As more and more governments get installed to regulate their currencies, strategic interests in Bitcoin may be the answer to avoiding meddling in financial markets. The drawback: it’s decentralized and largely anonymous, meaning states cannot exert complete control over Bitcoin.

Financial authorities on every continent are scrambling for a toehold and strategic interests in Bitcoin as the instability of traditional government-backed currencies becomes clear.

Like Bitcoin investment, if you are planning to trade Ethereum, you may also consider using a reliable Trading Platform. 

It is worthwhile for these central players to investigate how crypto-currencies can help them manage specific national interests in global financial policymaking. Despite internal disputes, China’s government has successfully leveraged its position as the world’s second-largest economy to secure a dominant role in the ongoing global currency war. The Chinese yuan is already an intermediary currency for settling international transactions. 

The Chinese are understandably concerned about losing control of their domestic financial markets as the impacts of capital flight and foreign investment dilutes their capacity to direct market forces.

As a result, China’s Central Bank is turning to Bitcoin and other cryptocurrencies as a tool for capturing capital flows generated by emerging technologies like mobile computing, social networking, and distributed manufacturing. In effect, Beijing seeks to use Bitcoin to secure global strategic interests.

 Using mobile phones as crypto-currency wallets allows Beijing to manage market disruptions by issuing Bitcoin-denominated bonds, conducting monetary operations in secrecy, and cashing in on bond market volatility.

A new global market for government bonds denominated in Bitcoin is emerging, which gives Beijing more economic options during times of financial crisis. Let’s discuss everything you should know about the strategic interests related to bitcoin. 

Bitcoin’s strategic import lost in “crypto” noise

As a reserve currency, China’s goal is to maintain the credibility of its currency – and the global monetary system – by defending its exchange rate. Unfortunately, the yuan has fared poorly in recent years, losing almost 30% of its value when measured against the dollar.

If a significant country besides the US, such as China, wants to play a central role in managing global monetary affairs, it needs an effective anchor. Bitcoin is seizing that role as a response to capital flight from currencies like the yuan.

Securing strategic interests in Bitcoin

The details of how the Chinese use bitcoin to move money beyond Beijing’s reach are complex and obscure. A trickling source of information is the frequent rumbling from Beijing about the “purchase” of bitcoin from Chinese markets. In addition, the Chinese financial press often reports that China’s bitcoin exchanges are under attack, but most of these stories do not explain how the attacks work.

Unlike in many other countries, Chinese banks are not directly financing bitcoin businesses. If a bank directly lends to a Bitcoin firm, its operations must be highly regulated and thoroughly vetted by authorities in Beijing. Instead, according to a source at one sizeable state-owned bank that lent money to bitcoin firms, the US$40m loans have come on the global bond market and are denominated in foreign currencies like euros or yen.

Key arguments

1. Classification: Bitcoin is not a crypto-currency, and the US government does care about regulating it. The US government believes that bitcoin and other cryptocurrencies are helpful to promote national interests in the global economy. The Chinese financial authorities also believe that bitcoin is an ideal “financial weapon” to fight problems related to traditional currencies.

2. Advantages: Compared with other central banks, the Chinese government is well-placed to profit from the volatility in its currency. The lack of transparency in the yuan exchange rate makes it difficult for banks to predict how much they will save or lose by moving money in and out of China. It also complicates their ability to make capital markets loans like bonds, which are now just a tiny part of total lending.

3. Financial sovereignty: China’s currency regime is a crucial part of its plans to reshape the global trading system. If a major country like China wants to play a central role in managing global monetary affairs, it needs an effective anchor. Financial sovereignty means that whatever volatility happens in China’s currency market, the yuan will not be abandoned as a legitimate unit of account for global transactions.

4. Incentives: The Chinese authorities want to create an open-ended incentive for people and businesses to hold the yuan rather than simply converting it into dollars whenever they feel more comfortable. They hope this will (i) increase their control over the financial system and (ii) give them greater flexibility when managing the balance of payments crises. Bitcoin mining, investment and trading are a few incentive models created by bitcoin since its inception. 

5. Global reserve: Bitcoin is the strongest contender in replacing gold in terms of the global reserve, and if bitcoin receives mass adoption in this decade, it can overtake gold.  

6. Bitcoin also will support China’s geopolitical ambitions:

– If a major country such as China wants to play a central role in managing global monetary affairs, it needs an effective anchor. Bitcoin could become that anchor for China.

– The use of Bitcoin will lead to a complete change in the international monetary system, which is the only way for Beijing to escape the debt crisis.

How is bitcoin beneficial to global trade?

China’s Ministry of Commerce is working to facilitate the use of Bitcoin in international trade, according to a spokesperson for the National Internet Finance Association of China.

The efforts seem to gather steam as media outlets report that the top Chinese online payment provider Alipay will tap into Bitcoin’s potential in cross-border transactions. China will integrate into its payment system one of the most influential innovations in global finance over the past five years.

Cross-border transactions require multiple parties with different needs and requirements to get involved. There is no single source of truth when it comes to ensuring that each party involved receives what they are supposed to at the right price and time.

Closure

As China’s economy slowed down in the second half of last year, the global price of bitcoin and other virtual currencies has risen. This development is partly attributable to the yuan weakening against major currencies.

As Chinese investors and businesses seek to exploit these arbitrage opportunities, they have begun converting their yuan into bitcoin. China’s top leaders do not want to cede strategic economic ground to the US government or any other country – whether in monetary affairs or any other field. 

Economic power: China has become a global juggernaut because it opened its markets to foreign goods, services and capital flows. The government can continue this integration by allowing cross-border use of Bitcoin (and virtual currencies).

Strategic interests in Bitcoin article and permission to publish here provided by Jean Nichols. Originally written for Supply Chain Game Changer and published on November 17, 2022.

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