China’s attitude towards cryptocurrency may look controversial. On the one hand, crypto exchanges and ICOs are banned in the country, on the other — the country accounts for 65% of the world’s BItcoin hashrate, promotes some leading blockchain initiatives, and is actively testing the digital yuan. However, this contradiction is quite easy to explain: China strives to control or ban everything that implies volatility and poses a financial risk, while promoting everything that raises economic efficiency and facilitates control. The recent crackdown on mining along with the CBDC development is a good illustration of this.
China’s blockchain bull run
In June 2021, the Ministry of Industry and Information Technology and the Office of the Central Cyberspace Affairs Commission presented the Chinese government’s plan on blockchain development and application. According to the document, by 2025, China is to become the leading blockchain-supportive country and will be ready to export the technology. Blockchain will be applied in the real economy and will help interconnect its different domains. The technology will reshape the IT industry; blockchain is to merge with the economic system. By 2030, blockchain will work together with big data and AI to boost the governance capacity of China.
However, here’s something not to be confused about: the Chinese government is promoting blockchain, not cryptocurrency. Trading, crypto exchanges, and ICOs are illegal in the country. One of the few projects that are getting along with the authorities is NEO, often dubbed as the Chinese Ethereum. This is a China-based platform for building DApps that is trying to work with the watchdogs rather than evading regulations.
Recently, the government has cracked down on a domain where China has been globally dominating for the last few years: Bitcoin mining.
Bitcoin mining under attack in China
Since 2018, fears have grown related to the centralization of mining in China: the country accounts for 65% of the total Bitcoin’s hashrate. This is because of the cheap electricity, workforce, and strong manufacturing power. The market participants are feared that the Chinese Communist Party may force local miners to unite and perform a 51% attack on Bitcoin’s network.
However, the percentage is decreasing: a few years ago, China’s Bitcoin mining dominance was at 73%. The county’s government has been strict on mining in the last years, and miners mulled over the countries where to move their businesses. Recently, the pressure rose: in May 2021, China’s State Council promised to pose more restrictions on mining and trading.
The actions were swift: June was marked by the massive crackdown on mining. The authorities of the Qinghai province and one district in Xinjiang ordered to immediately close all operations related to mining. In Yunnan, the local energy bureau threatened to inspect all establishments for illegal mining and misuse of power by miners. If any violations were found, the organization’s activity would be suspended.
Why did this outrage happen now? Here are three reasons:
- Authorities seek stability amid the coronacrisis and are focused on financial security. They got stricter on cryptocurrencies because of the bubble that was shaped in early 2021 and the fears of the economic shock in case this bubble bursts.
- China is building financial infrastructure that ‘supports rather than dominates’ the real economy sector.
- Cryptocurrencies evoked the debate on whether the state has the exclusive right to issue money. China argues the state has the priority as this way, it has more control.
Bitcoin mining in a container
A form of mining that may put the Chinese dominance in question is the portable mining rigs. This is a farm that is built in a shipping container and can be brought wherever, including the remote places of natural gas extraction: this is the kind of fuel this rig works on.
A portable Bitcoin mining rig including generators that convert natural gas to electricity
Building infrastructure for spare gas is too expensive, so often it just gets burned. However, gas can be used to fuel mining, which is good for the ecology and brings extra profits to the gas producer. Portable rigs may become popular and foster the decentralization of mining.
Blockchain for progress and control
The Digital yuan is a national digital currency issued by the People’s Bank of China. Its tests started in October 2020, and since, the authorities rained digital yuans worth $39 million to the people in 6 cities, including Shanghai and Beijing. The CBDC’s launch date is still unknown, however, it’s supposed to be used in China during the Winter Olympics in 2020.
Digital renminbi (RMB), as the Chinese CBDC is also called, has the goal opposite to that of Bitcoin. It is a state currency turned into the computer code that will allow citizens for a digital means of payments right through their bank. RMB is likely to be in demand among the population: digital mobile payments already make 86% of all payments.
However, the development of the CBDC is not only about caring for the people. First, the state wants to take its position in the digital payments market, where Alipay and Tencent have been dominant until recently. Second, in contrast to cryptocurrency that makes illegal and untraceable activities possible, RMB allows for total control.
Also, China seems to have ambitions for the digital renminbi to contest the Dollar’s status as the reserve currency. It would become more efficient than the outdated SWIFT that underpins the entire world’s bank system. In SWIFT, payments are settled within 5–7 days, while in RMB, it’s supposedly minutes or seconds.
America doesn’t have anything to offer in this regard yet. The closest analogue to RMB that they had was Facebook’s Libra сlamped down by the authorities. While American watchdogs debate on whether Bitcoin has any goals besides speculation and tax evasion, China has been working on its RMB for the last 5 years and is almost ready to launch it. The results of the digital yuan tests and implementation will have a deep effect on China and the world’s economy.
A part of the bigger picture
Here’s the current trend: in China, cryptocurrency is being put under stricter control, while blockchain and digital yuan are largely promoted. There’s an opinion that cryptocurrency may fall under a complete ban after the CBDC is launched.
The situation with cryptocurrency in China is a part of a larger pattern in the country’s economic policy. Markets are used for boosting the dynamic of the economy, while speculation is stamped out to preserve financial and political stability. As a result, we have a highly marketized economy with active state participation. Launching the digital yuan, China makes its economy more efficient while getting more tools to control both the economy and the population.
ChangeNOW will monitor the CBDC’s test results and the further actions of China towards cryptocurrency.
