The current news regarding China’s proposed Bitcoin mining ban isn’t exactly extensive. This is part of a general move to manage cryptocurrencies, and Bitcoin, being top of the crypto tree, is an obvious target. China’s planning agency, the National Development and Reform Commission is currently mapping out future phasing out of cryptocurrency mining in general.
The reasons given so far are that the cryptocurrencies are unsafe, non-compliant, and waste resources. Pollution due to endless processing is another consideration. (That bit of environmental information is actually quite correct. It’s a ridiculous amount of energy being used.) All of these reasons, taken at face value, don’t entirely add up to suddenly ending a process in which Chinese capital has been involved for quite some time.
A very high percentage of Bitcoin mining is done in China, so there’s a strong physical grip here for the Chinese government to enforce any reforms it wants. Previous crackdowns have seen some crypto operators rebase outside China.
China additionally manufactures Bitcoin mining equipment, and there have been recent ventures to market these manufacturers in the stock market. This move may throw a spanner in the original plan, but can be incorporated in a revised, Chinese-run scenario.
Working scenarios
There’s a bit of economic muscle in this move, and it can impact the entire crypto sector:
• If Chinese capital is removed from the cryptocurrencies, that’s a big exit of a lot of liquidity from the market. That alone could cripple the market in future. It could certainly devalue the currencies, short and long term. It’s extremely unlikely that hasn’t occurred to the planners.
• Crashing the crypto sector could be a good move in terms of introducing China’s much-rumoured own state cryptocurrency. It’d be an instant monopoly, so game over for the independent operators.
• Chinese crypto investors could easily enter their local market, bringing back money from outside and allowing the Chinese state to run it. Think “crypto bonds”, and you get the picture.
• Market speculation is not too popular in China when it involves big money, dubious transactions and origins of money and high risks. This could well be a statement of authority, “You do things our way”.
So from an economic perspective, China has a few good, self-help reasons to end cryptocurrency mining. Of course, there are other considerations, much less obvious from the information released so far.
Market assets considerations
The other possible reasons for what is really a very large policy shift are far more complex:
• Cryptocurrency mining is globally connected across a vast range of business and independent operations. It could be a very efficient back door for espionage. The billions of transaction mining operations could be particularly difficult to analyse for security risks. If you run those mining operations, however, you can track everything directly. The Chinese description of “unsafe” current operations is a very low key reference to these issues.
• Markets can be manipulated, in fact most investment markets are. Given the choice of doing your own manipulation and someone else doing it, what would be your choice? Cryptocurrencies account for billions of dollars’ worth of money. Almost a no-brainer.
• Blocking the way in, but creating your own external access to other people’s money isn’t such a bad idea either. If China does bring in its own cryptocurrency, that’d be the situation.
Predictable paranoia
The global effect of a Chinese crypto initiative would get some very Huawei-like responses. Chinese espionage, real and rhetorical, is the bubblegum of Western politics. You blow a bubble, you’re a great patriot, and you probably have very little idea of what you’re talking about.
There’s a much more practical reason for China to manage cryptocurrencies in this way. The overall pattern of China offering financial incentives as alternatives to Western offers has been pretty much going all China’s way. “Hey, we’ve got a crypto/something like it for you to invest in” would get a lot of attention. Markets will be interested in whatever China puts in place.
People tend to believe in the Chinese command economy as a safer alternative to the West’s various debacles, like the sub-primes, etc. Given the general level of intelligence and insanity in the West these days, it’s hardly surprising.
America’s flat-footed tariff war is another ironic basis for people hedging bets with China. The United States has been doing its credibility no favours with years of abuse and economic babble going back to pre-Obama era market issues. …So, would a Chinese alternative to cryptos be saleable? Would it drain a lot of money from the current investment market?
There’s an old Chinese saying, “Hide a dagger in a smile”. In this case, they’re hiding a blender in a somewhat low key, if confrontational, policy document. This is no dumb, reactive or xenophobic move, and it will have global ramifications, whatever happens next.
Also bear in mind – This is an exercise of China’s real economic clout. They can trash a whole sector this easily. What’s anyone going to do about it? Maybe the unsung Mensa society running the game show in the States and elsewhere would like to get their heads out of each other’s backsides and consider that?
