China’s Cryptocurrency Economy: Sacrificing the Chance to Control?

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The rapid advancement of cryptocurrencies since 2009 has given rise to a new and innovative comprehensive ecosystem – the crypto economy – in the form of the metaverse, blockchain technology, non-fungible tokens, cryptocurrency exchanges, secondary cryptocurrency trading companies, and decentralized payment networks. The cryptocurrency economy also poses countless political, social, and economic risks to China. Hence, Beijing has strictly banned cryptocurrency activities in order to (1) promote political, social, and economic stability, (2) strengthen its management of state policies, and (3) reduce energy misuse and environmental concerns.

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The development of cryptocurrencies has given rise to blockchain technology that creates a decentralized and entrenched ledger, facilitating the routing of assets and recording of transactions in a company’s network. Forbes called the metaverse a 1 trillion US dollars Revenue opportunity as technology moves toward Web 3.0. The non-fungible token (NFT) industry has also seen tremendous growth in total sales worth US$17.6 billion in recent years – more than 21,000 percent Increase from 2020.

Despite this, governments around the world have taken various stances towards the use and handling of cryptocurrencies. Democratic countries such as Australia, the United States, and Western European countries took more Non-interference positions, while some of the more authoritarian countries such as Algeria, Egypt, and China have completely banned the use of cryptocurrencies.

This commentary explores the rationale for China’s strict ban on the cryptocurrency economy, even though its expansion will stimulate much-needed economic growth and create new jobs and businesses.

A threat to China’s political, social and economic systems

Cryptocurrencies are a staple of the cryptocurrency economy, which has seen massive expansion over the past decade. As we previously suggested, Forbes predicts that the metaverse, which only uses cryptocurrency for transactions, has the potential to generate $1 trillion in income. Moreover, the total market capitalization of cryptocurrencies has exceeded more than 3.4 trillion US dollars As of December 27, 2024, making the Mercury asset class too large to ignore. So, why would Beijing choose to ban the use of cryptocurrencies and give up the opportunity to participate in the growth of the cryptocurrency economy?

To answer this question, we must first understand the Chinese government’s priorities. Previous studies have assessed that the legitimacy of the Chinese Communist Party and its political, social, and economic stability precede all other concerns under the one-party system in China. Thus, the potential for misuse of cryptocurrencies and the collapse of the crypto economy pose major threats to government stability.

Before 2017, China was the largest cryptocurrency market in the world 80 percent of Bitcoin is transacted in Renminbi (RMB). China was also responsible for this 75 percent Bitcoin mining operations in the world until the activity was banned in May 2022. Under these circumstances, China’s political, social and economic stability would be severely undermined in the event of a catastrophic collapse or misuse of cryptocurrencies.

Moreover, Nobel Prize-winning economist Paul Krugman opined that “Uncomfortable parallels“Between cryptocurrencies and the subprime mortgage crisis, which sparked the global financial crisis in 2007. Indeed, during a 12-month period from late 2021 to late 2022, cryptocurrencies lost More than 2 trillion US dollars in market capitalization, equivalent to about 75 percent of its total value, causing turmoil in the cryptocurrency economy. Overall, widespread use of cryptocurrencies could lead to an economic and political catastrophe that requires Beijing’s intervention.

The challenge facing China’s ability to manage policies

Because cryptocurrencies are transacted on decentralized blockchains, they are not owned by any central institution or government. Hence, cryptocurrencies pose a number of challenges for the Chinese government. First, since decentralized blockchains fall outside Beijing’s jurisdiction, cryptocurrencies could be used to circumvent China’s strict capital controls. Second, cryptocurrencies can be used to support illegal activities such as terrorist financing and financial crimes that Beijing will not detect. Third, cryptocurrencies hamper China’s ability to manage political, social, and economic policies since their supplies directly impact the country’s credit management and money supply. Finally, cryptocurrencies challenge Beijing’s financial and political power by providing an alternative means of exchange. Hence, the activities envisioned through the use of cryptocurrencies pose significant threats to China’s economy and challenge the effectiveness of its policies and authority.

In fact, Tobias Andrew, a senior official at the International Monetary Fund, stated that the price volatility inherent in cryptocurrencies is “Destabilization“Financial flows in emerging countries, and the use of cryptocurrencies instead of fiat currencies constitutes”Immediate and acute concernsAndrew also said that cryptocurrencies are being used to transfer money from countries considered unstable, which could exacerbate financial crises. To demonstrate its intention to exercise greater control over its economic and political tools, Beijing Forbidden Financial institutions and payment companies were banned from using cryptocurrencies two months after Baidu, China’s largest search engine, began using Bitcoin in October 2013.

To gain greater control over its financial system and mitigate the use of cryptocurrencies, Beijing began exploring the use of its own digital currency (e-CNY) in 2014. e-CNY was later launched on January 4, 2022, and now has about 260 million Users. Despite this, cryptocurrencies have created a global niche for use in the contemporary digital age.

Energy consumption and environmental concerns

Bitcoin is based on a decentralized network and must be “mined”, unlike traditional types of currencies, which are issued by a single institution such as a central bank. This type of computer mining consumes huge amounts of energy and emits huge amounts of carbon dioxide, especially when done on a large scale.

Before Beijing’s crackdown on cryptocurrency mining, China was responsible for a large portion of the world’s Bitcoin mining. The University of Cambridge estimated that “the Bitcoin network will Rank 32 In the world in terms of energy consumption if it were a country.” A report by the Chinese Academy of Sciences estimated that if Beijing had not intervened, China would have consumed about $200 billion. 297 terawatt hours of energy in cryptocurrency mining activities by 2024 – exceeding the combined energy consumption of Italy and Saudi Arabia – and emitting 130 million metric tons of carbon dioxide – exceeding the combined greenhouse gas emissions of the Czech Republic and Qatar.

Moreover, China has suffered intermittently Lack of energy In 2021 and 2022, affecting the lives of tens of millions of people due to rising coal costs. Failure to address issues related to stubborn energy consumption, negative externalities, and private companies benefiting from government energy subsidies resulting from cryptocurrency mining activities will likely lead to heightened social and economic tensions within China.

conclusion

The cryptocurrency economy is here to stay, and cryptocurrencies will play a larger role as a medium of exchange in the digital age. Policymakers must balance the political, social, and economic threats posed by the cryptocurrency economy with the benefits it provides.

Over time, political attitudes towards cryptocurrencies have varied across countries. Relatively speaking, Western democracies – where powerful business groups exercise significant influence over policy making – have taken steps to liberalize the use of cryptocurrencies, while Beijing has taken steps to limit their use.

The Chinese Communist Party’s need for greater economic and political control will continue to put China’s digital and technology economy at a significant disadvantage compared to Western economies. As the United States attempts to contain China’s rise and technological progress, China must take a more receptive approach to the adoption of cryptocurrencies and the crypto economy. Instead of restricting the use of cryptocurrencies entirely, Beijing should create institutions and formulate ground rules to regulate their use to keep its digital economy competitive.

About the author

Elgin Chan is a doctoral student at S. Rajaratnam International Studies Institute (RSIS), Nanyang Technological University (NTU), Singapore. Chan’s research interests include international political economy, international finance institutions, and global financial engineering.