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Currency and control: why China wants to undermine bitcoin | China | The Guardian

Few would argue that China’s recent crackdown on cryptocurrency trading and mining has contributed to the recent drop in the value of bitcoin and other cryptocurrencies.

But as the debate continues over whether cryptocurrency volatility is a sign of fundamental weakness or simply a bump in the road, experts see the initiatives emerging from Beijing as a sign of China’s attempts to incubate its own incipient electronic currency and restart the international financial system.

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The People’s Bank of China aims to become the first major central bank to issue a central bank digital currency. while the pboc’s counterparts in the west have taken a more cautious approach, it has held trials in several major cities, including shenzhen, chengdu, shanghai, and hangzhou.

The benefits of an electronic currency are immense. As more and more transactions take place using a centrally controlled digital currency, the government gains more and more ability to monitor the economy and its people.

The launch is also seen as part of Beijing’s push to weaken the power of the US dollar and, in turn, that of the Washington government. China believes that by internationalizing the yuan it can reduce its dependence on the dollar-dominated global banking system, just as its Belt and Road initiative is building an alternative network of international trade.

The alarm in Western governments is such that the threat posed by the digital yuan, which could put China beyond the reach of international financial sanctions, for example, was discussed at last month’s g7 meeting.

But another crucial motivation is the growing alarm in Beijing over the size of the crypto industry in China, where a large amount of cryptocurrency was being “mined” until the recent crackdown.

The threat of an unregulated alternative monetary system emerging from blockchain technology is a clear and present danger to the communist party, according to observers.

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jim cramer, a former hedge fund manager and business expert for cnn, said the beijing government “believes it’s a direct threat to the regime because…it’s out of their control.”

Seen from the perspective of central banks, cryptocurrencies are a threat to financial stability, argues Carsten Murawski, a finance professor at the University of Melbourne in Australia, and if digital currencies are to be developed, the authorities want the control.

“all the central banks want to control them: the pboc, the united states federal reserve, the european central bank”, he says. “They have no interest in parallel currencies floating. some countries may not be too worried, but in china it might be more worrying.”

on thursday, fan yifei, deputy governor of the pboc, said china was concerned about the threat posed by these digital currencies developed outside the regulated financial system. “we are still quite worried about this issue, so we have taken some measures”, said a fan.

Bitcoin’s value soared to a record earlier this year of nearly $65,000, after being worth less than $10,000 in the middle of last year, sparking a frenzy of interest in cryptocurrencies as an investment to hedge against more traditional assets. such as stocks and bonds. Comments from Elon Musk, the head of Tesla, that he would not allow bitcoin to be used to buy his cars added to the volatility and it is now trading in the low $30,000s.

but that has also attracted the attention of authorities such as those in china concerned about the largely unregulated market.

“In many countries it’s completely unregulated, it’s the absolute wild west,” says Professor Murawski, who also pointed out that there may not be the usual legal avenues to follow if people think they’ve been scammed.

“so that’s another reason to control cryptocurrencies: to protect the consumer. uninformed investors could lose a lot of money.”

In China, the implementation of the digital yuan accelerated this year along with the ban on cryptocurrency trading. In May, the PBOC banned banks from doing business with or providing accounts to anyone who trades in cryptocurrencies. It was followed by a ban on bitcoin mining in several provinces, including Sichuan. On Tuesday, China’s central bank warned companies not to help cryptocurrency-related businesses as it shut down a software company for its alleged involvement in digital currency transactions.

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fan said on Thursday that cryptocurrencies such as bitcoin had become “tools for speculation” and presented potential risks to financial security and social stability.

Online businesses have been allowed to flourish in china, but the beijing government has been relentless in curtailing them if they seem to be getting too big to control. Jack Ma, the high-profile billionaire founder of the Alibaba empire, abruptly disappeared from public view for months last year, with his company fined and ordered to downsize. Regulators have also targeted tech giants tencent and bytedance, the respective parent companies of wechat and tiktok, this week ordering ride-sharing app didi removed from app stores and launching an investigation.

dong shaopeng, a senior research fellow at renmin university of china in beijing, said some online industries, such as cryptocurrencies, had reached an “alarming” size. “It is time for the government to block such transactions from sources of capital, so that money stops flowing from real industries to those transactions,” Dong told the Global Times.

prof murawski says yet another reason china wants to clean up the crypto business in its own patch is the possible threat to the electrical system.

The process uses a large amount of electricity and tends to be installed in areas where cheap power is available. in china that has included sichuan, which benefits from abundant and cheap hydropower. But as profits rise thanks to the popularity of cryptocurrencies, governments may be less willing to allow miners to make huge profits from a system that uses so much electricity that it can threaten the stability of the power grid.

The crackdown on crypto is not limited to China. Britain’s financial regulator said last month that Binance, one of the world’s largest cryptocurrency exchanges, cannot conduct any regulated activities and issued a warning to consumers about the platform.

But crypto remains an extremely attractive asset for many investors who see nothing to fear from a Chinese crackdown and that mining will simply migrate to other more accommodating jurisdictions with little market impact.

michael saylor, co-founder of business intelligence firm microstrategy and one of the biggest proponents of cryptocurrency, recently purchased an additional 13,005 bitcoins for approximately $489 million at an average price of $37,617 per coin. And Silicon Valley venture capital firm Andreessen Horowitz just launched a $2 billion crypto fund and announced that it was “radically optimistic about the potential of cryptocurrencies to restore trust and enable new kinds of governance.”

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