Three scenarios for the development of events with Bitcoin and mining in China

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Journalist Shuyao Kong (Da Bing) shared her vision of the situation around bitcoin and cryptocurrencies in China, where the authorities again started talking about the ban on mining and trading.

Hundreds of years before the 20th century, the emperors of China banned international trade and shielded the country from the rest of the world. The so-called “closed door” policy is partly a response to the Opium Wars with Britain, which has mercilessly distributed the drug over the past century and has caused addiction to 12 million people in the country.

While cryptocurrencies are unlikely to be as addictive as opium, today’s regime has the same low opinion of them. Vice Premier Liu He recently denounced mining and trading as financial risks that would destabilize the country’s economy.

As a result, large mining firms have interrupted their activities and began to look for new refuge abroad. Huobi and OKEx, the two largest exchanges still serving Chinese investors, have also stopped mining and margin trading in the country.

Will this be the beginning of the “Cryptocurrency Wars” in China? Or is this just another example of psychological manipulation that tends to appear in every bull cycle in the cryptocurrency market? This week, Da Bing sorted out both Liu’s statement and the reaction from the local crypto community, proposing three likely scenarios for further developments.

Scenario 1. Complete ban on cryptocurrencies

Destroying the “official” crypto industry in China (with the exception of retail investors and others who use VPNs to bypass the “Great Firewall”) is certainly possible. The central government can impose a ban on mining and trading across the country. Then procedures will be established to revoke licenses from mining farms and punish those currently working under the guise of a “cloud computing center.”

If this happens, we can expect Huobi and OKEx to fall under the air as well. Both exchanges are based in Beijing, less than an hour’s drive from Xi Jinping’s residence.

Indeed, cryptocurrencies remain a small player in China’s fintech space, and the authorities have much larger targets like Alibaba and Tencent. But cryptocurrencies can be much more of a long-term threat than Alibaba and Tencent. After all, the authorities can easily control Alibaba by silencing Jack Ma, but they cannot easily silence cryptocurrencies as they grow. Governments know better than others that cryptocurrencies are a rabbit hole that will lead many beyond the gambling stage into an open, censored, and decentralized world. This especially scares the Communist Party.

Moreover, uncontrolled “real” cryptocurrencies may well be seen as a competitor and a confusing threat to China’s current initiative to create its own digital currency. As the full-scale release of the digital yuan approaches, any financial elements subverting it will be viewed as a threat to the government campaign. In addition, cryptocurrencies are used for inappropriate capital withdrawals, which is another source of irritation for the authorities.

Nevertheless, many observers consider a scenario of a full-scale destruction of the industry unlikely, because the authorities have put up with cryptocurrencies for more than ten years, and now it would be too radical to cut them off in one blow. I tend to agree.

The estimated probability of scenario execution is 20%.

Scenario 2. A lot of empty thunder

This phrase describes political statements that sound ambitious, but do not entail any action. If this scenario plays out, then Liu’s statement is the last thing we heard from the government. There will be no additional specific instructions for provincial authorities to prosecute participants in the crypto industry.

More importantly, there will be no performance criteria against which the actions of the provincial authorities would be judged. This is a key requirement, because in the absence of directives, they are unlikely to do anything against miners. After all, miners have been working peacefully for ten years now. They have developed a warm relationship with local authorities, not least thanks to good taxes.

If this scenario plays out, Liu’s statement can be seen in line with China’s commitment to carbon neutrality by 2060. The state decided to get rid of any obstacles on the way to this goal, and bitcoin mining, unfortunately, is one of them.

As a result, we can witness the disappearance of coal-fueled mining farms, while clean energy miners will be allowed to continue working. Cryptocurrency exchanges will do well too, apart from the need to close mining pools, which in any case account for only a small part of their income.

The estimated probability of scenario execution is 35%.

Scenario 3. Slow alienation

China-based venture capitalist Matthew Graham told me, “We are definitely of the view that Liu He’s comments indicate that the Chinese leadership has concerns about excessive speculation, including in cryptocurrencies. We can expect the authorities to tackle this problem more closely ”.

This means that the authorities will continue to practice a balanced approach to avoid the massive spread of the risks of cryptocurrencies, but will not prohibit them completely. They can start by banning coal mining, then gradually switch to hydropower, and then switch to mining using central processing units (such as Filecoin and Chia).

Huobi and OKEx have already closed mining pools and margin trading for local users. Other features such as OTC trading are also at risk.

Perhaps this is the most dangerous scenario, because it will stretch the negativity into the foreseeable future. The market does not know about the future actions of the authorities, so it can only react passively. Many crypto entrepreneurs share fears and have already left China or prepared a route of departure.

The estimated probability of scenario execution is 45%.

Unknown

As Graham noted, the cryptocurrency community has put a “fear-driven emphasis” on Liu’s statement. But this is not a fear of problems, it is a fear of uncertainty. If the authorities were clear about their intentions, the community could develop solutions.

An even bigger problem, at least for the authorities, is that the closed door policy may not work in this case. People in China can easily and routinely bypass restrictions by using a VPN to gain access to Google, Wikipedia, and all the other resources the government is trying to shield them from. They will find ways to go to foreign exchanges and participate in DeFi if major exchanges are banned, although it is understandable that converting cryptocurrencies into yuan in Chinese bank accounts will be more difficult.

What if Chinese miners disappear? This could be good news for cryptocurrencies, making them more decentralized and antifragile.

But it kind of breaks my heart. If cryptocurrencies leave China, a generation of hungry and smart entrepreneurs will miss out on a once-in-a-lifetime opportunity to create and make money on an emerging, global, limitless platform. Everyone will lose in this case.

Cryptocurrencies are not opium. The benefits they offer to Chinese entrepreneurs and investors should be obvious.

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