There were just two seemingly harmless words: “investment alternatives”. But when they were applied to Bitcoin – the groundbreaking cryptocurrency – in a recent panel discussion by an official at People’s Bank of China, they echoed like fireworks.
“A remarkable step for BTC,” says Lennix Lai, Director of Financial Markets at OKEx, the statement. Michael Peshkam, Executive in Residence at the European Business School INSEAD, describes the central banker’s remarks as “a significant shift in the country’s position” on crypto.
To sum it up: Li Bo, deputy governor of PBoC – China’s central bank – on April 18th at a CNBC event at the Boao Forum for Asia. said: “We consider Bitcoin and Stablecoin as crypto assets. […] These are investment alternatives. “CNBC reporter Arjun Kharpal commented:
“Industry insiders called the comments ‘progressive’ and are closely monitoring all regulatory changes by the People’s Bank of China.”
“Yes, I see a change of tone” in China, “a milder and more open approach to considering the role of Bitcoin,” Kevin Desouza – professor of economics, technology and strategy at the Queensland University of Technology Business School – told the magazine. “I still don’t see a full embrace from Bitcoin.”
“This is a very important development,” Daniel Lacalle, chief economist at Tressis SV told the magazine – one that involves a “significant change of heart” on the part of the Chinese government as it “divests its previous monetary policy”.
The government is de facto saying it will not ban or curb the growth of bitcoin and other cryptocurrencies, which pose a pervasive risk to both China and other governments, suggests Lacalle.
If so, why now? China is on the verge of large-scale adoption of one of the world’s first major central bank digital currencies – sometimes referred to as digital currency electronic payment or digital yuan. “If it wants a functioning digital yuan, it can’t ban crypto,” says Lacalle. Rather, it has to show that its DC / EP is just as attractive as a crypto alternative.
Connect the points: BTC and DC / EP
However, what exactly is the connection between Bitcoin and China’s DC / EP? Aren’t those two different things – one an emerging global store of value like gold and the other a domestic payment system?
The current composition of the Chinese yuan is used in very few international transactions. “It is underused worldwide because China maintains capital controls,” Lacalle told the magazine. China has long feared that its economy would quickly be “dollarized” if it dropped these controls – that is, its citizens would send dollars from China to the United States.
As things stand today, the introduction of a digital yuan would be an international failure, although it could be successful domestically. Outsiders would assume that the Chinese government wants to control them like their traditional yuan.
“But when they open the market for crypto in China, they signal that capital controls do not apply to the digital market,” explains Lacalle. This is arguably a “smart move” by the Chinese government, which, like Russia, now sees advantages in opening its economy to crypto. In fact, cryptocurrencies could eventually – albeit in the “distant future” – damage western fiat currencies, the authorities speculate. But in the meantime, a new tolerance for Bitcoin can make its digital currency more viable beyond its limits.
A potential currency?
Peshkam tells the magazine that Li’s statement goes beyond recognizing BTC as just another asset, which is hardly a world-shaking revelation. China now sees crypto as “a future potential currency in world trade”.
Using Google Trends data from 2014 to date, Peshkam notes interest in Bitcoin in China – d. H. in the indigenous population – follows a pattern similar to that in the US and the world as a whole, measured by the number of searches for the word “bitcoin”. Ignoring this growing interest of the population is “perhaps economically and financially not sensible for the country in the long term, hence the change” in Chinese politics, says Peshkam.
China’s DC / EP is likely to become “the primary means of daily commerce, from grocery shopping to paying bills and larger ticket items,” said Peshkam. But it’s too early to gauge its international impact, including whether it will pose a threat to the US dollar as the world’s premier trading currency.
Just in case, Peshkam continued, China would like BTC to be available to reduce its dependence on the dollar for world trade. A strong BTC could also weaken the dollar’s influence on China’s regional neighbors, making them more open to using the new digital yuan. “Shifting China’s position appears to be a strategic move to secure its future economic dominance should Bitcoin move from an ‘investment alternative’ to a ‘trading currency alternative’,” says Peshkam.
Who is li
Maybe you read too much into a single person’s statement? Li is just after all one of seven deputy governors the Chinese central bank. Could these bitcoin and cryptocurrency remarks be just a banker’s opinion?
No, Lacalle tells the magazine. “That doesn’t happen in China.” Not on forums like this one. “If you want to inform the world about something new [financial] The first comment often comes from an analyst at a state bank. ”The next thing is usually a statement from a central banker. And finally, at a later date, the policy will be officially announced, explains Lacalle. This happened, for example, when China devalued the yuan in 2015. “It’s subtle but efficient.”
China’s central bank is not as independent as some of its western counterparts, including the Federal Reserve, another source who wanted to remain anonymous, told the magazine, “In his [Li’s] It would of course be necessary to check whether his statement agrees with the government’s view. Or, alternatively, he was given a tip that this was the government’s view. “
So Li is just acting as a government spokesman? “It can be looked at that way,” says Molly Jane Zuckerman, Head of Content at CoinMarketCap, in conversation with Magazine. She added, “The lieutenant governor of the People’s Bank of China and the former governor of the PBoC both mentioned Bitcoin while explaining the progress of the CBDC development” in the recent forum. They viewed Bitcoin as a special commodity and said the government would put it under supervision and regulation. The central bank had previously described Bitcoin as a virtual commodity.
