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China Vs. Bitcoin: We're In The
Endgame Now
Sep. 27, 2021 4:54 PM ET | Bitcoin USD (BTC-USD) | USDT-USD | 381 Comments | 62 Likes
The Digital Trend
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Summary
China has outright illegalized all Bitcoin and cryptocurrency
transactions.
The CCP can't allow Bitcoin to thrive if it wants its digital yuan to
succeed.
Despite China's best efforts, the rest of the world will not shun Bitcoin
as its benefits are too large to overlook.
Find out more now
remotevfx/iStock via Getty Images
Thesis summary
A few days ago, the People’s Bank of China (PBOC) released a statement
saying that it would deem all crypto transactions illegal. This is the latest in
a long line of measures and policies put into place to “crackdown on
Bitcoin” (BTC-USD). It’s also important to note that Bitcoin is not only
Bitcoin that China dislikes, but all crypto, including stablecoins like Tether
(USDT-USD). The crypto market dipped significantly following the news but
has since recovered somewhat.
The big question for crypto investors around the world is, how significant is
this for Bitcoin? Will China’s actions delegitimize Bitcoin around the world?
To answer these questions, we must first look at the motives behind
China’s anti-crypto moves and put them into perspective on the larger
geopolitical landscape.
Why does China hate Bitcoin?
There is no love lost between China and cryptocurrencies, that much has
been clear for over a year now. It all started with China limiting and then
outright illegalizing Bitcoin mining. Then, exchanges were targeted, and
financial institutions were prohibited from facilitating access to Bitcoin and
other cryptocurrencies. Now, China has gone all out saying that
cryptocurrency is not fiat and cannot circulate legally:
Crypto-related transactions will be considered illicit financial activity,
including services provided by off-shore exchanges, the People’s Bank
of China said on its website. It added that cryptocurrencies, including
Bitcoin and Tether, are not fiat currency and cannot be circulated.
The CCP doesn’t want its citizens to mine or even transact Bitcoin. But why
exactly? Official reasons include “protecting consumers”, “fraudulent uses”
and “environmental concerns”. China’s economic planning agency also
recently pointed out that stomping out Bitcoin mining is an urgent task if
carbon goal emissions are to be met.
All of the above are on the surface legitimate reasons for curtailing Bitcoin
mining/usage. However, the true reasons may be more strictly practical
and economic.
While China is doing its best efforts to prevent the use of Bitcoin, it has also
embarked on a full-fledged campaign to promote the use of its digital
coin/cryptocurrency, the digital yuan.
This Central Bank Digital Currency can’t thrive if people are using Bitcoin
instead. But why is the CCP so invested in the digital yuan? The answer as
often is with governments, comes down to control. Control over money
means control over transactions, financial institutions and, ultimately, the
whole economy.
Now, let’s take a quick look at how exactly the digital yuan works. Contrary
to popular belief, the digital yuan is not a cryptocurrency. It is simply a form
of digital money, which works on two layers, starting with the central bank
and then going through financial institutions. However, the digital yuan
does empower banks to use “smart contracts”, in a similar way that
Ethereum powers DeFi on its platform. According to Di Gang, deputy
director of China’s Central Bank Digital Currency Research Institute, this
more conventional technology was chosen because of performance and
scalability challenges. However, Di Gang is now toying with the idea of
using distributed ledger for issuance of the digital yuan and is already
implementing blockchain technology in some ways:
He highlighted three areas where the central bank is using blockchain.
They are:
exploring DLT for digital yuan issuance, which will help with
reconciliation
participating in m-CBDC cross border trials with the BIS, Thailand,
Hong Kong and UAE
using blockchain for trade finance.
Ultimately, while the digital yuan is not a cryptocurrency in itself, blockchain
technology is being implemented into this ecosystem.
Aside from allowing the CCP complete control over its economy, the
Chinese also hope that the digital yuan will be able to power international
trade outside of the dollar ecosystem, especially with neighbouring regions
and countries.
World economic domination (for China) can’t happen while most of the
trade is being conducted in dollars. The digital yuan aims to change this
and the recent attack on cryptocurrencies also aims to stop the prevalence
of the dollar. China has not just illegalized Bitcoin, it has also deemed
stablecoins like Tether illegal. Tether is nothing more than a digital dollar
and could compete directly with the digital yuan. Would countries around
the world benefit from using Tether to settle transactions? It seems quite
reasonable to think so, especially when Tether deposits can yield far higher
returns than Treasuries. Of course, we are a long way from this.
