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Why China’s Shift in Tone on Bitcoin Is a Major Event for the Industry

Pragmatism will eventually prevail regarding Bitcoin.

Pragmatism will eventually prevail regarding Bitcoin.

Illustration by Sylvain Saurel

hina’s history with Bitcoin is mixed. For several years, China was one of the world’s largest buyers of Bitcoin. Then, in 2017, things changed. The euphoria that gripped the Bitcoin market began to worry the Chinese authorities.

The madness of ICOs (Initial Coin Offering), a new way of raising money for companies in the cryptocurrency world by issuing digital tokens, pushed China to take action.

As always, the Chinese government has not been half-hearted. ICOs were banned in China. A little later, the Chinese authorities even banned local cryptocurrency trading platforms. To justify these strict decisions, China put forward concerns about financial stability.

While this didn’t stop Chinese companies from continuing to dominate mining on the Bitcoin network, it has at least slowed down Chinese investors.

As of mid-2019, the People’s Bank of China (PBOC) was still supporting this position. The goal for China was still the same: to try to control the rise of decentralized and unregulated platforms in the cryptocurrency world.

However, these bans have simply shifted the problem.

Many Chinese users did not give up their activities related to the cryptocurrency world. They have continued to buy Bitcoin via platforms located in Hong Kong or Japan. The fact that the PBOC sees virtual currencies as illegal, because they are not issued by a recognized monetary institution, obviously did not change anything at the time.

Again, we see how difficult it is for governments to ban the use of Bitcoin. The decentralization of Bitcoin is something that makes such a ban virtually impossible to enforce effectively.

The story between China and Bitcoin took a new twist on April 19, 2021. At a panel hosted by CNBC at the Boao Forum for Asia, Li Bow, the deputy governor of the PBOC, referred to Bitcoin as an “alternative investment”. This is a complete change of tone from China’s previous positions:

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“We regard Bitcoin and stablecoin as crypto assets … These are investment alternatives.”

Li Bow then went on to explain that Bitcoin could not be considered a currency, however:

“They are not currency per se. And so the main role we see for crypto assets going forward, the main role is investment alternative.”

Nevertheless, this change in position regarding Bitcoin shows that China realizes it cannot continue to hold this banning position forever.

The rise of Bitcoin in recent months is changing China’s position. More and more institutional investors are buying Bitcoin in the United States. Large companies are making it their reserve assets like MicroStrategy or Tesla. Coinbase has just completed its IPO in the U.S. Finally, American banks are going to offer Bitcoin to their clients.

So China does not want to be left behind in this field. As is often the case, pragmatism will prevail in the end.

Just as the United States is thinking about defining clear and precise regulations for Bitcoin, China wants to go down this path, as Li Bow explains:

“Many countries, including China, are still looking into it and thinking about what kind of regulatory requirements. Maybe minimal, but we need to have some kind of regulatory requirement to prevent … the speculation of such assets to create any serious financial stability risks.”

Having failed to ban Bitcoin, China will therefore likely seek to take advantage of Bitcoin in the future by regulating its use. This is a major step forward for the entire industry.

More and more governments will eventually take this kind of position. Bitcoin is becoming mainstream, and it becomes unthinkable to try to ban its use when you are a major world economic power. Only countries under totalitarian regimes where hyperinflation is taking its toll will continue to go down this dead-end road.

I’m thinking of Turkey, whose central bank has just banned payments in Bitcoin and cryptocurrencies.

For China, Bitcoin could also be a weapon giving it a chance to challenge the supremacy of the U.S. dollar over the world. Bitcoin would add to its e-RMB, which is already being tested in several major Chinese cities.

Well aware that the current financial system is in the hands of America, China will try to move the battle to a new playing field: that of digital currencies. With its e-RMB and a new, more open stance on Bitcoin, China is advancing its hand.

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