Chinese-mainland authorities took a tougher stand on cryptocurrencies last month by imposing a new ban covering services that had not been mentioned previously.
Financial institutions and payment companies have now been barred from providing services concerning cryptocurrency transactions, and investors have been warned against engaging in speculative crypto trading.
In other words, institutions must not accept virtual currencies, use them as a means of payment and settlement, nor offer their clients services involving cryptocurrencies, such as registration, trading, clearing and settlement.
Before the latest ban came into force, mainland authorities had already taken a series of measures since 2017, clamping down on activities involving the trading and use of cryptocurrencies, mainly due to concern about the financial risks associated with such assets. For instance, the practice of raising funds through initial coin offerings is banned.
Under the regulations, ICOs involving cryptocurrencies, such as bitcoins and ethers through irregular sale and circulation of tokens, are deemed to be illegal public financing.
Thus, if bitcoin mining is a problem worldwide due to its high energy consumption, it’s even a bigger problem in China due to the fact that almost two-thirds of the world’s mining activities take place there. Although the ban on bitcoin mining has drawn criticism, I think it’s perfectly in line with China’s current goals
However, it’s not illegal to hold bitcoins and other cryptocurrencies in China. There is no law at present that prohibits Chinese investors from having cryptocurrencies or trading in them. This seems to be consistent with a notice jointly issued by five mainland agencies, led by the People’s Bank of China, in 2013, which defined bitcoins as a special virtual commodity, but not a currency. It also stated that bitcoins are not a legal currency and should not be circulated and used in the market.
In April, Li Bo, deputy governor of the PBOC, described bitcoins as an “investment alternative”, asserting that cryptocurrencies are not currencies per se, but an alternative investment asset class.
The mainland has also ramped up pressure on bitcoin mining. Investopedia defines “bitcoin mining” as the “process by which new bitcoins are entered into circulation, but it is also a critical component of the maintenance and development of the blockchain ledger. It’s performed using very sophisticated computers that solve extremely complex computational math problems”.
The main problem with bitcoin mining, though, is its energy consumption. An analysis published in February by the Cambridge Centre for Alternative Finance said bitcoin mining uses more electricity annually than the whole of Argentina, consuming around 121.36 terawatt-hours annually, which is, undoubtedly, a very high amount and an environmental conundrum.
The mainland’s latest crackdown on bitcoin mining and trading has forced many cryptocurrency miners to halt all or part of their operations in the country. China accounts for up to 65 percent of the world’s bitcoin mining, especially in the Inner Mongolia autonomous region, which accounts for 8 percent globally — more than the total amount in the United States.
Thus, if bitcoin mining is a problem worldwide due to its high energy consumption, it’s even a bigger problem in China due to the fact that almost two-thirds of the world’s mining activities takes place there.
Although the ban on bitcoin mining has drawn criticism, I think it’s perfectly in line with China’s current goals. Under the 14th Five-Year Plan (2021-25) for National Economic and Social Development and the Long-Range Objectives Through the Year 2035, China aims to reach its carbon emissions peak before 2030 and become carbon neutral before 2060.
By comparison, the US and the European Union aim to achieve carbon neutrality by 2050. If they were to meet their targets, it would have taken the US around 45 years and the EU some six decades to move from their carbon emissions peak and achieve neutrality. But China plans to do it in just 30 years, which is a very ambitious, albeit attainable goal.
From an energy-consumption perspective, getting stricter with bitcoin mining activities seems consistent with China’s carbon objectives.
We may be wondering: Is China’s ban compatible with its policies? To me, it is. It’s fair and respectable for every country to adopt a different approach toward cryptocurrencies. While some countries, like Singapore, can be more “crypto-friendly”, other nations may take a tougher stand, like China, and it’s understandable.
I’m not against cryptocurrencies, but I’m aware that they pose certain risks and challenges, such as their volatility, as well as regulatory and energy consumption-related risks, which need to be solved, especially those concerning energy consumption.
Finally, I would like to refer to my main area of research, the digital yuan. As I mentioned in my previous article, unlike what some people may think, the digital yuan is a central bank digital currency, which is not a cryptocurrency, although there is, of course, some relationship between them. Central bank digital currencies could, to some extent, be categorized as stable coins.
It’s important to note that some people may find it confusing in seeing China working on and about to roll out its digital currency electronic payment system, while taking a tougher stance on cryptocurrencies.
As I’ve mentioned, the rationale behind central bank digital currencies and cryptos is actually the opposite. While the former is central bank money in a digital form (therefore, it’s legal tender, as it’s issued by a central bank) and thus centralized, cryptocurrencies are an important pillar in decentralized finance and are established by private entities and supported by numerous distributed nodes that are incentivized through block rewards to maintain the network. In other words, the rationale behind central bank digital currencies is control, while that behind cryptos is the opposite.
Summing up, China’s latest ban on cryptocurrencies seems perfectly in harmony with its policies, especially when it comes to bitcoin mining and the goal of becoming carbon neutral as listed in the 14th Five-Year Plan.
Moreover, there is no contradiction in China promoting the digital yuan on one hand, and encouraging Chinese companies to seize the opportunity offered by blockchain technology on the other, while it takes a tougher line against cryptocurrencies and virtual-currency trading platforms, since central bank digital currencies (like the digital yuan) and cryptocurrencies are not the same.
The author is a fintech adviser, researcher and a former business analyst for a Hong Kong publicly listed company.
The views do not necessarily reflect those of China Daily.
HONG KONG NEWS