Can China stop Bitcoin?
I’ll keep this short and sweet. No. China can’t stop Bitcoin. The fact of the
matter is that China has been cracking down on Bitcoin for the last two
years with little success. Due to financial repression, the Chinese
population is more interested than ever in owning Bitcoin, and even if
China does succeed in making it near impossible to own Bitcoin in China,
the rest of the world won’t follow suit. The simple reason is that there is too
much to gain from embracing Bitcoin and blockchain technology. El
Salvador has already embraced Bitcoin by making it legal tender, and this
is just the beginning. If we look at the countries with the most Bitcoin
usage, we find many developed nations at the top of the list like Nigeria,
Vietnam and the Philippines.
Those using Bitcoin in these countries are not just rich investors or
speculators. These are in fact “regular folk” using Bitcoin for its many
practical advantages. For them, Bitcoin acts as a source of protection
against their depreciating currencies, a cheap way of sending money
abroad, and even a way to purchase things in places where Bitcoin is
accepted and their home currencies are not. In the west, we take these
things for granted as we have relatively developed financial systems and
“stable” currencies. But even Europeans and Americans may soon turn to
Bitcoin if inflation persists.
The only way China could somehow defeat Bitcoin is if somehow the digital
yuan could come to replace it. While the digital yuan is not a
cryptocurrency, it aims to be as practical and powerful as Bitcoin. Could
this happen? Possibly, but it would fly in the face of logic. The beauty of
cryptocurrencies and blockchain is that anyone can work on them. They
are free and “democratic” which is what powers innovation in space. The
digital yuan may have the best Chinese researchers behind it, but it will
never be free and democratic.
What's the endgame?
So, how will this Bitcoin and China situation end? Ultimately, though China
may renounce Bitcoin and other countries may take the same approach, I
believe Bitcoin, and also stablecoins like Tether are here to stay. These
cryptocurrencies will be the best economic weapon the west can use
against China.
One thing is undeniable, regular fiat currencies and financial systems, both
in the East and the West, will have to undergo significant changes to keep
up with Bitcoin. The benefits of blockchain technology are too big to go
unused, even if it threatens those in power.
Bitcoin is empowering all individuals around the world to choose their
money, and this is something that can’t be stopped. In the future, we may
well have a system that mimics the gold standard of the 19th century, but
which has stablecoins and Bitcoin at its centre. Stablecoins will make
international transactions completely frictionless and will also help power
things like decentralized exchanges. Countries around the world will be
able to easily trade with each other using stablecoins, like Tether, but I
expect that they will use Bitcoin to store their wealth, much in the same
way that gold was and still is used today in this manner. Bitcoin could even
become the standard of value, and fiat currencies, like the dollar or euro,
could be managed to maintain a certain value vis-a-vis Bitcoin, as was the
case when the dollar was “pegged” to gold.
A word of caution to this tale
While the above is, in my opinion, the most likely scenario, there is a
possibility that things don't play out in this way. China and the Chinese
yuan aren't supported by a worldwide ecosystem of engineers,
entrepreneurs and crypto enthusiasts, but we are talking about what will
soon be the largest economy in the world. This means that China has a lot
of other ways of making its pseudo cryptocurrency more "appealing" than
other alternatives, even Tether.
China now sits in a privileged position, where it can use its wealth to
influence the politics and economy of its Asian neighbors, which are also
fast-growing regions. If the digital yuan becomes the only acceptable way
of participating in China's ecosystem and accessing, for example, its
capital markets, or its consumers, then countries will have very compelling
reasons to use the digital yuan.
Having said this, there is room for countries to trade with the digital yuan
and still use cryptocurrencies like Bitcoin. Eventually, we could see an
increasingly polarized world, where borders become defined not by a
country's geography but by economic blocs and currencies. Still, the digital
yuan will face the same challenge that the yuan does today; lack of trust.
Ultimately, centrally controlled currencies serve the interest of those who
issue them, which is why I believe that a completely decentralized
currency, like Bitcoin, is the only true way to establish a de facto "world
currency."
This article was written by
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The Digital Trend
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Analyst’s Disclosure: I/we have a beneficial long position in the shares of BTC-USD either through stock
ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not
receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company
whose stock is mentioned in this article.
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