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Few would dispute that China’s recent crackdown on cryptocurrency trading and mining has contributed to the recent plunge in the value of bitcoin and other cryptos.
But as the argument rages on whether crypto volatility is a sign of fundamental weakness or just a bump in the road, initiatives emanating from Beijing are seen by experts as a sign of China’s attempts to incubate its market. own emerging electronic money. and restart the international financial system.
The People’s Bank of China aims to become the first major central bank to issue a central bank digital currency. While the Western counterparts of the PBOC have taken a more cautious approach, it has held trials in several major cities, including Shenzhen, Chengdu, Shanghai and Hangzhou.
The benefits of electronic money are immense. As more and more transactions are carried out using a centrally controlled digital currency, the government increasingly acquires the ability to monitor the economy and its people.
The deployment is also seen as part of Beijing’s push to weaken the power of the US dollar, and in turn that of the Washington government. China believes that by internationalizing the yuan, it can reduce its dependence on the dollar-dominated global banking system, just as its Belt and Road initiative builds an alternative international trade network.
The alarm of Western governments is such that the threat posed by the digital yuan, which could put China out of reach of international financial sanctions, for example, was discussed at the G7 meeting last month.
But another crucial motivation is growing alarm in Beijing over the size of the crypto industry in China, where a huge amount of cryptocurrency was “mined” until the recent crackdown.
The threat of an unregulated alternative monetary system emerging from blockchain technology is a clear and present danger to the Communist Party, observers say.
Jim Cramer, former hedge fund manager and CNN business expert, said the Beijing government “believes this is a direct threat to the regime because … it is out of its control.”
From the perspective of central banks, cryptocurrencies are a threat to financial stability, argues Carsten Murawski, professor of finance at the University of Melbourne in Australia, and if digital currencies are to be developed, authorities want it. control.
“All the central banks want to control them – the PBOC, the US Federal Reserve, the European Central Bank,” he says. “They have no interest in the parallel currencies floating around. Some countries might not be too worried, but in China it might be more of a concern. “
PBOC vice-governor Fan Yifei on Thursday said China was concerned about the threat posed by these digital currencies developed outside the regulated financial system. “We are still quite worried about this issue, so we have taken action,” Fan said.
Bitcoin’s value hit an all-time high earlier this year of nearly $ 65,000, after valuing less than $ 10,000 in the middle of last year, sparking a frenzy of interest in cryptos as an investment. to protect against more traditional assets such as stocks. and obligations. Comments from Tesla boss Elon Musk that he would not allow the use of bitcoin to buy his cars has added to the volatility and it is now trading in the $ 30,000 range.
But it has also caught the attention of authorities such as those in China, concerned about the largely unregulated market.
“In many countries it is absolutely unregulated – it is the absolute Wild West,” said Prof Murawski, who also pointed out that there might not be the usual legal avenues to follow. if people thought they had been defrauded.
“So that’s another reason to control cryptos: to protect the consumer. Uninformed investors could lose a huge amount of money.
In China, the rollout of the digital yuan has accelerated this year alongside the ban on crypto trading. In May, the PBOC banned banks from doing business or providing accounts to anyone who trades cryptocurrency. This was followed by the ban on bitcoin mining in several provinces, including Sichuan. China’s central bank on Tuesday warned companies against helping cryptocurrency-related businesses as it shut down a software company for alleged involvement in digital currency transactions.
Fan said on Thursday that cryptocurrencies such as bitcoin have become “tools of speculation” and carry potential risks to financial security and social stability.
Online businesses have been allowed to thrive in China, but the Beijing government has been ruthless in downsizing them if they appear to grow too big to control. Jack Ma, the top billionaire founder of the Alibaba empire, abruptly disappeared from public view for months last year, and his company was fined and downsized. Regulators have also targeted tech giants Tencent and Bytedance, the respective parent companies of WeChat and TikTok, and this week ordered that the Didi rideshare app be removed from app stores and launched an investigation.
Dong Shaopeng, a senior researcher at Renmin University of China in Beijing, said some online industries such as cryptocurrency had grown to “alarming” size.
“It is time for the government to block such transactions from sources of capital, so that money stops flowing from real industries to these transactions,” Dong told the Global Times.
Professor Murawski says another reason China wants to clean up the cryptocurrency industry on its own patch is the possible threat to the power system.
The process uses a huge amount of electricity and tends to be carried out in areas where cheap energy is available. In China, this has included Sichuan, which enjoys abundant and cheap hydroelectric power. But as profits increase thanks to the popularity of cryptos, governments may become less willing to allow miners to reap huge benefits from a system that uses so much electricity that it can threaten the stability of the power grid. .
The crackdown on crypto isn’t limited to China. The UK financial regulator said last month that Binance, one of the world’s largest cryptocurrency exchanges, cannot conduct any regulated activity and has issued a warning to consumers regarding the platform.
But cryptos remain an extremely attractive asset for many investors who see nothing to fear from Chinese crackdown and that mining will simply migrate to other more accommodating jurisdictions with little impact on the market.
Michael Saylor, co-founder of business intelligence firm MicroStrategy and one of the biggest cheerleaders in crypto, recently bought an additional 13,005 bitcoins for around $ 489 million at an average price of $ 37,617 per room. And Silicon Valley venture capitalist Andreessen Horowitz just launched a $ 2 billion crypto fund and announced it is “radically optimistic about the potential of crypto to restore confidence and enable new types. governance “.
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