Despite crackdowns on cryptocurrency trading and mining, China remains one of the most active cryptocurrency markets in the world, according to a new report by blockchain data platform Chainalysis.
Between January and June 2021, cryptocurrency addresses believed to be controlled by Chinese users received over US$150 million worth of cryptocurrencies, second only to the US, the report says.
Historically, the country is also known for dominating the cryptocurrency mining landscape, controlling at times as much as 75% of Bitcoin’s global hashrate, or the computing power that goes toward mining the cryptocurrency.
This year, China has made considerable efforts to steer the nation away from cryptocurrencies. In May, officials announced intentions to crack down on mining and trading of cryptocurrencies, stating that tighter regulation is needed to protect the financial system.
Price volatility and speculation are amongst the key concerns for Beijing, but another major one is the fact that decentralized cryptocurrencies make it easy to bypass China’s capital controls, which restrict people from converting more than US$50,000 worth of yuan into foreign currencies each year for travel, overseas study or work.
The move comes as China continues the rollout of its digital yuan, a central bank digital currency (CBDC) it began trialing in late-2019. The so-called e-CNY scheme is meant to be used by end-users through both software and hardware wallets.
In July 2021, the working group in charge of the project at the People’s Bank of China (PBOC) released an update report, stating that more than RMB 34.5 billion (US$5.3 billion) worth of transactions had been made using the e-CNY system, with users reporting convenience, cost-efficiency and improved efficiency.
In the report, the group cited motivations for launching a digital currency as being the declining use of cash, rising cryptocurrencies and stablecoin adoption, and rapid development of CBDCs by other central banks.
Chainalysis report says that while the digital yuan could improve the Chinese government’s ability to manage the domestic economy and lower payment costs especially for merchants, there are also concerns that the system could be used as a tool for financial surveillance and provide the government with the additional ability to exclude specific people and organizations from the financial system.
It cites a recent report by Yaya Fanusie, an adjunct senior fellow at the Center for a New American Security (CNAS), in which she claims that the digital yuan could be a tool of authoritarianism, though believes it’s more meant to collect as much data as possible on citizens.
“There’s never been a centralized database for a government to access records of all citizens’ transactions,” Fanusie told Chainalysis. “Yes, China can request that data from mobile payment apps, but that takes time, and sometimes they push back.”
There are also speculations that China intends to promote international usage of the digital yuan in order to reduce reliance on the US dollar, circumvent US imposed sanctions, and decrease American influence over world trade.
“I think they’ll try to make arrangements with other countries where they enable CBDC-to-CBDC exchange,” Fanusie told Chainalysis. “Think of it as an atomic swap of CBDCs.”
These transactions wouldn’t rely on the SWIFT system, and if they became the norm, there would be less need for people outside of the US to hold US dollars, he noted.
China’s crackdown on Bitcoin has sent the hashrate plummeting, failing from 75% in September 2019 to 46% by April 2021, according to the Cambridge Bitcoin Electricity Consumption Index (CBECI).
The world’s largest mining pools today, including F2Pool, BitMain’s AntPool and Binance Pool, are either based in China or have Chinese founders. Several localities are now looking to woo them. In June 2021, Miami’s mayor Francis Suarez said that the city’s doors are open to bitcoin miners and promoted Miami’s essentially unlimited supply of cheap nuclear.
Nevada-based Black Rock Petroleum Company said in July 2021 that it had reached an agreement to operate up to one million bitcoin mining rigs in Alberta, Canada. These miners will be relocated from locations in China.
