But it will be one of the first major nations to issue a digital currency
On May 15th 2021, the Chinese Communist Party (CCP) announced their first crackdown on the mining of Bitcoin, which it said was due to concerns that the Bitcoin mining process is too energy intensive and thus not in line with the state’s clean energy goals. On Monday June 21st, China expanded their Bitcoin mining crackdown to the Sichuan Province, a territory in southwest China with a population of 81 million. Fear, uncertainty, and doubt gripped the crypto markets worldwide that other states would follow in China’s footsteps- most of us lost at least 30% of our crypto portfolio value.
When reading headlines from authoritarian states, it’s always good to read in between the lines. Why hasn’t Denmark, an extremely environmentally conscious country, also outlawed the mining of bitcoin? How come the US, the largest energy consumer and producer in the world with a government friendly toward environmental policies, has not also done the same? This suggests there could be something else motivating the CCP’s moves against crypto. The most likely explanation is that the state is afraid of losing some of its control and legitimacy. And yes- there is some merit to the fact that Bitcoin mining is a waste of electricity, a problem Ethereum and Cardano are solving by offering proof of stake instead of proof of work.
Why does a government want to squash any threats to its central currency? Control of the supply of money (the Chinese Yuan in this case) and control of interest rates within a country affords governments great say over their macroeconomic situations. When a decentralized currency or store of value enters the picture, that control is threatened- and when a rising power (cryptocurrency) challenges an incumbent (fiat), struggle has historically ensued. It’s quite likely that in the next five years we see cryptocurrency headlines in mainstream media brought up in the context of legality and adoption and how that affects positively or negatively central governments. Issuance of a currency that is used everywhere adds to the legitimacy and power of a government over its people. If we begin to think about regions officially part of China that are administrative headaches like Tibet and Xinjiang (until 60 years ago), Taiwan, or Hong Kong- all have or had their own currencies separate from the Yuan.
China will innovate and create a Digital Yuan. It’s far easier for China to innovate with financial technologies like digital currency because theirs is not the default world currency- the US dollar is. Over 70% of US dollars in existence are held by people and governments outside of the United States, because the US dollar is seen as a stable, reliable form of money that holds its value well through all different types of economic storms. As of this writing, at least 66 different nations have pegged their national currencies to the US dollar– because doing so has led to far more money stability than their own previous attempts at money issuance. Let me say that differently: roughly 33% of all countries in the world have their currency pegged to the USD. If something has been working so well (the US dollar), why would the US Government change it? China has far less to lose, and has already shown more flexibility in the adoption of digital payments. We will see a Digital Yuan in the next few years. In another post, I’ll describe why govcoins nearly defeat the entire purpose of blockchain currencies, but could still add value in the form of smart contracts faster transaction times. They will also allow the currency issuer a great method for surveillance on its citizens- something authoritarian governments (or any government?) has shied away from.
Despite the recent selloff (Bitcoin testing its $30k support level), little has changed about the fundamentals of cryptocurrency, other than fewer computers are now mining bitcoin until others quickly pick up the slack. The end state of Bitcoin is that all 21 million (we’re at 18 million mined now, only 3 million to go!) coins will be mined sometime probably in the next ten years. The higher the value of Bitcoin goes, more computers will come online to mine, much like competitors continuing to enter the market until something is no longer profitable. This state of all Bitcoins being mined will be reached with or without the Chinese government’s approval of mining- even if other governments decide to make dumb decisions to ban mining as well. Mining and an increase in the value of Bitcoin are going to happen anyway- why not have your citizens be the lucky wealthy winners of newly minted Bitcoins and not some other country’s citizens? Bitcoin is still being mined at a furious rate in the world’s most free and most wealthy nations. Those nations that continue to welcome cryptocurrency and financial innovation will become even wealthier.