authorities.
Why are China doing this?
China’s claims that this is for reasons of “environmental concern” or “illegal transactions” are unlikely to be true. China simply has another agenda — the digital Yuan.
The country’s CBDC (Central Bank Digital Currency) is at an advanced stage, with an estimated roll out date somewhere in 2022. Essentially an entirely digital version of a normal fiat currency, it comes with a top-of-the-line surveillance package as standard.
If there’s one thing the Chinese Communist Party loves, it’s total control of the economy and the population as a whole. The digital era creates a whole new arsenal of tools to do just that.
Imagine, for example, being able to view the flow of money through your economy in real time.
Imagine being able to drill down to individual transactions to check citizens are not buying anything they shouldn’t or are trying to send money out of the country.
Imagine being able to deduct a fine or a tax immediately from a user’s account when required, or block a transaction the ruling party does not approve of.
Imagine being able to control the money supply by region, caste or even sex without the consent of those concerned.
All of this, and more, is possible with a CBDC. Can the people of China really trust a central government with a dubious human rights record to manage this in a fair, unbiased way?
It’s an Orwellian dystopia, but in an authoritarian regime like China, a CBDC can easily be installed without opposition and the people will have no choice but to use it.
As long as alternatives such as Bitcoin are not available, of course.
Bitcoin, in this sense, is the anti-CBDC, providing freedom from surveillance, government control and capital movement. It simply cannot be allowed to co-exist within the borders. China has probably already realized they can’t stop it, so they can only do the next best thing — remove themselves from the network as best they can through coercion.
But can this really work and what is the likely outcome?
Since the penalties of use cryptocurrencies are likely to be severe, anyone brave enough to continue to do so will have to be very careful. This means using VPNs or even satellite tech to try and circumvent the ruling, but for many this is undesirable and simply not worth the risk.
This means the most likely outcome is that the vast majority of the population will simply comply and what’s left of the Chinese crypto industry will simply vanish.
At least for now.
There are also precedents of sorts. Historically, China has also been reasonably successful in banning the use of information and social media platforms originating from outside of the country via the “Great Firewall” — effectively a digital version of the Great Wall of China.
Google, Facebook, YouTube and WhatsApp are universally banned, all being having been replaced with “Chinese only” counterparts. However, since the modern world is so interconnected with technology, no system is perfect, and there have always been anecdotal reports of some small usage of these systems throughout the population. Could the same happen for Bitcoin?
Of course, this will also remove China from the accelerating development based on the Bitcoin network that is happening in the rest of the world. China is obviously banking on the talent it has within its own borders to build and run a better system itself, but, in my view, the odds of success in the long run are not good.
The country may have a population of almost 1.5 billion which represents 18.3% of everyone on the planet, but they are still effectively trying to beat the combined network effect of much of the other 81.7%.
Not only this, they are going to try and do it with a fiat currency, a system that we know to be flawed in the long run. Sure, in the short term you probably can succeed in doing it through suppression and extreme disincentives, but what about five years from now? Or a decade?
If Bitcoin’s trends and development continue at its current rate, the logical conclusion is that it will become the most powerful financial system the world has ever known. At some point, it’s entirely feasible that the digital Yuan will, at the very least, have to have some sort of exchange ability with Bitcoin if it wants to trade internationally — how will this sit with the powers that be?
How will the ruling party keep it’s citizens happy as they see their international purchasing power slip against the rest of the world? At what point do the people say “enough is enough” and demand action? Even in a country like China, there is a limit to what a population will take.
Recent research by Coinshares indicates that China is now losing around $6 billion a year through the loss of its Bitcoin mining operations, money it has effectively sent, for free, to its economic competitors. It even provided the equipment they need to operate, also for free.
However, in my view, this is a tiny percentage of the overall economic disadvantage it has ultimately awarded itself. What about associated financial services? Or new tech built on the global payment rails? Or the huge sums generated by the exchanges that have already gone?
It may only be a few tens of billions for now, but Bitcoin is still relatively small. In a few years that number may well be hundreds of billions of dollars, or possibly trillions, numbers so big that even the mighty economy of China (GDP $14.77 Trillion in 2020) cannot afford to ignore them.
At the same time it should also be remembered that many of its economic competitors will be benefiting from the development revolution that is happening now, creating an even bigger divide.
The bottom line
Of course, much of this is conjecture. There is a long way to go before anyone can claim that a Bitcoin standard is here or even that is has universal acceptance and global regulatory clarity. It may never happen.
The point, however, is that it is certainly possible. Network effects are simply extremely difficult to stop, let alone reverse. No matter how powerful your government, company or monarchy is, the people will always outnumber you.
China has chosen to go all in on fiat currency and attempt to disconnect itself from a new and potentially revolutionary financial system for reasons of total domestic control — reasons that make perfect sense in an authoritarian system.
And, since it has willingly given up its unique position as a major player in the world of Bitcoin and crypto in general, it is gambling with a very high stake indeed — its status a world economic power in the future.
We have to assume, therefore, that the Chinese ruling party has thought this through, played out all the scenarios and have concluded that Bitcoin will ultimately not succeed. Otherwise there is little logic in attempting to do this.
And while it’s true that you cannot underestimate the resilience, intelligence and resourcefulness of the Chinese, the authorities have made significant monetary policy errors in the past. The most notable of these is probably the decision to remain on the silver standard in the 1930’s leading to the ultimate collapse of the economy and the rise of Chairman Mao.
So, will history judge this as a shrewd economic move? Or a “silver standard” moment?
Only time will tell.
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Disclosure: The author of this opinion piece has been heavily involved with bitcoin for several years and holds a substantial cryptocurrency portfolio, including bitcoin. He also has a mining operation running the SHA-256 algorithm based in Siberia and is a published author on the subject of promoting the understanding of cryptocurrency. Jason is an analyst at Quantum Economics and consultant to Luno.
Disclaimer: This content is for educational purposes only. It does not constitute trading advice. Past performance does not indicate future results. Do not invest more than you can afford to lose. The author of this article may hold assets mentioned in the piece.
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