It’s fair to say that when it comes to heavy-handed monetary policy, China is no stranger.
Amid a turbulent year which has seen the PBC (People’s Bank of China) impose some of the strictest currency controls in recent memory in an attempt to stave off depreciation of the Yuan, as well as somewhat blunt attempts to steady the markets amid a looming trade war with the US, a quieter clampdown has also been ongoing.
China’s swift and uncompromising ban on cryptocurrency trading started in earnest this summer and has now reached the point where virtually all trading activity within the country has ceased. Although not garnering as much space in the headlines, this significant shift in fiscal policy from the CPC (Communist Party of China) has wide-reaching implications for the future of e-currencies.
As the hardline from Beijing reaches a crescendo, let’s take a look at how we got here, and where China is heading in the future.
How We Got Here
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Things weren’t always this way. As recently as last year, China accounted for a vast majority of cryptocurrency trading in the world, with as much as 90% of all transaction in Bitcoin, Ethereum, and other leading currencies taking place within the border of the People’s Republic. Furthermore, China was (and actually continues to be) the world leading in Bitcoin mining, expending many gigawatts of electricity to the activity, which is mostly done illicitly.
This all changed in September 2017. During the height of crypto trading in China, the government announced a blanket ban on all ICOs (Initial Coin Offerings) and the “Great Firewall” went into overdrive blocking all trading websites and brokers. A total of 88 cryptocurrency exchange platforms have been shut down inside China’s borders, while a further 85 ICOs have been put out of business.
The ban had an immediate effect, with the government quickly releasing a statement at the start of 2018 bragging that such activity had all but ceased, with a mere 1% of all Bitcoin trading now taking place in China, a drop of 89% in a very short period of time.
The government hasn’t stopped there though; additional bans were soon introduced on Chinese citizens attempting to trade cryptocurrency via overseas intermediaries, with harsh penalties imposed on those who defied them.
Xi Jinping’s hardline stance continues to progress. This year, dozens of hotels in Beijing and Shanghai have been banned from hosting cryptocurrency-related events and conferences, with attendees being promptly informed the event they paid for has been canceled.
In addition, media news outlets based in China that cover cryptocurrency developments have had their official WeChat accounts blocked in a move to prevent them from disseminating “illegal information”. It seems that there is little light at the end of the tunnel for crypto.
Why Has This Happened?
The reasoning for such a sudden backlash from the CPC is broader than most might expect. China has had a long history of maintaining tight control over financial markets, going back to the early days of Mao. Although market-oriented reforms have been significant in the past couple of decades, the CPC is wary of any developments which threaten their control over the centrally-planned economy.
Take forex trading for example. The exchange of foreign currencies in China was strictly controlled and even prohibited until relatively recently, due to concerns that it would expose the currency, the Yuan (CNY) to external destabilizing forces. This has changed a lot, with forex trading now permitted in China to a certain degree, although some limits are still in place.
The point is that the CPC sees control of the economy as integral to their control over China’s politics and stability, therefore, something as disruptive and as exposed to market influences as Bitcoin is naturally seen as a threat.
Furthermore, the CPC’s defining domestic policy agenda has long been about fighting corruption. With allegations and concerns that the untraceable nature of cryptocurrencies makes it a ripe vehicle for money laundering, it’s not surprising that Bitcoin fell into Xi Jinping’s crosshairs. Cryptocurrencies can potentially be used to shift vast amounts of capital abroad, meaning that corrupt officials and tax-dodging businessmen might naturally see the appeal of using it for laundering.
Most importantly, cryptocurrencies are unstable and disruptive. The explosive popularity of Bitcoin in China took the party bigwigs by surprise. That tens of millions of Chinese citizens were suddenly moving away from the state’s fiat currency toward one that the government has zero influence over is the main reason for the ban.
Anyone with a knowledge of China’s modern political history will be well aware that anything which so clearly threatens to drive a wedge between the citizens and the state would be duly stamped out.
So, where do things stand for crypto? For the time being, the blockchain is safe in China. No moves have been made to ban blockchain technology, and Xi Jinping has even endorsed a number of billion-dollar blockchain enterprises, so the technology behind cryptocurrency doesn’t seem to be going anywhere soon.
What this might mean is that, rather than a free market of cryptocurrencies returning to China, we might soon see the introduction of a state-sanctioned e-currency, not too dissimilar to Venezuela’s recently-introduced crypto, the Petro.
China’s ban should be understood in the context of fiscal control, rather than hostility to the benefits of cryptocurrency. If the Central Bank ever does decide to release their own version of Bitcoin, expect it to take off like a firework.