This is an abridged version of China bans bitcoin, embraces DLT with ESG implications by Chi Lo
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Since May 2021, China has intensified its clampdown on cryptocurrency trading and mining. In June, the Qinghai provincial government banned all bitcoin mining and several other regions quickly followed. In July, the State Grid issued a nationwide notice requesting the closure of all crypto mining operations and disconnected them from its network.
The economic and environmental factors
Dealing with power shortages and targeting climate control underpin Beijing’s ban on bitcoin. China aims to reach peak carbon emissions in 2030 and be carbon neutral by 2060. These are tall orders because
- China’s projected emissions peak is much higher than those of the US and the EU
- China’s timeframe to achieve carbon neutrality is much shorter (30 years after the peak) than for the US (45 years) and the EU (71 years).
The industrial sector, which accounts for 80% of carbon emissions, will have to shrink and shift from its current 67% reliance on coal towards clean energy. However, progress with renewable energy sources such as hydro, wind and solar power has not been fast enough to offset the fall in energy supply from reducing coal output.
Torn between mining more coal to alleviate power shortages and committing to its carbon emissions reduction goals, China is favouring the latter.
Banning cryptocurrency mining, which uses a huge amount of energy, is a major step in cutting energy consumption. The impact has been significant (Exhibit 1).
The People’s Bank of China (PBoC) has intensified its crypto-trading crackdown since May 2021, effectively outlawing all crypto-exchanges and services in China.
Beijing embraces DLT
Despite China’s anti-crypto moves, it has been developing an official digital renminbi. It is embracing distributed ledger technology for the benefits it could bring to its financial system and monetary policymaking.
Cash usage is declining, which erodes monetary control and transmission. And a small number of private payments providers now dominate the payments system, affecting privacy, security, access and competition. The PBoC sees this as a risk to its policy sovereignty. So by offering a digital platform for transactions and payments in the decentralised e-payment infrastructure, it is trying to cater to the public’s demand for such services.
Beijing realises that DLT could underpin the development of a digital renminbi with wider applications such as virtual finance and financial inclusion. Banks are already starting to use DLT to automate functions such as regulatory reporting and risk management.
Digitisation can reduce transaction costs, speed up processing, increase regulatory oversight and reduce risk. Central bank digital currencies (CBDC), such as the e-CNY, can reduce costs and inefficiencies by using DLT to standardise operational and settlement systems, allowing cross-border payments to be settled almost instantly.
The social aspects
Financial inclusion could be an important social benefit. With a significant number of people still without bank accounts, the e-CNY would let them access banking services through digital wallets and digital bank accounts. This would go a long way to helping reduce wealth and social inequality, a key goal of President Xi Jinping’s “common prosperity” policy. The financial services sector is currently carrying out trials.
Since late 2020, there have also been trials linking the e-CNY to local transport systems, with free e-CNY being given to residents as an encouragement to take public transport. Used in this way, the e-CNY facilitates carbon neutrality and creates environmental and social benefits.
Monetary policy sovereignty & governance
There are strong motives for China to drive out bitcoin, develop its e-CNY and embrace DLT.
Firstly, the programmability of an e-CNY should allow the PBoC to implement with greater accuracy its targeted monetary policy, boost financial inclusion and even use ‘helicopter money’ by injecting liquidity into specific areas of the system, thereby strengthening monetary policy control and transmission.
Secondly, in a no-physical-cash system, which seems to be the way things are moving, an e-CNY could remove the zero-lower-bound constraint on monetary policy by allowing the PBoC to use negative interest rates to tackle deflationary shocks and induce economic agents to cut savings and spend more.
China’s two-tier e-CNY system combines a centralised architecture and a distributed architecture to create ‘controlled anonymity’, rather than the ‘untraceable anonymity’ of private-sector cryptocurrencies. While the potential applications of DLT are still under development, the PBoC has indicated that the e-CNY would include central features such as cryptography (to enhance privacy and security) and programmability (to allow automatic execution of transactions based on smart contracts with pre-defined criteria).
Internationalisation not a priority
The e-CNY’s legal status and centralised nature give it the governance backdrop for promoting the international use of the digital renminbi. However, China is in no hurry to push internationalisation.
While the cross-border use of e-CNY for retail purposes could act as the starting point for wider use down the road, the renminbi’s status as a global currency fundamentally depends on China opening up its capital account; the depth, liquidity and transparency of domestic capital markets; and the credibility of monetary policy. This will be a long road for China to navigate.
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.
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