Bitcoin mining was one of the last vestiges of China’s experimentation with decentralized virtual currency. Until recently, China was the world’s bitcoin mining center. For the crypto faithful (and the agnostics who profited from mining), it was great while it lasted. But now regulators have decided mining in China should go the way of trading. Several weeks ago Kapronasia wrote that the crackdown was just warming up. Sure enough, provincial authorities are turning up the heat. What began in Inner Mongolia – it shut down 35 mining firms between January and April – has spread to Xinjiang, Qinghai and Yunnan.
It was only a matter of time before bitcoin mining landed in China’s crosshairs. Beijing identified decentralized digital currency as a systemic financial risk in 2017 – for its use in skirting capital controls and links to money laundering - and promptly hobbled key parts of the crypto ecosystem, shutting down all exchanges and banning initial coin offerings. Mining does not pose the same immediate risks to the Chinese financial system, but its enormous power usage could crimp Beijing’s efforts to curb its carbon emissions – a major central government policy objective. With that in mind, the prospects for bitcoin miners in China look dim indeed.
The hype about China's digital yuan can obscure the reality, especially in the cross-border space. The most adamant supporters of China’s CBDC argue that it poses a challenge to the US dollar’s role as the world’s dominant international currency because, well, it is digital, has a technological edge and thus will perhaps redefine global payments rails. This argument exaggerates the benefits of digitization while overlooking the fundamentals of the dollar's paramountcy.
China is leading the world in CBDC development, prompting speculation that DCEP (digital currency, electronic payment) is on its way to becoming the digital equivalent of the U.S. dollar. The reality is more nuanced. To be sure, China's digital fiat currency is at a more advanced stage than any other major country's CBDC, and China has many potential applications for it domestically. When it comes to cross-border use, however, many questions remain about the digital yuan.
Here comes China's blockchain bandwagon, ready or not. The novel coronavirus may have slowed the Chinese economy down, but now that life is slowly returning to normal, blockchain hype is back. China currently has about 35,000 blockchain companies, according to information portal Tianyacha. In Guangdong Province alone, there are 20,000 of them. Even amidst the coronavirus pandemic, more than 2,000 new blockchain companies were formed between January and March, according to Forkast News.
Unsurprisingly, most of these firms are not focused on distributed ledger technology. Research by Forkast shows that just over 500 of them have a state-issued blockchain service filing number. Without one of those, a company is not a certified blockchain provider in China. China's 01 Think Tank found that about 1,000 of 30,000 blockchain firms in China are engaged in business that uses distributed ledger technology.
North Korea's growing nuclear program has long been a point of contention between the U.S. and China. Beijing prefers to handle its mercurial neighbor with kid gloves while Washington favors a tougher approach, namely economic sanctions. To evade sanctions in the digital age, Pyongyang has upped its hacking game. Both banks and cryptocurrency exchanges are victims. Digital currency offers North Korea a way to raise funds and do business outside the US dollar led global financial system. North Korea stole more than US$2 billion from both traditional financial institutions and crypto exchanges - including South Korea's Bitthumb - the United Nations said in an Aug. 2019 report.
The Trump administration has not shown much enthusiasm for a sovereign digital currency so far. With China's advances in the area, however, Washington's stance could be set to change. In early February, a member of the United States Federal Reserve Bank board of governors said the Fed is researching and experimenting with distributed ledger technologies and their virtual-currency applications. Among the applications being explored is a central bank digital currency (CBDC).
Lael Brainard, who chairs multiple Fed committees, made the remarks at a speech during an event on payments held at Stanford University. Brainard noted that 80% of central banks globally are researching CBDCs. However, she stopped well short of endorsing a full-throated campaign to create a digital dollar, devoting considerable attention to the challenges and risks posed by digital fiat currencies.
