Cryptocurrencies War US-CHINA

Por 25 octubre, 2021 No Comments

The long-term trade war between China and the United States has a new front these days: cryptoassets.
Everyone expected that the US would ban cryptocurrencies (or hinder the trading thereof) in an attempt to protect their official currency and that China would work as an ideal place for mining spreading attracting global investments, but we were totally wrong.
On the contrary, the US is open to expand their (regulated) crypto market while China banned mining activities and local trading transactions. In this article we will try to better understand the motivations for this measure and to review the coming trends.
In this article published by Tekios, the Country Manager of Satoshi Tango attempted to approach a good explanation. Even though restrictive measures in China started in 2009 and 2013, certain tolerance was admitted for a growing ecosystem which was positive for their economy; however, as from June 20, 2021, all the mining companies of the province of Sichuan (leader in this sort of business ventures) were closed by the Chinese government and all energy distributors were forbidden to supply energy to these farms. This event revealed that 1/3 of cryptoassets mining was located at China.
On September 24, China’s Central Bank announced that all crypto-related transactions and services were illegal, making clear their intention to shut down crypto trading in all its forms. This ban had immediate effects on Mainland China and many Chinese users were got “stucked” with frozen assets unable to be bought or sold (mainly because many brokers started closing accounts belonging to Chinese citizens). This kind of “trap” raises distrust towards the crypto ecosystem to such an extent that many users who trusted in these assets in the past will be likely to seek other investment options. Besides, Chinese authorities threatened those people who kept transacting to be criminally investigated and prosecuted according to law.
The official explanation connected to the mining-environmental impact and to the threatening aspect of anonymous transactions in terms of security was not convincing at all. In the past China was a pioneer in disregarding these facts; indeed, many investigations concluded that these activities consume energy from renewable sources depending on the energy matrix used. On the other hand, as reported by Chainalysis 2020, less than 0.5% of cryptoassets transactions are connected to cybercrimes.
I agree with the author of the mentioned article that it is more connected with the control over money-printing sovereignty and financial stability, especially close to the launching of the Digital Yuan (China’s official digital currency controlled by their Central Bank). This added to the energy crisis China currently endures.
United States
Meanwhile, in “the land of freedom”, policies are focused towards (an increasing) regulation. In this article published by BAE Negocios it is clearly explained why both countries -in different ways- seek to regulate the crypto market. Their main concerns are financial stability and the relative powers of their Central Banks as the only entities authorized for money printing.
Obviously, the American position is much more friendly for the crypto ecosystem than the Chinese one. The United States allows cryptocurrencies transactions in compliance with certain rules and standards; this compliance encourages a mass adoption of cryptocurrencies (mainly by large mutual funds or multinational companies). They intend to benefit from a market that moves over 2,500 billion dollars globally and to become an important player in the industry expansion.
Several government agencies keep an eye on this market. The SEC has been watching carefully the cryptoassets market for several years and has been adopting resolutions connected to crypto transactions. Further information on this issue in the next title. Lately two players emerged who had been silent up to now: The US Department of Treasury and the Federal Reserve.
The fact that there exist stable coins that, by means of an algorithm, keep the constant parity with the dollar, paves the way to the creation of a dollar out of the control of the Federal Reserve (FED). If taken out of proportion, in the long term, it could mean that from all assets that “are worth one US dollar”, the United States could only control a small portion (especially if stable coins start being more attractive than the “official dollars”).
This possibility is likely to be confirmed given different platforms offer yields over 10% in dollars keeping stable coins with them, with a prompt liquidation upon request and easy to be operated with almost all available cryptocurrencies. The more “money” (or “value”) is operated through cryptos (stable or not), the less value gets concentrated in fiduciary money (FIAT), thus weakening the powers of all government agencies in charge of monetary control. An asset “so similar to the real dollar” (with a stablecoins market cap of 120,000 million dollars) is perceived as a threat to financial stability (but, at the same time, it is a business opportunity likely to generate a multi-million taxable industry in any nation whatsoever). Other issue that concerns US government is the existence of “airdrops” and tokens for free. There is an increasing variety of games, platforms and all sort of apps that compensate their users through goals achievement. Further information in our article Crypto Investment related to Ripio expansion.
An “airdrop” is a promotional stunt that involves sending “coins” for free to wallet addresses that can be later exchanged for bonuses, cryptocurrencies and/or FIAT money; this strategy to gain attention and new followers has been evolving though the years. To deliver “money for free” for “doing nothing” is concerning regulation authorities that are trying to approach a legal and accounting definition. Can they be considered donations? Or interests and profits? Accepting airdrops can be considered gambling? There are no answers until a regulatory framework is designed for this activity.
Going back to American agencies, FED Chair talked about the (assumed) failure of these assets and said that “he was skeptical that cryptoassets could become a payments vehicle” and also warned “on their extremely quick expansion”. We think Powell should be open to hear the market rumors before making conclusions.

