On the part of the Chinese central Bank, surprisingly open tones can be heard against Bitcoin. Why China can’t keep Bitcoin small forever, what a gradual opening can look like and what impact this could have on the crypto market.
China has a difficult relationship with Bitcoin and the crypto economy. Even before the ICO bubble burst in 2017, China banned trading and paying with cryptocurrencies. The loss of control was too great for the government to pull the strings. Now, about four years later, a lot has happened in the crypto sector. In the meantime, it is large banks and stock exchanges that enable regulated crypto trading, especially in the West. The state has understood that Bitcoin is not anonymous. A bitcoin held by a central depository is just as good or bad to control as a traditional equity fund.
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The recent statement by China’s Central Bank that Bitcoin can be seen as an “investment alternative” exudes the cautious hope of a crypto opening. Not an opening, as crypto enthusiasts imagine, but an opening that could allow limited legal participation in Bitcoin and Co.for the Chinese population in the future.
You can ban Bitcoin though, it just does not work so well
The idea of a Bitcoin ban is more relevant than ever. For example, Turkey has banned paying with Bitcoin and Nigeria and Venezuela have banned Crypto Trading. These and other countries, which are currently taking action against cryptocurrencies, agree that their national currencies are affected by massive inflation and are devaluing their external value sharply. Consequently, capital flight is particularly great in these countries. The fact that states intervene to prevent an even worse devaluation is quite understandable from this point of view.
However, the effectiveness of these prohibitions is questionable. So it is known that detours are repeatedly found by the population to circumvent the prohibitions. The states must also be aware that they are doing massive damage to themselves in the long term. After all, many of the future business models will be based on cryptocurrencies. Banning cryptocurrencies is a little bit like turning off the Internet. Either of Statementwhich, mind you, comes from SEC Commissioner Hester Peirce and not from an anarchist Bitcoin maximalist.
The fact that a Bitcoin ban threatens significant negative consequences is therefore no longer a secret knowledge even among states. If even the powerful U.S. Securities and Exchange Commission (SEC) says that it would be “idiotic” to ban Bitcoin and you don’t think it’s realistic, then every other state should think very carefully about whether it wants to stick to a ban. A drastic restriction of cryptocurrencies that goes beyond “normal” regulation is just a desperate and short-term solution to mask other symptoms.
China’s way back to the crypto market
In contrast to Turkey or Venezuela, the Chinese Renminbi does not struggle with devaluation, quite the contrary. The government is rather confronted with the problem that the domestic currency appreciates too much and thus makes exports more expensive. In surveillance-infatuated China, worry about loss of control is likely to be the main motivation for crypto bans. The fact that cash flows cannot be recorded centrally must be prevented at all costs, see Digital Central Bank Money (CBDC). Accordingly, the monopoly status of the e-yuan being tested must be secured. Cryptocurrencies in the sense of a currency should therefore have no chance in China so quickly. However, it looks different if, as is now customary with Bitcoin, one emphasizes not the currency aspect, but the asset aspect. So it is by Li Bo, Deputy Director of the Central Bank of China (PBOC)):
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They are basically no currency. The main role we see for crypto assets in the future is that of an investment alternative.
Li Bo, Deputy Director of the Central Bank
This sentence says a lot about understanding Bitcoin and allows speculation that China could allow Bitcoin as an asset. As a freely convertible currency, however, Bitcoin would remain prohibited. Should mean that the possession of cryptocurrencies via private key remains prohibited, but not the acquisition of Bitcoin financial products or Bitcoin, which are centrally stored by a regulated entity. Similar to PayPal from the USA, it could be conceivable that, for example, Alipay or Tencent would be granted a state license to offer crypto trading via Custodial wallets, under the same KYC conditions as a bank account opening and without the possibility of sending the cryptocurrencies to an unverified wallet.
No economic power without platform economics
In this context, it is conceivable that China would like its people to contribute to the value creation of the crypto sector. Without economic freedoms and various investment options, the Chinese national wealth will not be able to grow to the extent necessary to position China as the No. 1 economic power. In this context, limited access to blockchain platform solutions is also conceivable, in which one approaches the payment aspect in parts via utility tokens. These blockchain platforms are again likely to be regionally limited and thus controllable. State nodes such as the Blockchain Service Network (BSN) can very well create decentralized structures that allow innovative decentralized platform solutions, but without giving up too much control.
After all, there is a Chinese counterpart for almost every major American Internet platform. Just think of Amazon and Alibaba, or Google, and Baidu. It is therefore quite possible that China will create its own blockchain protocols. These could then try to map all the services or smart contract functionalities of the “free” blockchain solutions.
Caution with too high expectations
If the Chinese state considers a slow opening for the “investment market” of cryptocurrencies, then this is a very positive signal for the prices of cryptocurrencies. Due to the legal and regulated environment, a great deal of free capital from Chinese households and companies would also enter the market. Given the high growth rates, this should not only stabilise prices sustainably, but also drive them further north.
However, it is still too early for euphoria. The Chinese state will be careful not to open the floodgates for the crypto market from one day to the next. The cautious statement of the PBOC is only a first step, which many still have to follow until something really happens.
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