Noelle Acheson is a 10-year veteran of company analysis,
corporate finance and fund management, and is a member of CoinDesk's
product team.
The following article originally appeared in CoinDesk Weekly, a custom-curated newsletter delivered every Sunday, exclusively to our subscribers.
The
financial world saw history made last week when, for the first time
ever, a Chinese head of state took the podium at the World Economic
Forum's famed Davos conference in Switzerland.
Issued on 17th January, Xi Jinping's speech
has since been interpreted as a response to rising protectionism – and
an attempt to consolidate China’s position on the world stage.
But, it's worth examining in another light.
It is also likely to be indicative of the path Chinese authorities will take regarding the country's bitcoin exchanges.
A recap
While we've been focusing on the central bank's scrutiny (and its
potential impact on bitcoin's network and price), this view masks
the bigger picture.
First, a bit of background. Over the past weeks, we’ve seen clear evidence of China's weight in global bitcoin markets.
News of meetings between the People's Bank of China (PBoC) and leading exchanges sent prices tumbling.
The subsequent suspension of margin lending and the introduction of trading fees had dramatic effects on volumes, and many feared that the resulting dent in Chinese demand would dampen price growth.
Some interpreted the moves as an impending crackdown on bitcoin.
China needs to stem capital outflows, the reasoning went, and since
bitcoin is an attractive vehicle for that, it needs to be stopped.
Feet wet
On the surface, this might make sense. Traditionally, the US has been
the world’s champion of free trade while China has dragged its feet.
But now, the tables seem to be turning, China appears eager to
position itself as a 'modern' economy with a flourishing FinTech
ecosystem.
Part of that is seen in its interest in blockchain technology.
Earlier this week, local news sources reported that the PBoC had tested a blockchain-based digital currency and is establishing a related research institute. Furthermore, banks, startups, academia and consortia are working with international institutions to foster a bustling blockchain environment.
While interest in permissioned ledgers is not the same as support for
digitized assets like bitcoin, a desire to participate in foundational
change bodes well for the acceptance of alternatives.
And an understanding of how the technology works should prevent
impractical measures. (The PBoC has not, to our knowledge, indicated an
interest in banning bitcoin, nor is it likely to).
Most pronouncements have expressed a cautious interest, and trading
restrictions are less an indictment than they are part of the central
bank’s job.
Ebb and flow
Capital outflows, on the other hand, are a concern, but local experts downplay
the threat to monetary policy. While most of the world’s bitcoin mining
and trading takes place in China, the cryptocurrency’s market
capitalization is minute compared to the overall size of the Chinese
economy.
More broadly, the recent interest in bitcoin exchanges could well be part of a larger attempt to deflate asset bubbles.
This week, the PBoC asked banks to curb lending,
ahead of what is traditionally the strongest quarter for growth in
loans. The request stressed the importance of reducing mortgage
allocations, with the hope of curtailing runaway real estate prices.
The central bank also raised interest rates for the first time in years, which some analysts interpreted as part of its objective to curtail speculation.
While the bitcoin-related moves do seem to inch towards regulation, few believe that would be bad for the sector. Most appear to focus on the legitimacy it would bestow and the confidence it would give the ecosystem.
Looking ahead, political and economic troubles could complicate things.
The possibility of a trade war or even a military conflict in the
South China Sea could send the exchange rate lower, drive the BTC price
higher and put increasing pressure on China's government to appear
strong, especially in the run-up to its 19th party conference later this
year.
Tables turned
Yet, as China heads into its week-long holiday for the Lunar New
Year, the approach seems to be one of dialogue and further
investigation.
In his Davos speech, President Xi quoted a Chinese proverb
This not only is a fitting metaphor for China’s internal conflict
between wanting to participate in (or even lead) global progress and at
the same time keep things calm at home, it also seems to sum up
bitcoin’s struggles to become an accepted medium of exchange in a world
of shifting priorities.
And it should reassure us that, in China, bitcoin is not a target.