China: is Bitcoin comeback behind the corner?5 min read
Just as China does not want to give up the advantages of programmable money, it also does not want to allow itself to fall behind the West in other Web 3 sectors. Especially since it can only suppress the demand from its own population to a limited extent in the long term and is dependent on economic growth.
This should explain why China repeatedly allows a certain openness towards crypto applications. For example, on January 1st this year, China launched a state-controlled NFT marketplace. The state “blockchain” called Cultural Protection Chain is used for this. Also speaks The market regulator of the Chinese province of Hainan advocates an innovation-open regulatory approach for NFTs by underlining their potential.
The rebranding of NFTs
However, the term NFTs is avoided, instead speaking of “digital collectibles”. Due to the crypto ban, these can logically only be purchased with renminbi.
Of course, this has absolutely nothing to do with an open and decentralized blockchain system. In the form of a private blockchain solution, the state-owned companies have full control. The same applies to the Chinese state’s intensive metaverse efforts, which should primarily be based on the XR dimension and not on the principles of an open digital economy.
Crypto: More of a gray area than a red line
In addition to a new openness towards NFTs, the interest in fungible cryptocurrencies does not seem to be disappearing from China. The fact that bitcoin mining is fundamentally illegal in China and no crypto exchanges are allowed to operate there does not prevent people from being part of the crypto economy. Many Chinese continue to trade on foreign crypto exchanges, which underscored FTX’s insolvency. Investigations have revealed that the third-biggest customer group of the failed exchange is from mainland China.
Bitcoin mining is also still taking place in China. Despite the ban and the exodus of miners to the USA, Kazakhstan and Russia, China is still one of the largest Bitcoin mining nations. Latest available figures from the previous year suggest that there could still be a double-digit percentage of hashrate originating from mainland China.
Bitcoin nostalgia and full wallets in China
Although China is an autocracy, many Chinese seem unwilling to let the state restrict their economic freedoms. It is questionable how strict the authorities really are against the sector. It seems as if the citizens are largely left alone when they are on foreign stock exchanges. As long as the volumes do not get out of hand, a certain tolerance can be expected. After all, the possession of Bitcoin for private individuals is not prohibited per se.
So there should still be many Bitcoin millionaires, ergo Bitcoin whales, in China. After all, prior to its crypto ban, China was the driving force behind the Bitcoin mainstream. Ranging from bitcoin mining to crypto trading, China was ahead of the US and Europe. Accordingly, there is likely to be great interest among the population in being able to legally participate in the crypto economy again in the future.
Fraud, loss of control and capital outflows
The reasons for the crypto ban in China are no secret. Increasing Renminbi capital outflows into non-state-controlled infrastructure (including Bitcoin) were the main reason for the Communist Party to issue a ban. In addition, there were countless fraud scandals and pyramid schemes in the course of the ICO hype in 2017, so that a legitimate reason was found to crack down on crypto under the guise of consumer protection.
However, with increased surveillance and the introduction of the e-yuan (CBDC), these arguments are becoming less and less valid. As long as the state has control over the wallets of its citizens, i.e. can also control the outflow of funds, the aspects mentioned lose their threat potential for the state.
Bans also cost money
In the future, from an economic point of view, it is likely to be more expensive for the Chinese state to continue to ban cryptocurrencies than to create a highly regulated framework for legal crypto trading. After all, China wants to become the No. 1 economic power. However, this only succeeds if it can play a leading role in digital value creation.
The new ones therefore also speak in favor of a gradual opening Crypto Tax Rules. Crypto revenues are to be deducted with 20 percent income tax. The mere fact that taxes are waived on cryptocurrencies is very positive in terms of opening up.
Token yes, blockchain no. This is how one could describe the recent disputes with the crypto economy in China. After all, the digital renminbi, i.e. China’s digital central bank money, is not based on a blockchain, but on a centralized database structure. This principle, which at best uses individual blockchain properties such as cryptography, is likely to continue in other areas for the time being.
However, the low point of the anti-crypto-policy has probably already been reached. Ever better control options on the part of the state increase the likelihood of easing. Gradual openings of the crypto market could be carried out via special economic zones such as Hong Kong.
Crypto ban: how much longer can it last?
The pressure on the government should not be too great at the moment. In the bear market, the demand for cryptocurrencies is limited. However, if a new wave of crypto is launched with commercially successful applications in the US and Europe, then it will be very difficult for the Communist Party to isolate its population from development and ignore their crypto demand.
Either China manages to set up an equivalent, closed crypto industry, just as it has set up counterparts to the Web2 platforms Amazon, Google and Co. with Alibaba or Tencent, or it has to open the home market for foreign or open blockchains. The behavior of the Chinese government at the next crypto rally should therefore be very revealing about how serious the crypto ban is.
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