Last Friday’s news made everybody’s day. China declared that all cryptocurrency-related transactions are illegal, Bloomberg wrote citing the local regulator’s statement. Was this expected? It most certainly was.
The historical experiences from the 19th and early 20th centuries have taught us that when central banks unleash a war to the bitter end on private quasi-money issuers, it is usually to play and win. This war has been fought before, on a worldwide scale, and everybody knows how it ended. Fiat currencies were winning during the 19th century in all leading European countries, and in the United States before World War I. The issuance of private money virtually stopped in the developed markets and disappeared from the global agenda until the end of the 1980s, save for a few relapses such as the 1920s Hyperinflation in Germany or the Austrian Wörgl Experiment. The weapons that won national banks that war were crude and as far from market tools as could be, from the setting of higher and higher banking reserve requirements for private issuers (up to 100% of the issue volume) to monetary fines and jail terms for private issuers. More details can be found in the thesis written by Vera Lutz, Friedrich von Hayek’s doctoral student, as well as in my 2000 book Private Money: History and Modernity.
Moreover, the war between state and private issuers actually broke out with the state currency’s strengthening and spread in the payment turnover, an event that was not directly related to any market factors affecting a private currency’s pricing.
Had the expert community foreseen this turn of events?
Rather yes than no. Consider looking at a few digital news clippings from economic publications released last spring.
According to Robert Carnell, chief economist and head of research at ING Asia, the world’s leading powers are considering launching their own central bank digital currencies (CBDCs), and that is likely to be followed by legislation to tax gains (from operations with crypto assets).
“That may be the death knell for these other cryptocurrencies, though central bank coins are on the up and up,” he said.
According to CEO of digital asset trading solutions company H-Finance, Vytautas Zabulis, if CBDCs were developed in a way that they were “easy to interact with,” most digital currencies used for settlements will likely lose their both their goal and value. He does not believe there is a big argument for bitcoin becoming a settlement tool.
“Blockchain technology is for that, so, CBDCs will be built on blockchain,” Zabulis added.
The Chinese ruling elite apparently recognized that country’s version of CBDC as mature enough and ready to take over as the only legitimate crypto payment means, and sounded the charge.
However, there is a new factor in this war of issuers as compared with the century before last; it was bound to emerge, which it did — the extraterritorial nature of the new private money. China is not America, and cannot really influence the patchwork of global crypto regulation with brute force in the current geopolitical situation. The “Salvadoran scenario” with mushrooming new crypto-friendly jurisdictions cannot be discounted either.
In this situation, the Chinese regulator had no other choice but to block overseas crypto exchanges from providing services to the country’s residents, in the same fight-to-the-bitter-end cue. To actually achieve this, however, with a high probability, China will need to reinforce its firewalls and strengthen the sovereignty over its segment of the internet.
Now, what will happen to the crypto assets held by 1.5 billion Chinese residents as of the date that any operations with them were banned? Will they be unloaded on the world market as distressed assets, sold at discounts in panic to the “right” owners? Or will the Chinese authorities provide tools for a legitimate disposal of crypto assets that have become illegal — for example, allow selling them to state banks at a fixed rate? I wonder how many of my readers ever got hold of Soviet Beryozka cheques. Perhaps some of you have even read my article about the CUC, A Currency of the Liberty Island in MoneyNews, regrettably, the now defunct online media outlet. Replacement, freezing or zeroing Chinese crypto are equally non-market solutions.
One of my concerns is that other issuers of regional reserve currencies will be tempted to go the Chinese way — and possibly, in a more clumsy fashion than that of the pioneer. I am adamant that the minimum necessary criterion for any responsible monetary authority to start considering this option should be their own CBDS’s technological maturity. If after the private segment is swept away from the market, there is no one to pick up the falling banner and become the crypto payment means, their policy has been an unmotivated attack that hurt their own population without any tangible benefits for the government or the state budget.
By Artem Genkin, Doctor of Economics, Professor, President of the NPO “Center for Protection of Bank Clients and Investors,” founder of Invest Foresight