China has outlawed cryptocurrencies in a move that seeks to protect the central government’s control of the financial system but will ensure that all innovation in this ground-breaking sector goes overseas and benefits other countries.
In a joint statement on Friday, the People’s Bank of China (PBoC), in conjunction with nine other regulatory agencies, declared that all activities related to digital coins are “illegal”.
Cryptocurrency exchanges in China have been outlawed since May 2021, but many operating overseas offer services to Chinese citizens and businesses in China.
This activity is now illegal, and anyone who participates in these activities is at legal risk of an unspecified nature.
This is a heavy blow for Bitcoin, which fell by 8% immediately and remains fairly subdued.
This is not unexpected as despite the restrictions, China was the second-largest market for cryptocurrencies which will now hurt demand for the asset class.
China is justifying its stance by citing that cryptocurrencies are a breeding ground for Illegal and criminal activity, pyramid schemes, money laundering, and so on, but it is fairly clear what the real agenda is.
Cryptocurrencies run on the blockchain, which is a decentralised ledger-keeping system that no one controls.
Hence, if Bitcoin and other cryptocurrencies become a widely accepted medium of monetary exchange, then governments and central banks will have lost control of the money used within their domains.
The current crackdown by China is driven at least in part by a requirement to maintain control over all aspects of the economy.
Hence, any cryptocurrency is deeply threatening to centralised control, which is why this was always going to happen; it was just a question of when.
Second, digital Yuan:
China is in the process of launching a digital version of its current currency, the Yuan.
This will be entirely under the control of the PBoC and will provide the central government with complete transparency on all transactions that use this currency.
It will be able to tell where each Yuan has gone and where it came from, making money laundering and other criminal enterprises very difficult.
The digital Yuan will also allow the government to cancel the Yuan held by any person or entity that it does not approve of.
This is the equivalent of having US$1,000 in banknotes in one’s safe where the Federal Reserve knows the serial numbers and can set fire to them remotely should it so desire.
This is why I think that the digital Yuan will go nowhere outside of China and outside of those who are compelled to use it.
I can see China making it a condition of participation in the belt and road initiative, but outside of that, I cannot see how anyone would use it as a store of value.
The currency is expected to be given a test run at the Winter Olympics in 2022, and this ruling by the PBoC & Co. will clear the market of any competitors for it.
This ruling specifically outlaws cryptocurrencies but does not take any specific moves against the blockchain, which is the technology that enables them to work.
This is because blockchain can be used for many things, of which cryptocurrencies are by far the most popular.
Blockchain is used for non-fungible tokens (NFTs), which I think have a bright future in things like copyright ownership and fractional ownership of specific assets.
These sorts of activities can still proceed in China, but the question is, for how long?
The blockchain also supports decentralised finance (DeFI), where there is a lot of investment going on in terms of working out how to provide financial services on the blockchain.
This is also deeply threatening to the CCP’s control of the banking sector, so I think this too will soon be outlawed.
It is viewed with similar suspicion in western countries for the same reason, but these countries are likely to try and fight it with regulation as a blanket ban will cause uproar and never work.
The real problem for China is that this sends a very negative message to any entrepreneur with a genius idea for using the blockchain for financial services.
These entrepreneurs will now have a strong incentive to leave China and start up their businesses elsewhere, depriving China of some of its best minds meaning that innovation in this sector will not be happening there.
In the long run, this means that China will fall behind in developing technology, meaning that its desire for technology independence will become harder and harder to achieve.
This is not just happening in fintech but also games and now also in education.
This is a very long-term effect, and we will only the results of these policies over 20 years or more, but China is sowing the seeds, which will lead it to lose the technological cold war with the USA.
China continues to do more to hurt its long-term ambitions than the USA can ever achieve on its own.
Related article: Cryptocurrency stocks drop in Hong Kong, China intensifies crackdown