China has intensified efforts to control its cryptocurrency industry in recent weeks, prohibiting crypto mining operations and directing major banks to not do business with crypto firms.
On Tuesday, the government took action against a company that was allegedly offering cryptocurrency-related services. The authorities cancelled the business registration of the company and warned all financial and payment institutions not to offer virtual currency-related services either directly or indirectly.
Despite Bitcoin’s claim of being a decentralized cryptocurrency that can be based anywhere and everywhere, around 65% of global Bitcoin mining is done in China. Because a few powerful Chinese mining centers have embraced Bitcoin as the largest cryptocurrency in the world by competing against other miners to create more bitcoin.
Bitcoin’s value rose by over 1,000 percent thanks to Chinese miners, reaching an all-time high in April of almost $65,000. The value of Bitcoin plummeted after Chinese miners shut down their machines. This brought the year’s first half down nearly 50%.
Stability vs volatility
Bitcoin is one of the most well-known cryptocurrencies. It is not backed by precious metals nor government credit. Its price is a speculation on its future worth. It is a young currency and therefore a risky investment. Bitcoin has suffered losses of at least 50% in the last ten years. This is something that other sectors are not able to experience.
Although there are many factors that could have prompted China to crack down, authorities made it clear repeatedly: Bitcoin’s volatile price movements pose a threat for the nation’s financial and economic stability.
According to the State Council’s Financial Stability and Development Committee meeting, Vice Premier Liu He was the top economic and financial representative of President Xi Jinping.
China made the first move to ban Bitcoin currency use in its banks in 2013. This was due to concerns that Bitcoin’s speculative nature could threaten financial stability. The government has grown more cautious over the years. Beijing has been trying to shut down crypto mining operations in China since May. The central bank ordered payment companies and banks to close the accounts of crypto transaction-related individuals in late June.
Isabella Weber, assistant professor of economics at University of Massachusetts Amherst, stated that the Chinese state has “a fine-grained control” over fluctuations in markets for key goods and assets.
Weber stated in an interview with VOA, that China not only bails investors out after financial bubbles burst but also actively attempts to stop bubbles from ever bursting. Authorities are therefore sensitive to rapid speculative expansions, price rises, and such events as those that have occurred in the Bitcoin industry in recent months.
“Currently, there is growing concern about financial stability in China. She said that the crackdown on cryptocurrency was an attempt to limit a potential source for instability.
Ross Darrell Feingold is a lawyer and political risk advisor who advises clients doing business with Asia. He stated to VOA that if an election does not provide a government with political legitimacy, it must come from other sources, such as economic achievements.
Feingold stated that China is a case in point, as the party organization along with other stakeholder such government agencies plays a crucial role in economic policy formulation.
You have the right to mint money
While China’s economic growth is Beijing’s primary concern, analysts believe that the real reason why the government cracked down on Bitcoin was because it is fundamentally a threat to the state’s monetary sovereignty.
Bitcoin was created in 2009 by Satoshi Nakamoto (an anonymous programmer). Bitcoin is unique in that it does not have a central authority to make policy decisions that impact its value. This is unlike fiat currencies issued traditionally by governments. Many cryptocurrency advocates claim that the currency’s market-driven value is superior to government-issued currencies, which fluctuate with central bank monetary policies.
According to Brendan Ahern (Chair Investment Officer at Krane Shares), a China-focused provider exchange-traded funds, “Central banks worldwide likely view cryptocurrency as a threat for fiat currencies.” It’s not within their purview or their jurisdiction. He said that it was threatening their ability to pull the levers in the economy.
This view suggests that the more Bitcoin is popularized in a country, the less power the government has to influence economic policies.
China declared Bitcoin ‘not currency in the true meaning of the term’ for the first time in 2013. This was in 2013, as the virtual currency was starting to gain popularity. The government also stated that Bitcoin was not a currency and should not be used in the market.
Weber, author of ‘How China Escaped From Shock Therapy’, stated that this raises the question of who is entitled to issue money.
Weber noted that the desire for monetary sovereignty by the state is not only Chinese. ‘Once the private currency becomes more than a fringe phenomenon states with the power to do so, will tend to intervene to regain their monopoly on the right to issue money.
However, China’s case is more than just economics. The government’s legitimacy rests on China’s economic growth. Zennon Kapron founded Kapronasia, which is a consulting and research firm in fintech. Kapron explained to VOA via email that any challenge to economic stability or development, or the financial systems that support it, is equally challenging for the political system.
Kapron believes that crypto is not a good idea for China’s growth and could even be detrimental to it, as it keeps a value out of government control. “It becomes an easy decision for regulators and the government to exile the few million Chinese people who are likely to be involved with Crypto, rather than risking upsetting the entire economy.”