The crypto markets have dropped significantly since May, down 50% from recent highs. The crash was partly attributed to China’s negative stance on crypto. What’s the reason to China's crypto stance?
For good or bad, China is the one country that has always had a major influence on the price of Bitcoin. One of the reasons for this is the majority of Bitcoin mining is based in China, and some of the earliest crypto exchanges and trading communities were also based in China. As a result, China’s ever changing stance towards crypto assets has tended to have an exaggerated effect on the already volatile crypto markets.
However, while headlines proclaiming “China bans Bitcoin” or “China cracks down on mining” appear to represent worst case scenarios, the reality is much more nuanced. In fact, as is the case with much of the internal machinations in Chinese business and politics, the real situation is complex, and ever-evolving.
Disrupting normal economic and financial order
First let’s look at what can be verified as true. China does appear to have stepped up what could be perceived as a crackdown on crypto trading and bitcoin mining. Over the weekend, access to several widely followed crypto-related Weibo accounts was denied, with a message saying each account “violates laws and rules”.
On June 9th, all Chinese search engines such as Baidu and Sogou blocked key words of the three major Asian crypto exchanges: Binance Huobi and OKEx. The exchanges were also blocked by social media platforms such as Weibo (China’s Twitter) and Zhihu (China’s quora).
Last month, Beijing authorities said they would ban banks and payment firms from providing services related to cryptocurrency transactions.
Financial regulators said banks and payment firms were not allowed to offer clients any services involving cryptocurrencies, and warned of the risks linked to crypto trading. In a statement regulators said, “Recently, cryptocurrency prices have skyrocketed and plummeted, and speculative trading of cryptocurrency has rebounded, seriously infringing on the safety of people’s property and disrupting the normal economic and financial order.”
Meanwhile, several official Chinese news agencies have published articles highlighting the risks of trading the volatile crypto markets and the many scams that take advantage of naive investors. The state broadcaster CCTV said the crypto markets are lightly regulated, and that crypto is used in the black market, often for money laundering, arms smuggling, gambling and drug dealing.
These are not empty threats. In early June, the Beijing Daily Client reported that 170 criminal gangs had been destroyed and more than 1,100 criminal suspects had been arrested. The arrests are based on the illegal use of virtual currency to provide transfer and money laundering services for telecommunications network fraud.
Similarly, Inner Mongolia’s branch of National Development and Reform Commission (NDRC), the highest economic planning agency in China, issued a detailed draft guideline explaining how local authorities can crack down on crypto mining activities in the region. It’s understood that currently, Shihezi, Changji, and Korla in Xinjiang have banned crypto mining activities, with no clear bans in Yili, Aksu, Altay, and Kuitun. It is unclear whether all of these restrictions will remain in place after the upcoming CCP anniversary this month.
There’s a growing perception across the global blockchain ecosystem that this trend will continue. More actions are expected, including linking illegal crypto activities in China more directly with the country’s criminal law, according to media commentators. Based on Western media reports, you could be forgiven for thinking that Bitcoin is now illegal in China and the Chinese mining industry is winding down with mining hashpower moving to the west. The truth? Well, the truth is harder to find, and much more nuanced.
Contextual knowledge is extremely important
Matthew Graham is the CEO of Sino Global Capital, an investment firm based in Beijing that invests in decentralized technologies that have a strategic connection to the mainland Chinese market. Matthew’s team closely monitors any blockchain and crypto related announcements by Chinese authorities and have a network of sources able to filter the signal from the noise.
A recent guest on Brave New Coin’s Crypto Conversation podcast, Matthew provided some insightful commentary on the recent developments in China.
One of the key points that Graham made was the idea that from the Chinese state’s point of view, one of their goals is to project party control. Maintaining this semblance of discipline and control, whether it’s over the population or capital, or financial markets, is very important.
“It can be a challenge to interpret Chinese policy,” admits Graham. “So we do a lot of triangulating of information from both official and non official sources. It’s important to understand that contextual knowledge is extremely important and you have to understand what the actual Chinese government priorities are. It’s not always about what is stated, but more what is the motivating factor behind those statements. And so for example, the Chinese government is extremely motivated by anything related to fiat on and off ramps.”
“The Chinese government is concerned about overall financial markets, stability, and retail speculation. That’s the big picture story, not something specific to crypto” – Sino Capitol’s Matthew Graham
Graham explains that the financial markets will always be closely watched by the Chinese state. He says the renminbi is not a free floating currency and it is subject to very strict currency controls. The control, or at least the appearance of control, over capital markets is “something that is enormously important to the mainland China government.”
From this perspective, it’s easier to understand why the Chinese ruling party is hyper sensitive to crypto-fiat on and off ramps, and the sometimes murky world of Bitcoin mining, which could be used as a means to get money off shore. Any activities that involve money laundering or tax evasion, will also be very sensitive – as they are to any government.
While China’s complex relationship with Bitcoin miners is continuing to evolve, an outright ban is not on the cards. Although there has been talk of miners moving out of China due to the uncertainty, Graham says “it’s important to understand that many Chinese miners were already moving some capacity internationally. Some of this due to the seasonal migration due to the rainy season. It’s our view that mining will not be outright banned across the country, that seems like a very low probability scenario. It’s likely that there will be a crackdown on different types of illegal Bitcoin mining that is siphoning off electricity from the power grid or not conforming to environmental standards, things like that.”
Another important point, says Graham, is that the Chinese government is extremely sensitive to excessive retail speculation. Many Chinese investors are unsophisticated, and often have a gambling mentality. As a result, multi level marketing (MLM) and Ponzi style crypto schemes have become commonplace in China.
“Because of the false promises and incentive structures of these schemes, they can grow and metastasize very quickly,” Graham says. “That means that a crypto scam can grow very big, very quickly in a specific region of China. When it falls to pieces, as they inevitably do, then all of a sudden that’s a potential for unrest, you could have a fairly large amount of upset people in a small geographic region, potentially mobilizing. So the Chinese government is extremely sensitive to these kinds of things. We should keep that in mind as the starting point for trying to interpret what the actual impetus is for their policy pronouncements.”
A key strategic technology pillar
It’s clear that Chinese authorities have a motive to retain tight control over crypto trading by the local population. It’s also clear, however, that China sees blockchain as a key strategic technology pillar critical to the next decade of growth. Graham says China’s leaders are engineering-minded and technologically bold. China sees blockchain very differently from the west and is uniquely positioned to be the first large nation state to deploy a state-issued digital currency or DCEP (Digital Currency / Electronic Payment).
As it prepares to deploy its DCEP, China has a unique opportunity to take even tighter control of its monetary system. It has been conducting a series of trials in different Chinese cities over the past several years.
“It continues to basically be a slow, steady progression,” says Graham. “It’s something that has been in the works for years. This has been a long journey and it started with an R and D research process. Now we’re close to having this out in the wild. The full implications are unclear, but we anticipate that the Chinese government will be creative in terms of getting people to use the DCEP and they will have to be as people are used to Alipay and WeChat.”
Finally, Graham says a mistake that Westerners make is that we tend to put ourselves and crypto at the center of the story, but that’s not how the Chinese state thinks. “In actuality,” says Graham, “the Chinese government is concerned about overall financial markets, stability, and retail speculation. That’s the big picture story, not something specific to crypto.”
Source: Insight on why China is so negative about Bitcoin – Fintechs.fi