For more than a decade, huge fortunes have been made and lost in the world of cryptocurrency. While China has played a big role in the cryptocurrency boom, Beijing has been tightening its grip on the volatile market in recent years because of concerns it could disrupt the economy. Raymond Yeung, economist, and author of China’s Trump Card: Cryptocurrencies and its game changing role in Sino-US trade, says market volatility is only one reason state regulators do not view cryptocurrency as a…
Video Transcript
[MUSIC PLAYING]ALKIRA REINIRANK: China has a long and fraught relationship with cryptocurrencies. While it’s illegal to trade cryptocurrencies in the country, about 70% of the world’s bitcoin mining is done in China. Despite being an unofficial leader in the volatile space, Beijing has long worried about the potential for cryptocurrency to disrupt its economy. So is cryptocurrency too risky for China?
[MUSIC PLAYING]Cryptocurrency is a digital or virtual form of currency. Unlike physical money, it’s decentralized, meaning it’s not tied to one country and doesn’t fall under any central authority. That means people across the globe can trade cryptocurrencies and cut out the middle man– like banks. Bitcoin was the first and most popular cryptocurrency, but there are others in the market, such as ethereum and dogecoin.
While this all sounds appealing– there is a catch. The cryptocurrency market is risky because it’s extremely volatile. You just have to look at the price of bitcoin. When bitcoin started trading in 2010, it was only $0.8 per coin. By April 20, 2021, however, it peaked at nearly $65,000 per coin. But it’s not always an upward trajectory– bitcoin’s value can change by thousands of dollars in a matter of minutes, and could have a ripple effect on the rest of the market.
In May, about $1 trillion was briefly wiped off the market after China announced a tougher ban on banks and payment companies offering crypto-related services. Price volatility can also be exacerbated by comments from people like U.S billionaire Elon Musk. In May, he said Tesla would no longer accept bitcoin because of the large carbon footprint created when mining or creating the coins. Subsequently, the currency plunged by more than 10%.
RAYMOND YEUNG: The role of the cryptocurrency market has been very, very high and that is also one of the reasons why the regulators and the authorities they don’t usually regard cryptocurrency as a legitimate form of payment, because the price is not stable.
ALKIRA REINIRANK: So the big question– is cryptocurrency too risky for China? The simple answer is– yes, the government has always taken a firm line on cryptocurrencies. Going back to when it first banned Chinese banks from dealing in bitcoin in late 2013, the same year the currency really started to gain traction in the country. Over the years, China has rolled out a number of bans or warnings because of concerns around financial risk, money laundering and energy use.
RAYMOND YEUNG: China, obviously, as we all know that the regulatory philosophy is to emphasize on control. And if the government can retain the control of monetary policy, that can also curb or mitigate any financial risk um, in the economy.
ALKIRA REINIRANK: As it stands, the country maintains a blanket ban on the trading of any cryptocurrencies. But individuals can still own virtual currencies like bitcoin. China was– and still is a leader in the world of bitcoin mining, even with the government’s best efforts to crack down on it. Despite the tightening of restrictions, the recent growth of the market and the buying frenzies have enticed many Chinese investors to buy cryptocurrencies. And this is a worry for the government. So what exactly is China afraid of? Cryptocurrency is viewed as high-risk, and is a concern because China uses its big banks and tight control over the national currency to maintain economic stability. By not being tied to its central bank, cryptocurrency exists outside the control of China. And Beijing doesn’t want to lose control of its capital flow.
RAYMOND YEUNG: The Chinese authorities are afraid about you know, the cryptocurrency can be a means of capital flow. Because that is you know, bypassing the cross-border control and the cross-border payment structures.
ALKIRA REINIRANK: China has said recent wild swings in the currency prices seriously violate people’s asset safety and disrupt normal economic and financial order.
[MUSIC PLAYING]Basically, the fear is that cryptocurrency might be seen in the future as a threat to the existing financial infrastructure of the country– and the sovereignty of its national currency, the yuan.
RAYMOND YEUNG: I would not be surprised you know if the next stage should they see that cryptocurrency eventually becomes a threat to the existing financial structure. I– I believe that even banning or a blanket style or restriction um, would not be surprised me.
ALKIRA REINIRANK: This isn’t the only time that state regulators have stepped in when things seem too risky. In recent years, Chinese regulators have cracked down on peer-to-peer lending and multilevel marketing schemes. They’ve also introduced measures to cool Gen Z appetites for buying things on credit. Regulators are basically ready to step in whenever a growing industry, in their eyes, poses a threat to the stability of the country’s economy. And that’s a big part of why cryptocurrency remains such a concern for the central bank.
RAYMOND YEUNG: It might be a statement or the authorities want to make a statement that they don’t really want Chinese citizen to uh, to trade and expose themselves on the risk. One of the earlier regulations talked about the risks of bitcoin, you know, very specific term point to this cryptocurrency. But then another one, later on is about virtual currency. This can well summarize you know, what the regulators think about, or to safeguard the renminbi, the sovereign currency, as the only legitimate means of payment.
ALKIRA REINIRANK: Beijing is also developing its own digital currency. It’s the first major economy to do so, in 2014– with trials of the digital yuan being run in several cities this year. Unlike cryptocurrencies, China’s sovereign digital yuan would fall under the authority of the central bank, allowing Beijing to maintain control of the flow of money in and out of the country.
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