China Cracks Down on Cryptocurrencies

The Chinese Communist Party (CCP) is all about control. In the well-known words of Chairman Mao:

Every Communist must grasp the truth, “Political power grows out of the barrel of a gun.” Our principle is that the Party commands the gun, and the gun must never be allowed to command the Party.

These days political power is linked to economic power and control of information, as well as raw military firepower. Cryptocurrencies have assumed financial importance and they entail information processing and tracking.

On the other hand, a key driver for cryptocurrencies is precisely to escape from the domination of big central authorities, such as the CCP. Proponents of crypto revel in the fact that anyone with a PC can get in on “mining” and that the crypto universe does indeed operate on the web as a largely democratized enterprise. Anybody can transact large sums with anybody, with a moderate degree of anonymity.

These two different visions of life collided on Sept. 28 when the Chinese government banned nearly all crypto-related transactions:

China’s central bank said on Friday that all cryptocurrency-related transactions are illegal in the country and they must be banned, citing concerns around national security and “safety of people’s assets.” The world’s most populated nation also said that foreign exchanges are banned from providing services to users in the country.

In a joint statement, 10 Chinese government agencies vowed to work closely to maintain a “high pressure” crackdown on trading of cryptocurrencies in the nation. The People’s Bank of China separately ordered internet, financial and payment companies from facilitating cryptocurrency trading on their platforms.

The central bank said cryptocurrencies, including Bitcoin and Tether, cannot be circulated in the market as they are not fiat currency. The surge in usage of cryptocurrencies has disrupted “economic and financial order,” and prompted a proliferation of “money laundering, illegal fund-raising, fraud, pyramid schemes and other illegal and criminal activities,” it said.

Offenders, the central bank warned, will be “investigated for criminal liability in accordance with the law.”

The Chinese government will “resolutely clamp down on virtual currency speculation, and related financial activities and misbehaviour in order to safeguard people’s properties and maintain economic, financial and social order,” the People’s Bank of China said in a statement.

Well, those are the bare facts. It’s good to know the CCP is so diligently safeguarding people’s assets and public order. And as noted, Mao’s successors would not naturally favor systems that allow people to just do what they want to do, free from guidance from the Party. But inquiring minds want to know or at least speculate further regarding the reasons for this move and its consequences.

Brian Liu and Raquel Leslie highlighted two other motivations for this crackdown. One motivation  concerns China’s desire to launch its own state-controlled digital currency. This will give the government heightened ability to track every single transaction by every single user. It would also provide China with a new means of exerting influence over other nations and corporations:

The ban comes as the People’s Bank of China (PBOC), China’s central bank, is piloting its own digital currency, the eCNY or “digital yuan.” Unlike private cryptocurrencies, the eCNY is issued directly by the central government and is being designed to provide the PBOC with near-real-time financial data on user transactions. Some observers fear that the eCNY will be used as a tool to strengthen the Chinese Communist Party’s domestic surveillance. Others worry that the eCNY will be used to retaliate against international companies that speak out on human rights issues. Fan Yifei, a deputy governor of the PBOC, announced last week that the eCNY has entered a “sprint stage” ahead of the February 2022 Winter Olympics in Beijing.

Another motivation may be to help prevent wealthy Chinese from taking their money abroad:

The crypto ban may also be intended to deter capital flight. Despite past crypto crackdowns and strict capital controls, wealthy Chinese have used cryptocurrencies to funnel more than $50 billion overseas in 2020. As China is in the middle of an economic slowdown that has been exacerbated by other regulatory crackdowns on the tech and education sectors, China may be redoubling its efforts to ward off skittish entrepreneurs from exporting their money overseas.

Will this crackdown fully succeed? Many observers doubt it. They think that people will find ways to do what they want to do, using platforms that are hosted outside China.

As for the digital yuan, well, it kind of goes against most of the reasons people have gravitated to crypto. It represents a move back to government control and surveillance. It is not really a “crypto” currency at all, but simply another form of regular money.  It could get traction, however, in international trade among countries who have reasons to try to escape from the current U.S. dollar dominance. Also, China could hand out its digital currency like candy to impoverished nations, to get them on board. Millions, maybe billions of people live without regular banking access, and so a medium of exchange and store of value that requires only a cell phone to move funds around town or around the world could be attractive. At any rate, count on China to make the digital yuan a big “thing” for international visitors due at the February 2022 Olympics.