Much like its anti-corruption campaign, China's crypto crackdown is relentless. Beijing views decentralized digital currency as a conduit for money laundering and capital flight. In contrast, Beijing sees crypto's underlying blockchain technology as useful. Blockchain can help China boost its tech prowess, improve supply-chain integrity and surmount bottlenecks across many industries, particularly financial services.
It can be hard to cut through the hype surrounding Facebook's cryptocurrency project and evaluate it objectively. Facebook champions the Libra stablecoin as a powerful vehicle for financial inclusion which would be easily accessible to its many users in developing countries without a bank account. To advance the Libra project, Facebook chief executive Mark Zuckerberg has been playing up its nationalist credentials. If U.S. regulators fail to greenlight Libra, then Washington will cede digital currency ground to Beijing, he says.
"China is moving quickly to launch a similar idea in the coming months," Zuckerberg told the House Financial Services Committee in October. "If America doesn't innovate, our financial leadership is not guaranteed."
Misunderstanding of China's blockchain aspirations remain widespread. Virtual-currency enthusiasts once thought the Middle Kingdom would be crypto central. They were wrong: China doesn't want to be a hub for all things crypto, but it does want to harness the underlying blockchain technology to boost its technological prowess, improve the integrity of supply chains and overcome bottlenecks across many industries - notably the financial services sector.
It was with those goals in mind that Chinese President Xi Jinping recently called for a larger role for blockchain in China's economic development. According to state-run Xinhua, Xi urged "deep integration of blockchain with the real economy," which he said could help SMEs get better access to credit as well as strengthen risk management in banking and the supervision of government agencies. He further said that China has a "solid blockchain foundation" and called for the nation to accelerate the development of blockchain technology and strengthen related basic research.
Facebook's plans to launch its cryptocurrency Libra in the first half of 2020 have prompted a new round of discussions in China about the merits of virtual currency. If Libra, which is aimed at the enormous global market of 2.38 billion Facebook users (not including China, where Facebook is blocked), were to succeed and China had nothing comparable, it could be left behind in the next wave of digital financial innovation.At the same time, Beijing worries that Libra will further entrench the hegemony of the U.S. dollar. “If the digital currency is closely associated with the U.S. dollar, it could create a scenario under which sovereign currencies would coexist with US dollar-centric digital currencies,” Wang Hexin, research chief of the People's Bank of China, was quoted as saying by The South China Morning Post in a July report.
With the launch of its cryptocurrency Libra, Facebook is diving headfirst into digital banking. The U.S. social-media giant can draw on its massive global network of 2.3 billion users as it forays into finance. Yet Facebook will not be introducing Libra to China, which has the world's largest number of internet users. China blocked Facebook a decade ago and has moved to cripple crypto to control systemic financial risk and discourage capital flight. If Libra is a success, being excluded from it could have major ramifications for China's fintech development. At the very least, Beijing's own fintech system would be further isolated from the rest of the world.
China has a complicated relationship with blockchain technology. Until the fall of 2017, China was the largest market for Bitcoin. But Beijing ultimately couldn't tolerate the decentralized nature of virtual currency and its utility in allowing Chinese citizens to evade capital controls, or in some cases, launder money. The ensuing crypto crackdown may turn out to be much like President Xi Jinping's anti-corruption campaign: never-ending.It's now clear that China will not allow decentralized digital currency in its financial system.
Less than two years ago, China was the world's virtual-currency capital by trading volume. On the eve of the great crypto crackdown in September 2017, China accounted for 90% of the world's Bitcoin trading. Miners capitalized on cheap electricity rates in far-flung provinces to churn out as many digital coins as their power supplies permitted. Crypto bulls lauded Beijing's apparent embrace of distributed ledger technology and decentralization.
As it turns out, the celebration was premature. In a move to control what it perceives as systemic financial risk, Beijing has been gradually squeezing the life out of the China crypto market. The Chinese government has banned ICOs and the use of fiat currency in virtual-currency purchases as well as blocked related websites. Recently, it began working to eliminate crypto mining. At the same time, the WeChat super app banned crypto trading effective May 31.