Why is China trying to kill off bitcoin?

Bitcoin has suffered a number of blows from various angles in recent weeks. There’s rising alarm over the cryptocurrency’s carbon footprint. Its most high-profile backer, Elon Musk, has wavered over it. But the most painful swipe came this week from the Chinese government.

Regulators in Beijing on Wednesday tightened restrictions on its domestic financial institutions, warning banks and other financial companies not to accept cryptocurrencies as means of payment and forbidding them from offering crypto-related services and products.

The new controls sent the traded value of the tokens down by as much as 30 per cent.

Many national financial authorities are wary of bitcoin and cryptocurrencies in general, but China stands out in its hostility and the extent of its clampdown on the ecosystem.

But why is Beijing so opposed to these tokens? And could the opposition of the world’s second largest economy prove fatal to bitcoin?

To some extent the antipathy is probably based on consumer protection concerns. The regulators’ statement this week warned that Bitcoin “is not a real currency” and that its performance was based on “speculation”.

In recent years China has periodically witnessed vast and destabilising stock market bubbles and there is a tendency of ordinary Chinese people to treat equities as form of legalised gambling. There have been signs of them speculating on bitcoin in a similar way.

There is also a clear environmental motivation from Beijing.

Around 65 per cent of bitcoin “mining” takes place in China, using large quantities of electricity from coal-fired power stations. The cryptocurrency is thus making it harder for China to decarbonise.

The province of Inner Mongolia earlier this year pledged to shut down bitcoin mining for environmental reasons and this week asked residents to report neighbours if they suspect they are engaged in the practice.

Yet these two motivations are almost certainly eclipsed by the desire by the Chinese authorities to retain financial control.

Digital finance is extremely advanced in China, much more so than in the west, with hundreds of millions of Chinese using their mobile phones to make payments and storing funds in online app wallets like WeChat Pay and Alipay.

Beijing is wary that this digitisation of cash could erode its control of the domestic financial system and the Chinese economy’s money supply.

China has grown its domestic economy in recent decades, and certainly since the financial crash of 2008, by channeling the money held by ordinary depositors in state-owned banks to high-investing state-owned companies in the form of ultra-cheap loans.

Those depositors have been seeing their savings eroded in real terms because the interest rate is lower than the rate of inflation.

But they are prevented by national capital controls from moving their money out of China, where they might get better returns.

The danger, from Beijing’s perspective, presented by global online cryptocurrencies like bitcoin is that they could enable people to evade those controls.

“Chinese capital controls can be challenged by cryptocurrency purchases in the country and transfers out of the country,” says Adam Reynolds of Saxo Markets.

“Avoiding use of them in the country is essential to maintaining capital controls.”

Cryptocurrencies could also starve the domestic state-owned banks of deposits, undermining the ability of government to pump up GDP growth through cheap loans to business.

This official concern about retaining financial control seems to have been responsible for the cancellation of the planned floatation of Jack Ma’s Ant Group digital payments service (which owns Alipay) last year.

It also probably explains why the People’s Bank of China has been one of the first central banks in the world to develop a new public sector digital currency. This will give people an official alternative to private digital currencies – and may well ultimately become the only option available to the Chinese people.

There’s one other important factor too. One of the reasons why libertarians like bitcoin is that it offers a degree of privacy for users. Yet it’s that very privacy that also arouses the antipathy of the authoritarians in Beijing, who don’t like the idea of their citizens moving money around shielded from official oversight.

As to whether China’s hostility will crush bitcoin or not, that depends (rather ironically) on how many of its users actually value the privacy element.

If they do, the hostility and controls of a repressive regime like Beijing could conceivably add to its allure and support the price.

It’s notable that, despite China closing its bitcoin exchanges in 2017 (which had accounted for the majority of global trading) the cryptocurrency continued to grow in the subsequent years, with the value of all bitcoins hitting $1 trillion this year.

Yet if it turns out that bitcoin users – despite the claims of some users – actually care more about the ability to connect the tokens to the mainstream financial system, its future might be bleak in China.

And if other national regulators decided to follow China’s lead, it’s certainly not impossible that this could bring an end to the cryptocurrency boom worldwide too.