The price of Bitcoin took this news in stride. It continues to bounce around in the same $40,000-$50,000 range that it has been in for the past three months. And being banned by China is not a death-knell for a financial entity.  Indeed, it could be a contrarian indicator. Consider that China has also banned Youtube, Facebook, Google, Instagram, Pinterest, and even (because of his uncanny resemblance to President Xi) Winnie the Pooh.

Government Elimination of Perceived Vices

My post yesterday was about video games, prompted by the CCP legal restriction on video games for children. To enforce this rule, the government is making a list. Any adult playing these online video games will have to register with their real name. Is this a regulation of an addictive substance for minors, like we have for cigarettes, or is it progress toward managing the leisure time of males?

Before the Communists came to power (and before video games existed), previous Chinese government administrations had tried to ban another addictive form of recreation: smoking opium. The British famously did not help with this endeavor, but the British imports of opium ended years before the CCP crackdown. Where others had failed, the CCP practically eliminated opium from China in about 3 years. For my information, I’m drawing partly from a honors thesis on this topic.

The CCP started the relentless march toward eliminating opium in a clever way. They gathered information before announcing how ambitious the program would be. It started with making a list.

There had been previous attempts to send soldiers to destroy poppy fields (hello, 21st century?) but never in a coordinated enough way to stamp out supply. Police had raided opium dens in the cities, but nothing ever worked. Addicts were going to buy the stuff as long as it was being produced, and producers were going to grow the stuff as long as it was profitable. The CCP pulled off a coordinated attack on both producers and consumers in the entire country at the same time.

After a period of record-keeping, the CCP started forcefully addressing opium both in the rural areas where it was both produced and in the cities. There were different strategies for all the unique regions of China.

Those who did not cooperate knew that prison or immediate execution could result. The CCP, along with civilian volunteers, provided rehabilitation for some addicts who were willing to register themselves as offenders. It was acknowledged that kicking an opium addiction is hard. When possible, the government manipulated taxes and subsidies in such as way that farmers would choose to switch away from cultivating opium. The use of force was a reason for the success of the campaign, but people who were willing to cooperate often could find a way to transition away from their old habits.

The Communists did not just write laws and send soldiers. They held rallies that sound to me a lot like religious revival meetings. They galvanized millions of people to not just distain addictive drugs but to become volunteers for the cause. I would assume that many Chinese parents didn’t like opium in 1949 but were not yet so fervent as to become police informants. That changed in 1950. Everyone wants to have a moral cause. For some people today, it’s global warming. For millions in 1950’s China, it was eliminating opium distribution and addiction.

In one of my posts on Afghanistan I speculated that it is self-defeating for Americans to purchase illicit opium as consumers and also task our military with stamping out its production by force. This week when I read about the opium campaign, I found that a related message was used in 1950. The CCP presented opium abstinence as a way to defeat America in the Korean War.

I will be curious to watch developments concerning screen time and China. There is much to be determined. As Vice reported this week, ‘It’s unclear how the government will define “sissy pants”…’

Dan Wang’s 2020 letter on China

Dan Wang is a writer who currently lives in Beijing. He’s released another long letter about what is going on in China. I’ll share the part that caught my attention.

Waiting politely in line is a pretty strong norm in America. I had heard from several sources that Chinese norms for waiting in an orderly line were weak. Here’s an update on that:

And for years, Xi has emphasized following clear rules of written procedure, under the rubric of “law-based governance.”  Since then, the state has improved regulatory systems, for example in setting clear standards for license approvals and in securities and antitrust regulation. The state has removed some of the arbitrary aspects of governance, thus bringing serious enforcement actions following the passage of relatively clear regulations. That has improved facts on the ground. Companies and lawyers tell me that a decade-long effort by the State Council to ease doing business has yielded real results. Obtaining business licenses no longer requires a relentless pace of wining and dining, and has instead become close to a matter of routine. I haven’t been able to verify this fact for myself, but one of my friends told me that the office of the National Development and Reform Commission used to be ringed by some of the fanciest restaurants in Beijing, offering mostly private rooms; many of these restaurants have now closed, following the professionalization of business approvals.

The lived experience of being in Beijing has improved in parallel. I remember what a nightmare it was to buy a high-speed rail ticket for the first time years ago, which involved lots of yelling and multiple people cutting in line. Today, I purchase one on my phone, with no need to obtain a paper ticket, and the lines to board are more or less orderly.

China is changing.

Incidentally, I tried to start a company when I was about 19 in New Jersey. Applying for a tax ID number for my sole proprietorship was quick and easy. All I had to do was fill out a form and pay a small fixed fee to some government office.