[Bithumb Easyconomy] A bigger picture drawn by the Chinese government

The recent bad news triggered in China has had a heavy impact on the digital asset market. Previously, China repeatedly introduced regulations on digital assets starting in 2017, when the digital asset craze was at its peak, and with the recent uptrend due to the increase in interest shown by the private sector, the Chinese government seems to be regulating them again.

On the 19th, three state-run financial associations including the National Internet Finance Association of China, the China Banking Association, and the Payment and Clearing Association of China, issued a joint statement on behalf of the Chinese authorities saying, “Financial institutions should not engage in any activities related to digital assets.” This measure collectively applies to banks, securities companies, asset management companies, as well as companies related to payment and clearing. In addition, the statement said, “The public should also manage their (asset) risks,” and “avoid engaging in financial activities related to digital assets.” It also emphasized, “All activities such as exchanging digital assets against fiat currency, providing intermediary services to facilitate digital asset transactions, and trading derivatives based on tokens can be prosecuted as criminal offenses.”

On the same day, the People’s Bank of China, the central bank of China, also issued a warning regarding digital assets. The People’s Bank of China pointed out that “current digital assets cannot be used for any purpose in real life because they are not certified by a government authority.”

The Chinese authorities didn’t stop there, and two days later, on the 21st, even took issue with bitcoin mining. The Financial Stability and Development Committee of the State Council of the People’s Republic of China even issued a menacing statement promising that “it will strike bitcoin mining and transactions” at a meeting held by Vice Premier Liu He. At the same time, there were news that the northern Inner Mongolia Autonomous Region, a major mining area in China, had started operating a reporting center to crack down on mining sites. Thus, it seems that China has declared a war to eliminate private digital assets by blocking all elements of the system from issuance (supply) of digital assets to their distribution and application services. However, there are some points that need to be considered more seriously.

First of all, as China has a socialist economic system, it tends to secure its control by giving a unified message when trying to establish a specific economic policy. This regulation on the digital asset market can also be seen as part of the ‘war against the asset bubble’ that the Chinese government has been promoting recently. China, which had been the first in the world to suffer from the Covid-19 pandemic, was one of the first to recover from it. Thanks to that, it received a large amount of overseas funds since last year, which allowed the prices of Chinese stocks, bonds, and real estate to soar.

For this reason, at the beginning of this year, the People’s Bank of China turned to a tight monetary policy to reduce the volume of money in the market. The People’s Bank of China focuses on inflation management and makes every effort to prevent asset bubbles in stocks and real estate. In this situation, it is presumed that the Chinese people exchanges national currency for dollars to go abroad and buy bitcoins, etc., and so the Chinese government presumably decided to crack down on this behavior.

Besides, China is one of the leading countries in the competition for the development of digital currency (CBDC in the case of China) issued by a central bank. A CBDC pilot service has been underway in major cities of China since the beginning of this year, and China is scheduled to officially issue CBDC as early as next year.

In this situation, China may have an intention to restrain bitcoin, a representative private digital asset that may become a competitor of CBDC. However, in the mid to long term, the possibility that bitcoin will be used complementarily with CBDC cannot be ruled out. This is because CBDC is limited to micropayments between individuals.

Peter Thiel, a billionaire venture capitalist who established PayPal, a leading payment service provider, and is an early investor and a member of the board of directors in Facebook, warned that “China will use bitcoin as a weapon in the financial sector against the United States.” He stressed, “Bitcoin is the biggest threat to fiat currencies, especially the dollar, so using bitcoin to weaken the dollar is a priority for China.”

Of course, the digital asset mining may remain highly regulated for the time being. This is due to the participation of the Chinese government in the ‘Net Zero’ declaration stating that it will reduce carbon emissions to zero by 2050. In 2017, China banned initial coin offerings (ICO) and closed coin exchanges. But it is obvious that, in fact, startups and exchanges that raise funds with digital assets are more successful overseas. According to some news, Chinese coin miners are already moving to Northern Europe and Canada, where renewable energy production is cheaper than energy production using fossil fuels.

Although digital asset regulations in China seem to be a psychologically negative factor for investment, one should objectively and seriously consider the bigger picture drawn by the Chinese government from a mid- to long-term perspective, rather than being swept away and selling coins based on emotions.

*This research and analysis material was produced for the purpose of providing reference information based on reliable data and information. However, its accuracy or quality is not guaranteed.

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