The New China Syndrome

Do any of you remember the 1979 film ‘The China Syndrome’? In it, a news reporter (Jane Fonda) and her cameraman (Michael Douglas) are unintentional witnesses to a SCRAM incident, an emergency core shutdown procedure at a nuclear power plant in California. The crew prevents a catastrophe, but the plant supervisor (Jack Lemmon) begins to suspect the plant is in violation of safety standards, and tries desperately to bring it to the attention of the public, fearing that another SCRAM incident will produce an atomic disaster.

You may ask why was it called ‘China Syndrome’ when the action took place in California. The answer is that the nuclear meltdown scenario in the film is based the fanciful idea that there would be nothing to stop the meltdown tunnelling its way to the other side of the world, i.e. China.

This week we have seen another form of ‘China Syndrome’ in the cryptocurrency markets. Bitcoin, Ethereum, Cardano and others have plummeted in value after Beijing renewed efforts to rein in the sector by cutting power to bitcoin miners in Sichuan province over the weekend, one of the country’s largest producers of the digital currency, writes Robert Hart at Forbes.

China accounts for 80% of global bitcoin operations and the crackdown in Sichuan has cut the country’s bitcoin production by more than 90%, according to China’s Global Times. This state media source also says, “regulators in other key mining hubs in China’s north and southwest regions have taken similar harsh steps.”

The move has cut bitcoin’s hashrate and caused bitcoin to drop to its lowest value in nearly two weeks. As you’ve probably noticed, the altcoins suffered as well.

China has an abundance of cheap electricity, making it an ideal location for energy intensive bitcoin mining, and Sichuan has an abundance of hydropower, hence its regional domination of the sector. However, a great deal of the energy used for mining coming from coal power stations, which means the industry is at odds with China’s new climate goals…and Elon Musk’s thinking.

This sounds commendable for a cleaner energy future, but that is not the only reason China has clamped down on mining. According to Hart, “China is also keen to prevent cryptocurrencies from “infringing” upon financial order, prompting a ban on financial services facilitating crypto trade.”

China has been causing problems in the cryptocurrency market since May when it announced its intention to intensify its regulatory crackdown on cryptocurrencies, something it does periodically.

Shentu Qingchun, CEO of Shenzhen-based blockchain company BankLedger, told the Global Times on Sunday: “We had hoped that Sichuan would be an exception during the clampdown as there is an electricity glut there in the rainy season. But Chinese regulators are now taking a uniform approach, which would overhaul and rein in the booming Bitcoin mining industry in China.”

And then he added, “As a result, Chinese miners must form alliances to migrate overseas, to places such as North America and Russia.”  It sounds like a move that might stop the meltdown that is currently tunnelling from China to the rest of the world.

Has China really changed its tune on crypto?

I am of course talking about China’s recent turnaround regarding cryptocurrencies. The change of tone coming from Beijing and the People’s Bank of China (PBoC), with regard to cryptocurrencies makes you pause to think, ‘What’s all this about?’

China’s central bank is now referring to bitcoin as an ‘alternative investment’, signalling something is afoot in the country that cracked down on digital assets four years ago.

Of course it is a welcome shift in perspective from the Chinese, and many are describing it as ‘progressive’. At the same time, they are closely monitoring the PBoC for signs of forthcoming regulatory changes in relation to the crypto sector.

During a panel hosted by CNBC at the Boao Forum for Asia on Sunday,

Li Bo, deputy governor of the PBOC, said, “We regard Bitcoin and stablecoin as crypto assets … These are investment alternatives.” He went on to say, “They are not currency per se. And so the main role we see for crypto assets going forward, the main role is investment alternative.” This indicates an unwillingness to see bitcoin and other similar tokens, such as Litecoin, as a means of payment, but at least it is a move towards a broader acceptance of cryptocurrencies in China.

As CNBC points out, China was once one of the world’s biggest buyers of bitcoin, before banning ICOs in 2017 and closing down crypto exchanges in the same year, both moves prompted by a perceived financial instability in the digital asset sector.

Li said, in explaining more about what he meant by calling them investment alternatives: “Many countries, including China, are still looking into it and thinking about what kind of regulatory requirements. Maybe minimal, but we need to have some kind of regulatory requirement to prevent … the speculation of such assets to create any serious financial stability risks.”

Flex Yang, CEO and founder of Babel Finance, called the comments “progressive”, while Vijay Ayyar, head of business development at cryptocurrency exchange Luno said, “I think it is quite significant and is definitely different to their previous statements or positions on public cryptocurrencies.”

When asked about what he thought had changed China’s thinking following the PBoC announcement, Ayyar said, “Governments are realizing that it is a viable and established, yet growing, asset class and need to regulate it. China regulating crypto would be another massive boost to the industry in China and globally.”

At the moment, China is still trialling its digital yuan, which will eventually replace the cash and coins in circulation, and there is a rumour that the country may wish to trial with foreign visitors to the Beijing 2022 Winter Olympics.

