Wednesday, August 4

Currency and control: why China wants to undermine bitcoin | porcelain


Few would argue that China’s recent crackdown on cryptocurrency trading and mining has contributed to the recent decline in the value of bitcoin and other cryptocurrencies.

But while the discussion about whether cryptocurrency volatility is a sign of fundamental weakness or just a bump in the road remains a heated discussion, experts see the initiatives coming out of Beijing as a sign of China’s attempts to hatch your own fledgling e-currency and reboot the international financial system.

The People’s Bank of China aims to become the first major central bank to issue a central bank digital currency. While PBOC’s counterparts in the west have taken a more cautious approach, it has conducted trials in several major cities, including Shenzhen, Chengdu, Shanghai and Hangzhou.

The benefits of an electronic currency are immense. As more and more transactions take place using a centrally controlled digital currency, the government gains more and more capacity to monitor the economy and its people.

The launch is also seen as part of Beijing’s push to weaken the power of the US dollar and, in turn, that of the Washington government. China believes that by internationalizing the yuan it can reduce its dependence on the dollar-dominated global banking system, just as its Belt and Road Initiative is building an alternative international trade network.

The alarm in Western governments is such that the threat posed by the digital yuan, which could put China outside the reach of international financial sanctions, for example, was discussed at last month’s G7 meeting.

But another crucial motivation is the growing alarm in Beijing over the size of the crypto industry in China, where a large amount of cryptocurrency was being “mined” until the recent crackdown.

The threat of an unregulated alternative monetary system arising from blockchain technology is a clear and present danger to the Communist Party, according to observers.

Jim Cramer, a former hedge fund manager and CNN business expert, said the Beijing government “believes it is a direct threat to the regime because … it is out of its control.”

Seen from the perspective of central banks, cryptocurrencies are a threat to financial stability, argues Carsten Murawski, a finance professor at the University of Melbourne in Australia, and if digital currencies are to be developed, authorities want control.

“All central banks want to control them: the People’s Bank of China, the US Federal Reserve, the European Central Bank,” he says. “They have no interest in floating parallel currencies. Some countries may not be overly concerned, but in China it could be more worrisome. “

On Thursday, Fan Yifei, a deputy governor of the PBOC, said that China was worried on the threat posed by these digital currencies developed outside the regulated financial system. “We are still quite concerned about this issue, so we have taken some action,” Fan said.

The value of bitcoin soared to a record earlier this year of nearly $ 65,000, having been worth less than $ 10,000 in the middle of last year, sparking a frenzy of interest in cryptocurrencies as an investment to hedge against more traditional assets such as stocks and bonds. Comments from Elon Musk, the head of Tesla, that he would not allow bitcoin to be used to buy his cars increased volatility and it is now trading in the low $ 30,000.

But that has also attracted the attention of authorities like those in China concerned about the largely unregulated market.

“In many countries it is completely unregulated, it is the absolute Wild West,” says Professor Murawski, who also noted that there might not be the usual legal avenues to follow if people think they have been defrauded.

“That is another reason to control cryptocurrencies: to protect the consumer. Uninformed investors could lose a great deal of money. “

A tech trader advertises high-speed computers that can be used for cryptocurrency 'mining' in Hong Kong
A tech trader advertises high-speed computers that can be used for cryptocurrency ‘mining’ in Hong Kong. Photograph: Alex Hofford / EPA

In China, the launch of the digital yuan has accelerated this year along with the outlawing of crypto trading. In May, the People’s Bank of China prohibited banks from doing business or providing accounts to anyone who trades in cryptocurrencies. It was followed by the outlawing of bitcoin mining in several provinces, including Sichuan. On Tuesday, China’s central bank warned companies not to help cryptocurrency-related businesses as it shut down a software company for alleged involvement in digital currency transactions.

Fan said on Thursday that cryptocurrencies like bitcoin had become “tools for speculation” and were bringing potential risks to financial security and social stability.

Online businesses have been allowed to flourish in China, but the Beijing government has been ruthless in downsizing them if it appears they are getting too big to control. Jack Ma, the high-profile billionaire founder of the Alibaba empire, abruptly disappeared from public view for months last year, and his company was fined and ordered to downsize. Regulators have also targeted tech giants Tencent and Bytedance, the respective parent companies of WeChat and TikTok, and this week they ordered the rideshare app Didi to be pulled from app stores and launched an investigation.

Dong Shaopeng, a senior researcher at Renmin University of China in Beijing, said that some online industries, such as cryptocurrencies, had reached “alarming” size.

“It is time for the government to block those transactions from sources of capital, so that the money stops flowing from the real industries to those transactions,” Dong told the Global Times.

Professor Murawski says that yet another reason China wants to clean up the cryptocurrency business in its own patch is the potential threat to the power system.

The process uses a large amount of electricity and has tended to be installed in areas where cheap energy is available. In China, that has included Sichuan, which benefits from abundant and cheap hydroelectric power. But as profits rise thanks to the popularity of cryptocurrencies, governments may be less willing to allow miners to rack up huge profits from a system that uses so much electricity that it can threaten the stability of the power grid.

The crackdown on cryptocurrencies is not limited to China. Britain’s financial regulator said last month that Binance, one of the world’s largest cryptocurrency exchanges, is unable to conduct any regulated activity and issued a warning to consumers about the platform.

But cryptocurrencies remain an extremely attractive asset for many investors who see nothing to fear from China’s crackdown and such mining. it will simply migrate to other more accommodating jurisdictions with little impact on the market.

Michael Saylor, co-founder of business intelligence firm MicroStrategy and one of the biggest crypto cheerleaders, recently bought an additional 13,005 bitcoins for approximately $ 489 million at an average price of $ 37,617 per coin. And Silicon Valley venture capital firm Andreessen Horowitz just launched a $ 2 billion crypto fund and announced that he was “radically optimistic about the potential for cryptocurrencies to restore trust and enable new types of governance.”


www.theguardian.com

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