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Few would dispute that China’s recent crackdown on cryptocurrency trading and mining has contributed to the recent plunge in the value of bitcoin and other cryptos.
But while the argument rages about whether the volatility of cryptos is a sign of fundamental weakness or merely a bump along the road, the initiatives coming out of Beijing are being seen by experts as a sign of China’s attempts to incubate its own fledgling e-currency and reboot the international financial system.
The People’s Bank of China aims to become the first major central bank to issue a central bank digital currency. While the PBOC’s counterparts in the west have taken a more cautious approach, it has held trials in several major cities including Shenzhen, Chengdu, Shanghai and Hangzhou.
The benefits of an e-currency are immense. As more and more transactions are made using a digital currency controlled centrally, the government gains more and more ability to monitor the economy and its people.
The rollout is also seen as part of Beijing’s push to weaken the power of the US dollar, and in turn that of the government in Washington. China believes that by internationalising the yuan it can reduce its dependence on the dollar-dominated global banking system, just as its Belt and Road Initiative is building an alternative network of international trade.
Alarm in western governments is such that the threat posed by the digital yuan, which could put China out of reach from international financial sanctions, for example, was discussed at last month’s G7 meeting.
But another crucial motivation is the increasing alarm in Beijing at the size of the crypto industry in China, where a huge amount of cryptocurrency was being “mined” until the recent crackdown.
The threat of an unregulated alternative monetary system emerging from blockchain technology is a clear and present danger to the Communist party, according to observers.
Jim Cramer, a former hedge fund manager and CNN business expert, said the government in Beijing “believe it’s a direct threat to the regime because … it is outside their control”.
Seen from the perspective of central banks, cryptocurrencies are a threat to financial stability, argues Carsten Murawski, professor of finance at the University of Melbourne in Australia, and if digital currencies are to be developed then authorities want control.
“All central banks want to control them – the PBOC, the US Federal Reserve, the European Central Bank,” he says. “They have no interest in parallel currencies floating around. Some countries may not be too worried but in China it could be more of a concern.”
On Thursday, Fan Yifei, a deputy governor of the PBOC, said China was concerned about the threat posed by these digital currencies developed outside the regulated financial system. “We are still quite worried about this issue, so we have taken some measures,” Fan said.
The value of bitcoin shot up to a record high earlier this year of almost $65,000, having been worth less than $10,000 in the middle of last year, sparking a frenzy of interest in the cryptos as an investment to hedge against more traditional assets such as stocks and bonds. Comments by Elon Musk, the boss of Tesla, that he would not allow bitcoin to be used to buy his cars added to the volatility and it is now trading in the low $30,000s.
But that has also attracted the attention of authorities such as those in China concerned about the largely unregulated market.
“In many countries it is completely unregulated – it is the absolute wild west,” says Prof Murawski, who also pointed out that there might not be the usual legal avenues to pursue if people thought they had been defrauded.
“So that’s another reason to control cryptos: to protect the consumer. Uninformed investors could lose a huge amount of money.”
In China, the rollout of the digital yuan has speeded up this year in tandem with the outlawing of crypto trading. In May, the PBOC banned banks from doing business or providing accounts for anyone trading in cryptocurrencies. It was followed by the outlawing of bitcoin mining in several provinces, including Sichuan. On Tuesday, China’s central bank warned companies against assisting cryptocurrency-related businesses as it shut down a software firm over suspected involvement in digital currency transactions.
Fan said on Thursday that cryptocurrencies such as bitcoin had become “tools for speculation” and were bringing potential risks to financial security and social stability.
Online businesses have been allowed to prosper in China, but the government in Beijing has been ruthless in cutting them down to size if they appear to be getting too big to control. Jack Ma, the high-profile billionaire founder of the Alibaba empire, disappeared abruptly from public view for months last year, and his company was fined and ordered to downsize. Regulators have also targeted tech giants Tencent and Bytedance, the respective parents companies of WeChat and TikTok, and this week ordered ridesharing app Didi be pulled from app stores and launched an inquiry.
Dong Shaopeng, a senior research fellow at Renmin University of China in Beijing, said some online industries such as cryptocurrencies had reached an “alarming” size.
“It’s time for the government to block such transactions from capital sources, so that money will stop flowing from real industries to those transactions,” Dong told the Global Times.
Prof Murawski says yet another reason why China wants to clean up the cryptocurrency business on its own patch is the possible threat to the electricity system.
The process uses a huge amount of electricity and has tended to be set up in areas where cheap power is available. In China that has included Sichuan, which benefits from abundant and cheap hydro-electric power. But as profits rise thanks to the popularity of cryptos, governments may becoming less willing to allow miners to accrue huge benefits from a system that uses so much electricity it can threaten the stability of the power grid.
The crackdown on cryptos is not limited to China. Britain’s financial regulator said last month that Binance, one of the world’s largest cryptocurrency exchanges, cannot conduct any regulated activity and issued a warning to consumers about the platform.
But cryptos remain an extremely attractive asset for many investors who see nothing to fear from China’s crackdown and that mining will simply migrate to other more accommodating jurisdictions with little impact on the market.
Michael Saylor, co-founder of the business intelligence company MicroStrategy and one of cryptos’ biggest cheerleaders, recently bought an additional 13,005 bitcoins for roughly $489m at an average price of $37,617 per coin. And the Silicon Valley venture capital firm Andreessen Horowitz just launched a $2bn crypto fund and announced it was “radically optimistic about crypto’s potential to restore trust and enable new kinds of governance”.
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