Impacts on markets

As usual in the financial universe, shocking news have strong impact on prices. First, China news on the last week of November (covered in the first title). As reported by iProUp, China’s latest ban on all crypto-related activities tumbled bitcoin and other major coins value, considering China accounted for 1/3 of the world’s crypto mining supply.
Notwithstanding the losses for their investors, the crypto market had a spectacular recovery. Bitcoin dropped 10% in one day, but 3 days later rose to its original price. A little comparison: suppose a company with three plants announces the closing of one of them arguing illegal activities, with shares dropping by 30% or more, and/or reversing this situation in less than a week, it is simply unthinkable. In spite of crypto volatility, prices were able to stop dropping showing confidence and reliability on the market.
Bitcoin bull market peaked on October 14/15 when rumors in the United States were confirmed: the first Bitcoin futures ETF (futures-based exchange-traded fund) called BITO was allowed to start trading. Without going further in boring technical processes, we can say that the SEC decided on October 15 to greenlight the first American Bitcoin futures ETF to begin trading as from October 19.
To explain the differences between derivatives and real assets is not the purpose of our newsletter (and, to be honest, exceeds my notions on this topic) but the important thing is that the most reluctant regulatory agency towards crypto investments, finally approved the possibility to invest through Nasdaq (an American Stock Exchange based in NY) in Bitcoin future valuation. Such a move may be beneficial for Bitcoin likely to attract a “dollars rain” as well as high investment risks (if large investors bet downwards).
Even though cryptocurrencies adoption increased rapidly, there still exists a much more traditional public who declines to use them as an asset. This public argues the lack of markets regulation and the lack of control by government agencies. These agencies are intended to control volatility and grant additional safety.
ETFs are suitable for large mutual funds and multinational companies who elect to invest in a mutual fund that invests in Bitcoin and their future price rather than holding BTC directly. It may be connected to their corporate commitments or commitments towards their investors regarding risks and applicable performance rules. An exchange-traded fund approved by SEC authorities (the first one in many, surely) will open the path for safety and reliability required by investors “to take the leap” into the digital future.

UPDATE 02/06/22

In a new chapter of this “war”, we can observe an interesting evolution in both States’ positions. On one side, China keeps supporting the ban on crypto transactions and keeps on promoting its national digital currency (CDBC), the digital yuan. For all legal purposes it is a currency except it lacks a physical representation (like the balance we can find in our Home Banking).

The United States reacted quickly to this move and to the potential it has. A group of Republican senators has proposed the total restriction of digital yuan’s use in all apps and platforms available. The official version is that they are concerned about users’ data capture by this centralized system but, considering some precedents, we believe it is more connected to sovereignty and geopolitical threat, especially considering that the United States is planning to launch the digital dollar in the future although it is expected to be available within a term much longer than the yuan.

As reported by the media Red Users, senators argue that they pretend to defend American citizens’ interests from currencies issued by totalitarian regimes. The bill aims to prohibit the acceptance of the digital yuan (e-CNY) immediately in all apps and e-commerce  platforms operating in the United States. Failure to comply may lead to licenses’ revocation to operate within the United States.

Legislators state that the e-CNY collects users’ financial data and can be used as a persecution method by blocking users’ accounts at election of the Chinese government. Our personal opinion is that they intend to limit the circulation of the Chinese digital currency “in American territory” as much as possible.