China is all set to “crack down on Bitcoin mining and trading behavior, and resolutely prevent the transmission of individual risks to the social field.”
That’s according to a statement from the State Council, released following a meeting of the Financial Stability and Development Committee on Friday. The proceedings were chaired by Liu He. (You remember Liu, right? He’s a somebody.)
Bitcoin slumped on the headlines. It was the second time in a week that a pronouncement from Beijing contributed to tumult in the cryptosphere. In the same statement, China promised to “punish criminal activities in the financial sector.”
When it comes to regulatory risk and crypto, I often point to China as an example of what governments can do if they decide to crack down.
Crypto adherents are fond of suggesting that no government can eradicate the market, no matter how draconian the measures. But that’s true of anything. For example, if you’re caught on the highway with 10 kilos of cocaine in the US, you’re going to prison, likely for quite a while. If you’re caught trafficking 100 kilos of cocaine, you’re likely going to prison for what may as well be the rest of your life. Paradoxically, the penalty for moving relatively trivial amounts of hard drugs in the US can be on-site execution thanks to the harsh realities of modern policing in America.
And yet, the very real threat of prison (or being shot either by police or a rival dealer) isn’t deterring the innumerable American citizens walking, driving, flying and sailing with cocaine on their person right now, as you read these very lines.
The point is, crypto is hardly unique in being generally impervious to efforts aimed at eradicating the market. If people are determined to do something, government decrees can’t prevent them from doing it.
I’ve argued previously that crypto is, if anything, more vulnerable to government crackdowns (compared to other illicit transactions) because the only way to stop people from converting, say, fentanyl into dollars is to be physically present to detain the buyer and arrest the seller. The conversion of crypto into dollars can be stopped by shutting down the exchanges. Sure, the conversion could take place on other venues, but they’d all be electronic and the vast majority of current crypto market participants would have neither the wherewithal nor the desire to engage in that kind of off-exchange, illegal transfer.
It’s just as difficult to discern Beijing’s precise position on crypto as it is to divine the Party’s position on anything else related to markets these days, but I’m sure of one thing: If China wants to eradicate crypto entirely within its borders, you’d be a fool to test their resolve for anything short of a chance at enormous financial gains.
That is: Absent an opportunity to book stupendous profits, the risk-reward profile for running afoul of Chinese authorities is almost always asymmetrically skewed to the downside. Lai Xiaomin, former Huarong chairman, could attest to that, but he’s too busy being dead.
Does China matter when it comes to crypto? Well, yes. It’s the second-largest economy on Earth, and proud declarations from the likes of Donald Trump and Joe Biden notwithstanding, it’ll be the largest in a relatively short period of time.
In addition to being the “world’s factory,” China is also an enormous market for virtually anything anyone wants to sell, assuming you’re willing to swallow unfair trade terms to gain access.
The idea that any cryptocurrency can flourish as a medium of exchange in the 21st century while being persona non grata (under penalty of God only knows what) with an autocratic regime in the world’s largest economy, is just about the silliest proposition imaginable.
Again (and I can’t emphasize this enough), I don’t pretend to know what one can and can’t do (or get away with) in China when it comes to trading, mining or transacting in cryptocurrencies. For all I know, it’s extremely easy to skirt whatever existing enforcement regime is in place and perhaps that regime isn’t even as onerous as it sounds.
But what I do know is that Beijing is angling to i) internationalize the yuan, and ii) roll out the digital yuan. Consider the following passages from a note by Boris Schlossberg, managing director of FX Strategy at BK Asset Management:
The digital yuan is both programmable and trackable giving the Chinese government enormous control over the economy. Not only will Chinese policymakers know every consumer choice made in the economy, but they could also directly affect spending behavior by making the currency expirable by a certain date.
Yet it is precisely this policy objective that will drive demand for crypto in the future. With many Chinese entrepreneurs and consumers clearly aware of the government’s intention to exert absolute authority over personal assets, the trend of converting at least part of one’s wealth into crypto assets will continue despite crypto’s inherent volatility.
No, it won’t. Or at least not if Beijing doesn’t want it to. Jack Ma was subjected to a harrowing shakedown late last year that cost him at least $11 billion personally, took a bite out of Alibaba and killed what would have been the world’s largest IPO. All he did (his “crime”) was critique regulators during a speech at a conference. Imagine what would have happened to someone like Ma had he decided to defy an across-the-board ban on any and all crypto transactions to covert a few billion into Bitcoin.
I still contend that the likes of Ma will eventually become so wealthy that no government or regulator will be able to exert much in the way of control over them personally. But someone like Ma, whose business interests are inextricably bound up with Chinese society, can’t simply abscond to Canada one night without risking repercussions for his China-based empire.
