Commentary on Political Economy

Tuesday 25 May 2021


Don’t Bet Against Beijing’s Efforts to Smother Bitcoin

China has several reasons to further crack down on cryptocurrencies

It is difficult to see the optimistic case for bitcoin mining and trading in China. PHOTO: MIKE SEGAR/REUTERS
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Bitcoin has recovered some of its losses after Chinese Vice Premier Liu He’s pledge to crack down on mining and trading on Friday. But investors should be cautious with all crypto as far as China is concerned. The government has its own reasons for smothering the sector, and a track record that suggests it will follow through effectively.

The first and most obvious reason is the stated one: to limit the risk of financial excesses becoming a broader social issue.

In some areas, particularly real estate, the Chinese government has struggled to seriously control expanding leverage and risk. But crypto advocates shouldn’t confuse that for laxity generally.

Case in point: peer-to-peer lending. An explosion of platforms and borrowing in 2014 and 2015 attracted attention from regulators, with a particular sharp negative turn in 2018 after a series of small protests against some lenders. The amount of outstanding peer-to-peer loans fell from more than 1 trillion yuan, the equivalent of $155.78 billion, in mid-2018 to less than half that by the end of 2019. By the end of last year, Chinese regulators announced that the sector had been “zeroed out.” Major players either wound down or moved into other businesses.


The second reason to smother bitcoin applies to mining particularly: The energy intensity of “mining” increasingly runs at odds with Beijing’s environmental goals. The government has become more ambitious in terms of targets relating to emissions in the past year, and environmental protection is one of the very few areas where there is still any prospect of significant China-U.S. cooperation. It’s hard to see why bitcoin mining would be a priority for increasingly scarce energy use.

The third reason is unlikely to be mentioned in press communiqués, but remains a core priority for Beijing. Put simply, any avenues citizens might use to easily move money out of China will be under perpetual threat of closure. Capital outflows between 2014 and 2016 caused a drop in China’s foreign-exchange reserves by around $1 trillion, and Beijing has spent the years since narrowing any potential escape routes.

With such strong negatives from Beijing’s perspective it’s difficult to see what the optimistic case for bitcoin mining and trading in China is—or for cryptocurrencies more broadly aside from the government’s own newly minted alternative, the digital yuan.

Friday’s statement is unlikely to be the last turn of the screw emanating from Beijing.

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