What Other Countries Will Learn from Chinese Crackdown on Cryptos

The Chinese government has been cracking down on bitcoin and other cryptocurrencies. This, along with a few other reasons, has led to cryptocurrencies crashing from their all-time high levels over the last few months.

The question is why is the Chinese government doing this? The simplest answer lies in the fact, and as I have explained on multiple occasions before, up until cryptocurrencies came along, the right to create money out of thin air was only with the governments.

Cryptocurrencies challenge that hegemony, and which has been their basic selling point over the years. The trouble is that the right to create money out of thin air is something any government isn’t going to give up on easily. The history of money tells us that while different forms of money emerge privately, it is the government which usually controls the monetary system.

This is a point that the economist John Maynard Keynes made in A Treatise on Money, in which he said that all modern states have had the right to decide what is money and what is not, and they have had it “for some four thousand years at least”. This is a point most crypto bulls don’t seem to get.

Another reason offered behind the Chinese crypto crackdown is that bitcoin and other cryptocurrencies are coal intensive. This is something that entrepreneur Elon Musk also said when he tweeted on bitcoin around a month back.

Now what does this mean?

Over the years, it has become more and more difficult to mine bitcoin. These days bitcoin farms with giant racks of mining computers are needed to mine bitcoins.

As Jacob Goldstein writes in Money – The True Story of a Made-Up Thing:

“People started building special computers optimized to mine bitcoin… Then they started filling giant warehouses full of racks of those mining computers. The computers sucked up so much energy that miners began seeking out places in the world where power was cheap, to lower their costs of mining. Vast mining operations sprung up in Iceland, Mongolia, and, especially, China.”

The point being bitcoin mining ends up using a lot of electricity. And most of this electricity is generated through fossil fuels. 36% of the electricity worldwide is generated through the use of coal and 23% through the use of natural gas. The burning of fossil fuels emits greenhouse gases.

As Bill Gates writes in How to Avoid a Climate Disaster:

“Greenhouse gases trap heat, causing the average surface temperate of the earth to go up. The more gases there are, the more the temperature rises. And once greenhouse gases are in the atmosphere, they stay there for a very long time; something like one-fifth of the carbon dioxide emitted today will still be there in 10,000 years.”

Bitcoin mining adds to this pollution.

As Dylan Grice writes in the latest edition of the Popular Delusions newsletter: “China is also concerned that bitcoin mining in the country is coal intensive and that is complicating efforts to reduce pollution.”

While this is an extremely valid argument, the trouble is all this has been well known for a while. So, why is it being brought up now? And that’s where things get interesting. It is being brought up now simply because the Chinese governments cannot openly talk about the real reason behind cracking down on bitcoin and other cryptos.

And what’s the real reason?

The success of cryptocurrencies has made governments realise that they need to be in on the game as well. This has led to governments and central banks, including that of China, planning their own digital currencies.

What is a central bank digital currency?

As Mark Carney writes in Value(s)—Building a Better World For All:

“A central bank digital currency would be an electronic form of central bank money that could be used by the public to make digital payments. Currently when we make payments with our debit cards or mobile phones we are using private money originally created by banks. Our only access to the ultimate risk-free asset of the central bank is when we use physical cash.”

The use of physical cash is declining rapidly and central banks feel that they need to get into that space by creating their own digital currency. If they don’t get into that space and people start using other digital currencies, it creates a problem for them, albeit minor one initially, but still a problem.

As mentioned earlier, the governments have the right to create money out of thin air, and sharing that with others is something that they are obviously not comfortable with.

As Grice writes: “From what we can glean from our friends in China, its motivation [behind the crackdown] was partly related to the roll-out of its own digital currency.” China is planning to launch its own central bank digital currency and given that it wants to wean off its citizens from the various cryptocurrencies that they are currently using.

In fact, China is already testing its digital currency. A report on CNBC.com points out that the plan is to hand out 40 million renminbi (or around $6.2 million) to a group of people in a lottery. The money can then be spent with selected merchants.

Also, there is another factor at play. China has one of the highest investments to gross domestic product (GDP) ratios in the world. Data from World Bank points out that in 2019, the ratio for China stood at 43.3%, when the global ratio was at 24.4%.

Hence, a bulk of Chinese savings get channelised into investments and this has over the years helped create massive economic growth. Bitcoin and other cryptos allow the Chinese to tunnel their money out of China, something that the Chinese government isn’t comfortable with. And like the Chinese government most governments won’t be comfortable with this.

As Grice writes: “It [i.e. the Chinese government] wants to ensure that growing familiarity with digital currency among its population doesn’t translate into growing use of digital currencies to evade China’s capital controls.”

These are the lessons that other governments and central banks around the world can easily pick up from the latest Chinese crackdown on cryptos. Hence, in the time to come, the government crackdown on cryptos will only go up.