This was a truly challenging week for the crypto crowd. Between Elon Musk, the US Treasury’s nod to more stringent tax enforcement and Beijing’s rather ominous messaging, market participants were reminded of why the space is so volatile and, many would say, uninvestable.
“Under which allocation heading should Bitcoin be classified anyway?,” SocGen’s Alain Bokobza asked, in a Thursday note, adding that it’s,
- Not a currency. Despite Elon Musk’s teasing, Bitcoin still can’t be used to buy a Tesla.
- Not a commodity. The energy transition is increasing demand for rare metals, but not for energy-slurping data centers per se.
- Not cash. Bitcoin will not increase your portfolio’s liquidity ratio or help settle your taxes.
Of course, if you’re in it “for the tech” (as so many claim to be) or “for the rush” (and kudos to anyone who just admits to being a gambler), then none of the above need necessarily bother you too much.
But if you’re in crypto based on any other thesis (e.g., you think it’s a “real” currency, or you believe it’s a store of value, or you think of it as an asset class), it might be time to take a look in the mirror and ask whether you’re being honest with yourself.
“The Fed, PBoC and other central banks tend not to appreciate competition that undermines their monopoly,” SocGen’s Bokobza remarked. “Regulation may be the biggest threat ahead for Bitcoin.”
Is it just me, or is that filthy old fiat currency backed by the full faith and credit of the United States looking better and better?
I think precious metals may benefit. Which would give the old hard money/inflation crowd all the proof they need.
Frying pan and fire.
Well anyone who thinks that sovereign countries are going to sit idly by while Bitcoin takes away their currency sovereignty, is probably smoking something more powerful than weed
I tend to agree with these sentiments regarding regulation. However, as long as people are free to choose crypto, the upside remains high. in the case of btc, the real tipping point to price appreciation wont be when ppl can suddenly spend their btc (easily like cash) but instead when they can easily demand to be paid in btc. if only a few of the worlds high earning entertainers, artists, and techies start requesting payment in btc (at whatever price they value their labor) then there will be sufficient demand on the small float of coin to massively drive price. is that a thesis? I dunno. But I do know that if airbnb allows me to set a price in btc for my rental, I would happily set such a price and accrue said btc even if I cannot pay business expenses with it. this future may not come for btc, but it will for some other crypto.
If Jack Ma wanted to take his wealth out of China in the middle of the night (assuming he could figure out a way to physically move his body out of China) and relocate to Malta, crypto would be the easiest way to do that.
No surprise with China’s actions- on many fronts.
During the devaluation scare in China three or so years ago, large buying out of China did appear. But if they crack down, what locally domiciled banker would want to risk approving the wire transfer to the BTC exchange? Unless he/she was on the same plane out that night.
China has the “Great Firewall” and one would be silly to think that one’s crypto transfer will go undetected by deep packet inspection.
The Chinese govt knows, or can know if they wish, the location of every mining computer operating in China. Anything going through the internet or using a substnatial amount of power can be located.
The US is perfectly capable of the same intelligence gathering, by the way (NSA, etc). Given that crypto currency enables ransomware and ransomware can be characterized as a national security threat, it would not be too far fetched to imagine that preparations for doing to are not in draft somewhere.
Decentralized finance is an interesting concept. Having done a little more reading on the subject, it has opened my mind. That said, what I am really saying is blockchain is an interesting concept to build upon. The coins not so much. My vague understanding is that etherium has a lot of developers for applications related to the coin as part of an ecosystem. But like many early innovations a lot of capital is going to be lost before a robust model develops. Sort of like the internet circa 2000. In the meantime if you are trading coins there is no question that you are entering a casino, and the house takes a large vig.
You all talk about China as if they are the only ones who would really crack down on this stuff. As far as I know the Feds can still do a warrant-less search of your house when you trip off to work. Under the Patriot Act they can get any financial info on you they want with little or no probable cause. I asked one of my banker clients one time how many Patriot Act requests they filled in an average week. They had 60,000+ customers and had to give the Feds full files on 200 of those customers in an average week. The Patriot Act is designed to root out terrorists and one excuse for clamping down on or outright prohibiting crypto is to block terrorism. We don’t need the Fed to stop crypto when we have the NSA, the Patriot Act, and the IRS for starters.
I agree, the US has some information about crypto trading. Coinbase sends 1099s to the IRS after all. However, I’ll bet many crypto traders and users aren’t reporting gains and losses and payment or receipt, and some probably have little chance of getting caught right not if they use crypto exchanges that are beyond US jurisdiction. That’s where NSA’s capabilities would be handy.
However, governments – US, China, or otherwise – may decide that even disregarding the tax evasion aspects, crypto poses too great a threat to other governmental interests. Actually, I suspect many governments will.