Bitcoin Swings From Bubble Crisis To China Crisis

The cryptocurrency set surely has its theories. It’s all about fraud, some argue. Scandals in Japan, South Korea, Thailand and elsewhere in China’s backyard have had regulators in a banning mood. First trading and initial coin offerings. Next, it could be scrapping bitcoin mining altogether.

The cryptocurrency set surely has its theories. It’s all about fraud, some argue. Scandals in Japan, South Korea, Thailand and elsewhere in China’s backyard have had regulators in a banning mood. First trading and initial coin offerings. Next, it could be scrapping bitcoin mining altogether.

It’s carbon emissions, stupid, others say. Bitcoin mining is among humankind’s most electricity-intensive pursuits. Runaway energy consumption has officials scrambling to regain control of excess capacity. On April 9, China’s National Development Reform Commission said it might list bitcoin production among activities guilty of “wasted resources, polluting the environment, being unsafe or not adhering to law.”

Still, others insist speculative bubble worries are paramount. Last year’s propulsive bitcoin rally—to nearly $20,000—and subsequent crash has Beijing in risk-containment mode.

But the most likely catalyst is control, something on which the Communist Party puts a premium above all else.

Over time, the market will, in theory, sort out the volatility and trust deficit that clouds blockchain assets. Yet that presents a paradox for China, once home to the majority of bitcoin trades by some accounts. The more efficient and pervasive cryptocurrencies become, the easier it is for the swelling ranks of billionaires to spirit money out of China. The epic capital outflows, loss of tax revenues and the ability of tycoons and crooked politicians to evade controls has Xi’s team losing sleep.

But then, Xi’s quarrel with bitcoin is emblematic of his stated effort to morph his casino of an economy into something more stable and predictable.

“Stated,” because even after six-plus years of Xi’s reforms, there’s still too much Las Vegas in mainland stocks and bonds to make China Inc. ready for primetime. The reason: Beijing wants to have things both ways—a gamble that isn’t quite paying off.

China has tried to walk a tightrope, clamping down on financial dealing but letting crypto miners do their thing. The hope is to keep China in the blockchain game, given its vast potential. Not only in terms of job and wealth creation, but also dealing a blow to the dollar’s stranglehold on global finance. Yet Xi’s team also wants to control things as tightly as possible. It’s a seemingly impossible balancing act.

Of course, China could go the other way and reform the system. It could create a regulatory framework to ensure transparency, greater investor protection and clear policies to deal with hacking and other shenanigans. Rather than dealing with the symptoms, Beijing could make itself part of the solution.

Why not prod crypto exchanges to fortify the management and maintenance of customer property, including private-key procedures? Regulators could require exchanges to keep net assets on hand equivalent to what’s needed in case if cyber intrusion. Figuring out countermeasures against crypto bourses going bust should be a priority. Instead of doing the heavy lifting, though, China is punting.

Of course, bitcoin may be beyond redemption. Still, Beijing’s approach will sound familiar to foreign punters trading shares in Shanghai and Shenzhen. For all Xi’s talk of giving markets a “decisive” role in policymaking, his tenure is more notable for putting the cart before the proverbial horse.

All China’s lobbying to get stocks included in MSCI’s indices paid off in 2018, pulling even more foreign money its way. It was the next logical step after its 2014 success in opening a Hong Kong-Shanghai stock-connect scheme (following by a Shenzhen link in 2016). Yet none of these moves is making Chinese companies more transparent, shareholder friendly or socially responsible.

These links, in other words, have done more to export China’s imbalances than import Joseph Schumpeter’s “creative destruction” dynamics. One might say the same of Xi’s titanically large “Belt and Road” project. Envisioned as a way to export China’s soft power, it’s done more to share overcapacity, opacity, pollution and debt with the developing world.

Nor has the yuan’s inclusion in the International Monetary Fund’s “special drawing rights” program given Beijing the expected nudge. That honor was extended to Xi’s government in 2016 after years of lobbying by then-central bank Governor Zhou Xiaochuan. He saw inclusion in the IMF’s top-five currency club as a way to force the party to open the capital account, increase convertibility and wield less control over markets.

This one step forward hasn’t kept Beijing from taking backward ones. Clamping down on press freedom and the internet, beyond anything Xi’s immediate two predecessors fathomed, is turning China into more of a black box. Early efforts to curb shadow-banking excesses have given way to a rush of new stimulus to keep growth north of 6%.

All this is increasing Beijing’s risk profile, even as Xi purports to be squeezing financial risks out of the system. This, too, will sound familiar to the crypto crowd watching China attempt to balance the pros and cons of being a blockchain leader.

China, of course, has seen two massive waves of wealth creation over the last two decades–first property, then a stock boom. It’s interesting that the latter entered its heyday in 2015, just as bitcoin was going mainstream. It fit with the zeitgeist about the potential for average people to become spectacularly wealthy seemingly overnight.

This get-rich-quick ethos is hardly unique to China, though its golden age is unfolding in the social media era. And given China’s scale–the second biggest economy with 1.4 billion people–there are more rags-to-riches tales to tell, to tweet about and to Instagram.

Add in China’s great blockchain contradiction. Though trading and ICOs are banned and banks can barely get even tangentially involved, China is crypto mining central (roughly 70% of all activity). And that might be about to change. China’s economic planner, the earlier-mentioned NDRC, may pull the plug, literally, on or after May 7.

That miners shifting elsewhere. Beijing-based Bitmain Technologies, the market leader, is moving operations to the U.S. and Canada. BTC.Top, another major mining pool, is opening facilities in Canada.

Yet China’s love-hate relationship with the casino-like crypto game is part of a bigger pattern. Treating the symptoms of billionaires’ desire to get spoils out of the mainland ignores the underlying impulse. If Beijing were building a more stable and trusted financial system, they might stay in yuan assets. Not mining for new ones.



By William Pesek


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