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For hundreds of years preceding the early 20th century, China’s emperors banned international trade and cloistered the country from the rest of the world. The so-called “closed-door” policy (闭关锁国) was partly a response to the Opium Wars with the British, who had been ruthlessly peddling the drug throughout the previous century and had addicted as many as 12 million people in the country.
Though crypto is hardly as addictive as opium, the current regime in China appears to be treating it with similar contempt. Last week, He Liu, the Vice Premier who also leads the State Council, explicitly denounced crypto mining and trading as a financial risk that would destabilize the country’s economy.
As a result, large crypto mining firms halted operations and began to look for new homes abroad. Huobi and OKEx, two of the largest exchanges that serve investors in China, also suspended pool mining and leveraged trading activities there.
Is this the beginning of the “Crypto Wars” in China? Or is it just another example of the FUD that tends to waylay every crypto bull run? This week’s da bing examines both Liu’s statement and reaction from the local crypto community and proposes three plausible scenarios for how it all will play out.
Do you know?
挂羊头卖狗肉 which means “hanging the head of a sheep but selling dog meat” is a colorful way to describe merchants who advertise one commodity but sell something different. In the case of mining, many miners have been accused of branding themselves as big data centers—but are actually burning coal to mine Internet money.
Scenario 1: Completely outlaw crypto
The obliteration of China’s “official” crypto industry (save for retail investors and others using VPN to avoid the Great Firewall) is certainly possible. The central government could issue a country-wide ban on mining and trading. Policies would then be enacted that strip mining farms of their licenses and punish those who are currently operating under the guise of “cloud computing centers.”
If this occurs, we would expect to see a crackdown on Huobi and OKEx, given that both exchanges are headquartered in Beijing, less than an hour drive from where President Xi himself lives.
True, crypto is still a small player in China’s fintech scene and the government has bigger fish, such as Alibaba and Tencent, to worry about. But crypto could be far more of a long-term threat than Alibaba and Tencent. After all, the government can easily control Alibaba by silencing Jack Ma, but it cannot effortlessly silence crypto once it goes big. Governments, more than anyone else in the world, know that crypto is a rabbit hole that will take many beyond the initial gambling stage to an open, censorship-resistant, decentralized world. And that’s especially scary to the CCP.
Even worse: Unbridled, “real” crypto could well be viewed as a competitive and confusing threat to China’s ongoing effort to establish its own digital currency. As China’s DCEP continues to mature, any financial primitive that de-legitimizes it will be viewed as a threat to China’s digital yuan campaign. Plus crypto has been facilitating unwanted capital outflow, which is another thorn in the government’s eye.
Nonetheless, many observers see this full-on, kill crypto and salt-the-earth scenario as unlikely, because after tolerating crypto for over a decade, such a “one-knife-cut” solution is too dramatic to execute. And I tend to agree.
DA BING’S BEST GUESS: 20% LIKELY TO HAPPEN
Scenario 2: Big Thunder, Little Rain
雷声大，雨点小 ( “big thunder little rain”) is a phrase that describes policy statements that sound ambitious but are followed by little action. If this scenario plays out, then Premier Liu’s statement would be the last words we hear from the government. There won’t be additional concrete directives from the central government to provincial governments forcing a crackdown on crypto activities.
More importantly, there won’t be any KPIs against which provincial governments would be measured. This is key because, in the absence of directives, provincial governments are unlikely to punish crypto miners. After all, miners have been operating peacefully in the country for a decade. They’ve developed cordial relationships with local governments and have been paying good tax money.
If this scenario plays out, then Premier Liu’s statement can be viewed as getting in line with China’s commitment to achieve carbon neutrality by 2060. The country has resolved to wipe out any blockers that prevent it from achieving that goal and becoming greener. And bitcoin mining, unfortunately, is one of those blockers.
As a result, we might see coal-powered mining farms largely disappear, while those powered by clean energy might be allowed to stay in operation. Crypto exchanges would also be fine other than shutting down their pool mining operations, which account for only a fraction of their revenue anyway.
DA BING’S BEST GUESS: 35% LIKELY TO HAPPEN
Scenario 3: Slow Estrangement
As China-based crypto VC Matthew Graham told me: “We certainly hold the view that Liu He's comments indicate that the Chinese government has concerns about excessive speculation, including in crypto. We can anticipate that the government will be taking a ‘close look’ at this issue.”
Here, a “close look” could mean that the government will continue to take measured steps to tackle the danger of crypto going mainstream, short of actually outlawing it.
It might start with cracking down on coal-powered mining operations, and then slowly hydrogen-powered mining operations, and then spread to hobbling CPU-powered mining operations (for instance, Filecoin and Chia).
Huobi and OKEx have already shut down pool mining and leveraged trading features to Chinese users. Other features such as OTC trading could be of imminent danger, too.
This scenario is perhaps the most dangerous one because it spreads the pain out for the foreseeable future. The market has no visibility to future policy and can only react passively.
Many crypto entrepreneurs have seen such a risk and have either exited China or prepared an escape route.
DA BING’S BEST GUESS: 45% LIKELY TO HAPPEN
No One Knows
As Graham observed, the crypto community gave a “fear-driven emphasis” to Liu’s statement. But it’s not fear that’s the problem; it’s uncertainty. If the government is clear about its intentions and direction, the community can figure out a way to cope.
The bigger problem--for the government at least--is that 闭关锁国 might not work this time. China’s citizens easily and routinely circumvent via VPN the Great Firewall to access Google, Wikipedia and all the other things the government is trying to close off. They will find ways to access to foreign exchanges and participate in DeFi if major exchanges are banned. (Though granted, finding an off ramp to convert crypto into yuan in a Chinese bank account will be trickier.)
And if China’s miners disappear? That could well be a good thing for crypto, making the blockchain more decentralized and anti-fragile.
But it sort of breaks my heart. If crypto leaves China, a generation of hungry and smart entrepreneurs will miss out on a once-in-a-lifetime opportunity to build and create wealth on a nascent, global, borderless platform. Everyone loses in that scenario.
Crypto isn’t opium. The benefits of opening it up to China’s investors and entrepreneurs ought to be obvious.