China’s recent “crackdown” on cryptocurrency trading and mining has contributed to the recent drop in the value of bitcoin and other cryptocurrencies. At the same time, there is an ongoing debate as to whether the volatility of digital coins is a sign of fundamental weakness or the usual problems in the development of this financial instrument.
Experts view the developments in China as an attempt by Beijing to create its digital currency to reboot the international financial system. The People’s Bank of China was one of the first to work toward creating its digital currency.
Work on the spread of the digital yuan accelerated in 2021, going almost simultaneously with the tightening of requirements for the circulation of digital coins in the Chinese market. Western experts see these actions as one of Beijing’s efforts to weaken the power of the U.S. dollar.
By internationalizing the yuan by offering the national currency in digital format, Beijing believes that it can reduce its dependence on the dollar’s dominance in the global banking system. This is quite in line with the Belt and Road strategic initiative, which envisages the creation of an alternative international logistics network.
Western governments have already assessed the threat posed by the digital yuan. The prospect that China could be beyond the reach of international financial sanctions was even discussed at the recent G7 meeting.
Recall that in May, the People’s Bank of China banned banks from interacting with and providing accounts to cryptocurrency traders. This was followed by a ban on bitcoin mining in several provinces, including Sichuan.
The process of mining bitcoins requires a huge amount of electricity. Most often mining farms are set up in areas where cheap electricity is available. Given that the profitability of mining is increasing due to the popularity of cryptocurrencies, Beijing has decided to restrict this activity, which also threatens the stability of the power grid.
The crackdown on cryptocurrencies is not limited to the Chinese market. The British financial regulator said last month that Binance, one of the world’s largest cryptocurrency exchanges, could not conduct any regulated activities, and issued a warning to consumers.
The threat of an unregulated alternative monetary system arising from blockchain technology is recognized as one of the real dangers for the Communist Party of China. From the perspective of most central banks, cryptocurrencies pose a threat to financial stability. The Chinese authorities intend to take digital currencies under their control.