China Has Reason to Be Afraid of Bitcoin
China's widespread crackdown has sparked outrage in the bitcoin community.
China has emerged as a prominent player in this new financial ecosystem, and Beijing's
measures may signal the start of a global regulatory assault on cryptocurrencies and
crypto assets.
This would be regrettable.
While cryptocurrencies have a number of faults, the underlying technology holds tremendous
promise.
China formerly prohibited initial coin offerings, the cryptocurrency equivalent of firms' initial
public sales of stock.
It then took steps to restrict the dealings of Chinese financial institutions with cryptocurrencies
and crypto assets.
The most recent shift is far broader.
All cryptocurrency transactions within the United States are currently forbidden.
In principle, such transactions can be carried out without the knowledge of the government.
However, few Chinese citizens or financial institutions are likely to take the risk of
incurring the wrath of the authorities.
Beijing's moves demonstrate how national governments and central banks are growing increasingly
scared of cryptocurrencies undermining their financial systems and wreaking havoc in other
ways.
They have a legitimate reason to be concerned.
Bitcoin, the original cryptocurrency, was originally used to facilitate unlawful transactions
on the dark web and is now used to facilitate ransomware attack payoffs.
Meanwhile, it has become clear that Bitcoin does not function well as a medium of exchange
for everyday transactions.
Bitcoin's value is volatile, and the Bitcoin network is incapable of processing a high
volume of transactions swiftly or inexpensively.
Rather than that, Bitcoin has devolved into a merely speculative digital financial instrument
with no fundamental value.
The entire value proposition of this item is predicated on its scarcity.
In contrast to fiat currencies, which central banks can print at whim, the computer algorithm
that regulates Bitcoin issuance puts a hard cap on the total number of digital coins that
can be created.
Governments are concerned about the prospect of households investing their money in crypto
assets, leaving them vulnerable to a speculative bubble crash.
China's government clearly did not want any part of this, particularly given the backlash
it is already experiencing for attempting to reduce the speculative bubble in housing
markets that it fostered.
Beijing was also concerned about the impact of cryptocurrencies on its control over domestic
payment systems.
This issue has been demonstrated by the government's attack on Ant Financial and other tech companies
that have consolidated their dominance over domestic retail payments, rendering central
bank money increasingly meaningless.
Beijing is particularly leery of emerging cryptocurrencies known as stablecoins, which
retain a stable value by being backed by fiat currency reserves and may be used in place
of the same fiat currencies for payment purposes.
Another concern was that cryptocurrencies and stablecoins could be used to circumvent
international financial flow limitations.
These restrictions have been loosened in recent years.
However, the government is concerned that unrestricted flows will make managing the
renminbi's currency rate more difficult.
In 2015-16, as China attempted to reign in enormous capital outflows and contain a sharp
depreciation of the RMB, demand for Bitcoin increased within the country as individuals
used it to transfer money out of the country and circumvent official regulations.
Beijing increasingly views cryptocurrencies as vehicles for capital control evasion.
China has also targeted Bitcoin mining—the process by which enormous quantities of processing
power are dedicated to validating transactions on the cryptocurrency's network in exchange
for Bitcoin rewards.
Due to the simple availability of inexpensive energy and computer gear, such mining has
grown in China, making it the global epicentre of activity.
Environmental consequences have been substantial in terms of energy use and computer trash.
With the government in the middle of a power crisis as it attempts to wean itself off nonrenewable
energy, it was evident that Bitcoin mining would not be permitted.
Despite these significant limitations, the blockchain technology that powers Bitcoin
may really have widespread benefits.
Already, the technology is finding applications in other facets of finance.
Without the use of traditional intermediaries such as lawyers and real estate agents, it
will soon be possible to undertake a wide variety of transactions, including the purchase
of a house or car.
Additionally, the rise of cryptocurrencies has led central banks to develop digital counterparts
to their own fiat currencies.
China has already begun conducting these experiments.
Japan and Sweden have also done so, and a number of additional countries are likely
to do so in the near future.
Cryptocurrencies' future as financial assets is uncertain.
However, the revolution they have sparked will make low-cost digital payments widely
available.
If permitted to develop further, these new technologies will also assist expand access
to basic banking and financial services, including for low-income households and those underserved
by established financial institutions.
Advocates for cryptocurrency should take the appropriate lessons from China's crackdown.
Rather of opposing regulation and oversight or saying that technology will enable the
industry to self-police, they should collaborate with governments and regulators to develop
effective legislation.
As a result, the industry will gain increased credibility and stability.
We hope you enjoyed watching and listening to this video, Please let us know your opinion
in the comments area below.
If you found our content useful, please like it and share it with your friends.
Also don't forget to subscribe to our channel and hit the notification bell for more crypto
related contents...