But maybe an “alternative investment” is just an alternative investment – and nothing more?
“It’s hard to be confident, but maybe the PBoC’s Assistant Governor Li Bo just wants to say that Bitcoin is a valid alternative investment,” said Darrell Duffie, Dean Witter’s distinguished professor of finance at Stanford Business School. opposite the magazine. “China is likely to remain opposed to using Bitcoin as a means of payment, which is another application.” This would be in line with Li’s earlier remarks, Duffie continues, adding:
“As a payment medium, Bitcoin makes it difficult for authorities in every country to monitor payments for compliance with laws and regulations, such as combating money laundering. As a means of payment, Bitcoin also makes it a little easier to bypass China’s capital controls that China doesn’t want to see. “
Li may have said that Bitcoin is used as a store of value – i. H. as Gold 2.0 – is fine, but not as a payment platform. James Barth, finance professor at Auburn University, told the magazine, “Bitcoin, like gold, could be viewed and approved as an investment that can serve as an inflation hedge.” . […] This still allows China to impose restrictions by prohibiting financial institutions within its borders from allowing transactions in cryptocurrencies. “
The banker may have simply described the current reality. Kevin Werbach, professor of law and business ethics at the University of Pennsylvania’s Wharton School, told the magazine, “Calling cryptocurrencies ‘investment alternatives'” is a statement of fact. It doesn’t necessarily mean anything about whether and how these alternatives would be available to Chinese investors. “
Contrary to what some believe, Werbach says China never tried to thwart Bitcoin and blockchain activity. “China has never been uniformly hostile to cryptocurrencies,” he says, adding, “The Chinese authorities closed initial coin offerings and renminbi-to-crypto exchanges in 2017 because of concerns about excessive speculation, fraud and capital flight. There was no indication that this view would have changed. “
Meanwhile, China has tolerated a huge crypto mining industry within its borders and actively promoted blockchain technology “as part of its ‘new infrastructure’ agenda,” adds Werbach. “Many of the world’s largest crypto exchanges such as Binance, Huobi and OKcoin have great connections to China, even if they officially have their headquarters elsewhere.” In summary, Werbach tells the magazine:
“My guess is that Li Bo said that Bitcoin should be viewed as a speculative investment, not an alternative currency or payment system. That would be very compatible with China’s approach. I think the crypto community got the wrong message from his comments.”
Others, however, continue to see a political shift behind the banker’s statement. For example, OKEx’s Lai told the magazine, “The PBOC banker’s new statement gave the market a very clear stance that BTC would be viewed as an alternative investment vehicle. We think this is a remarkable move for BTC, and we will likely see BTC being regulated with a similar framework to other alternative investments. “
Distrust of China
Others quickly recognized China’s ulterior motives. “China’s latest move to soften its position on cryptos should be greeted with a healthy dose of skepticism,” Pablo Agnese, lecturer in the Department of Economics and Business Organization at UIC Barcelona, told the magazine. He adds: “China is and has long been a big black box, and the old adage ‘Beware of the Greeks who carry presents'” seems as fitting as ever. “
But Bitcoin could get too big even for China to ignore, suggests Agnese – especially considering it has a market cap that recently passed the $ 1 trillion mark. “China will still try to ride the crypto wave just to undermine the USD’s power in international trade” – what Accounts for about 60% of the foreign exchange reserves – “since there is still a trade war going on”. Agnese comments on China’s own CBDC project:
“Cryptos in general, and BTC in particular, have challenged the financial status quo, not only by introducing much-needed competition, but also by exposing its longstanding weaknesses.”
Yu Xiong, Associate Dean International at Surrey University and Chair of Business Analytics at Surrey Business School, tells the magazine that Li’s statement only meant that China was starting to pay more attention to cryptocurrencies – with the intent of regulating them . “This does not mean that China will take a softer position vis-à-vis cryptocurrencies. China won’t soften until the government can really monitor transactions and cash flows. […] That won’t happen any time soon. “
An “Asset Class That Should Be Regulated”
In summary, it can be said that the Chinese government has so far shown little interest in regulating Bitcoin – which would be tantamount to acceptance of the cryptocurrency. But last month, a deputy governor of China’s central bank signaled, presumably with the knowledge and approval of the government, that the central bank wasn’t just doing it Not Block Bitcoin in China, but spoke positively for the first time about the digital currency.
“This is of enormous importance for both domestic institutional investors and high net worth individuals who want to invest in” alternative assets like Bitcoin “in the future,” Zuckerman told the magazine.
Lai adds, “I think after years of development, all major governments and regulators” – now China – have “recognized BTC as a viable asset class that should be regulated rather than an outright ban.”
There is growing awareness in China that the nation could benefit from an emerging crypto sector. After all, most of the electricity that powers crypto mining comes from China. The Chinese are also already involved in many blockchain-based companies. And in the meantime, the nation has an ambitious project for digital currencies underway, so a certain slowdown in relation to BTC also, as Lacalle posits, “with its desire to [globally] working digital yuan. “