China’s motivations for its assault on cryptocurrencies include concerns about money-laundering, which is a particular issue for a country that imposes stringent capital controls and exerts pervasive and intrusive scrutiny and control over the activities of its citizens.
The authorities have also been clamping down on the dominant digital payments companies, concerned about their growing power within the economy and financial system, the anonymity of transactions and the implications for financial stability. They have sought access to the fintech’s customers’ data.
China effectively pulled the rug from under what would have been the world’s largest initial public offering earlier this year, Ant Group’s $US300 billion-plus float, as part of a broader effort to more intensely regulate its previously lightly-regulated or unregulated fintechs.
The directives to its banks and Alipay fit within that larger push to tighten central control over all financial activity.
The restrictions on bitcoin mining had different drivers. In May, the government imposed a severe crackdown on crypto mining which, given that an estimated 65 per cent to 70 per cent of all Bitcoin mining capacity was based in China, represents a massive threat to the cryptocurrency.
Bitcoin mining uses highly specialised computers to record and verify crypto transactions and create new coins.
Mining requires vast amounts of power – it is estimated that the energy consumed is equivalent to that of nations like Argentina and Norway – and therefore has come under increasing and increasingly critical scrutiny in a world where a consensus is building to accelerate efforts to reduce global carbon emissions.
China’s carbon emissions target is net zero by 2060 and so the decision to drive digital mining activity out of the country was presumably based on its environmental impact, although it does form part of the wider attack on digital currencies.
China has its own digital currency plans and has been trialling a digital version of its yuan, both within its domestic economy and in cross-border transactions. Bitcoin could also facilitate.
A state-issued digital currency would enable the authorities to displace the cashless transactions that e-payment giants like Ant Group and Tencent pioneered and dominate and which Bitcoin could also facilitate. It would defuse any risk such a concentrated position in unregulated payments might have for a financial system that is more fragile and vulnerable than China is comfortable with.
The impact of its directive on mining has been almost instant, with China’s major provincial governments moving quickly to shut down Bitcoin mining in their jurisdictions. It is forcing a mass exodus of the miners.
Surprisingly, some are looking to the US as their new home, while others are moving to places like Kazakhstan and Russia.
Texas, because it has cheap energy, appears to be a favoured destination despite protracted blackouts earlier this year which revealed the underinvested, unstable and vulnerable nature of its deregulated energy sector. Texas’ government is enthusiastic about crypto assets.
Whether the Biden administration, where reducing carbon emissions and expanding green energy is a policy priority, will allow any large-scale transfer of the Bitcoin mining industry from China to the US could have a material impact on the industry that underpins the Bitcoin ecosystem.
While there are plenty of countries that would welcome the miners – eastern Europe has plenty of cheap coal-fired power – the continuing large-scale incidences of crypto scams and frauds is an argument against migrating the industry’s key infrastructure to “frontier” jurisdictions.
The implosion in crypto prices in response to China’s actions is the latest demonstration of what has been a permanent feature of crypto assets – their violent volatility.
Last month Tesla’s Elon Musk drove the Bitcoin price up, and down, quite dramatically with a series of tweets. That’s not how a supposedly large, maturing and institutionalising market is supposed to function.
That volatility is attractive to traders and the development of a fledgling market in crypto futures has begun attracting institutional traders. It isn’t, however, a comfortable market for the investors that Bitcoin and its smaller peers were starting to attract.
Aside from El Salvador, which became the first country to accept Bitcoin as legal tender alongside the US dollar this month, cryptocurrencies are not generally accepted mediums of exchange.
El Salvadorians might find the fluctuations in value disconcerting — a Bitcoin might pay for a new car one day but a taxi fare the next – which is why most businesses and individuals are reluctant to accept crypto assets in exchange for real goods and services.
Crypto assets are, apart from their use in illegal activities, really just vehicles for speculation – a form of gambling – rather than investment.
China’s actions have shown how narrow and vulnerable those foundations of the crypto markets are now that the markets are large enough, and visible enough, to attract legislators and regulators’ attention.