As with everything to do with China and finance – watch this space!

A look at the Money-verse in 2028

Today money is going through an evolutionary process as I write. The choices the finance sector, and the consumer, make today will shape the future of money, and we can already see that the world’s sovereign currencies are under siege from cryptocurrencies and stablecoins.

Bitcoin has not yet brought about the massive revolution that some expected on the one hand, but on the other, if “governments and central banks can’t offer a sound version of the sovereign money for the digital age, their downfall could be tragic,” Marcelo M Prates writes at Coindesk.

Prates envisages a ‘ future fantasy’ scenario in 2028 that may become reality. Amongst other things he sees, “ see drones dropping bags of money in the neighborhoods most affected by the latest cyber-attack on the e-Gov platform.” Regardless of whether the attack is foreign or domestic, “nobody can transfer digital dollars or even check their FedAccount balance.”

In his view, this kind of disaster could happen if the government decided not to offer an offline account option. Why not? The government might believe “people would finance domestic terrorism with an offline FedCoin that could be transferred from person to person without identification.”

As a result, every time the e-Gov platform is attacked, the government has to send out bags of old dollar bills so that people can make payments.

There may also be a global Big Tech Alliance offering its own digital asset that launches before a government-backed one, and it could potentially result in a fall in demand for dollars, especially if inflation is rising at a record pace.

Governments will have to deal with the fallout from the huge expansion in spending during 2020. Nations’ debts will be soaring, and it’s foreseeable that printing more money might well become a response.

Banks will also be affected if an organisation, such as Prates’ Big Tech Alliance offers customers a compelling reason to empty deposits in traditional banks, and use it for the consolidation of other debts, thanks to favourable loans. The result would possibly be multiple bank closures.

This entire scenario is likely to happen due to central banks’ ambivalence about digital currencies. In Prates’ world, “Many believe that the breaking point came when the government insisted on having exclusive control over the digital ID scheme created to provide every American citizen and corporation with a single digital identity. The goal was to keep track of the vaccination progress amid different coronavirus variants and better target the relief money sent monthly.” However, centralization is rejected, as it “was seen as a further step toward the growing surveillance state.”

What is clear, even now, is that the technology available makes a multi-faceted Money-verse entirely possible, because as Prates says, “Money does not need to be controlled by a government or limited to a sovereign territory anymore.”

Central banks need to get their digital strategy right, or face the consequences in the not too distant future.

Dogecoin passion could prevent government crypto bans

Dogecoin, which has existed for a few years, is not a cryptocurrency of the usual kind. It’s a fun, ‘meme’ coin and Elon Musk, Gene Simmons, The Jonas Brothers and Snoop Doge have been having some fun with it recently. However, although it has no utility, Noelle Acheson, says “it embodies two key themes impacting institutional interest in crypto assets: the role of “fundamentals,” and the likelihood of successful government bans.”

Acheson asks if fun should drive value (Dogecoin is up 1,350% in 2021, and answers her own question with, why not? She points to GameStop (yes, again!) saying that the market’s understanding of ‘value’ is shifting. Matt Levine at Bloomberg summed it up: “Money and value are coordination games; what we use for money depends on the channels that we use to coordinate social activity. Once society was mediated by governments, and we used fiat currency. Now society is mediated by Twitter and Reddit and Elon Musk, so, sure, Dogecoin.”

Even Dogecoin’s founders have no idea why its success has continued some seven years after launching it. But they can’t remove it, or close it down, because Dogecoin runs on a public, decentralized blockchain that no one controls. So, it will probably continue to exist so long as people value its fun element.

It’s about passion

GameStop and Dogecoin both exemplify what community passion can achieve, and how it may potentially block government bans on crypto. For example, India tried to ban cryptocurrencies recently, but the community mobilised, created a hashtag and rallied its members to lobby government representatives. They pointed out that the country has 10-20 million crypto users, plus 340 startups and 50,000 employees in the crypto space.

Something similar happened in Nigeria where the central bank ordered banks to close the accounts of cryptocurrency users. There was a public outcry, and the central bank had to issue a press statement “reminding the public that the rule was not new, and that it was for their own good.” The central bank had to unblock accounts of 20 people involved in the #EndSARS movement, which was about the dissolution of a federal police unit with a reputation for fierce brutality. Acheson says, “The fact that the accounts were frozen in the first place is one of the many reasons seizure-resistant cryptocurrencies are rapidly gaining in popularity amongst Nigeria’s young.” It is also the case that Nigeria is gaining recognition as Africa’s Silicon Valley, and trading crypto assets is a way of life for many young people. They have new tools to work with and a growing disrespect for institutions. Because of the central bank directive, they are simply moving from exchanges to peer-to-peer channels. As a result, the politicians have taken notice,, and some prominent voices in government have spoken out against the ban. Other countries will be watching this with interest, because as Acheson warns, “the very act of attempting to repress cryptocurrency’s use could light a fire under a generational understanding of why it’s necessary.”