Wednesday, 6 October 2021

China's Move

 Two weeks ago, I held a briefing about some of the most exciting things happening in the world of high tech right now. I also shared for the first time some video footage of me riding in and researching self-driving cars.

It was a great night, and the best part was the Q&A session towards the end of the briefing. There are always some interesting questions from viewers, and it’s fun to be able to respond in real time to those tuning in.

The best question that night was around what is happening right now in China with regards to cryptocurrencies and blockchain technology. The question was about whether or not the moves by the central government would be bad for the industry and if other countries would follow.

This topic has been of interest for years, as China’s central government has been dancing around the issues surrounding cryptocurrencies with restrictions placed here and there on parts of the industry.

But this time is different...

During the last two weeks, China put its foot down. The decision seems absolute. Not only has the central government outlawed cryptocurrency mining completely, but it has declared all cryptocurrency transactions illegal.

And the market has responded. Companies and individuals involved in the mining of cryptocurrencies have been dumping their mining rigs onto the market for whatever they can get. Mining operations have moved offshore almost overnight, and those who are going underground are running the risk of very dire consequences.

Does this come as a surprise? Absolutely not. If anything, I was a bit surprised it hadn’t happened sooner.

After all, the blockchain industry is built on distributed, decentralized, censorship-resistant technology that removes the power enabled by centralized control. The ethos and philosophical leaning of the blockchain industry is anathema to how a communist nation-state like China operates – with centralized control and an iron fist.

Why would China risk losing that control by empowering new money to be created? Why would it allow its citizens to transact in money that is not controlled by its central bank? In short, it wouldn’t – and it won’t.

I suspect that there is something to the timing of this announcement. I doubt it is a coincidence. After all, China has been developing and testing its central bank-backed digital currency (CBDC) for years now.

I suspect China is getting ready to launch it, and these latest edicts are intentionally designed to clear the field to prepare the country for a digital Yuan.

That will give the central government even more control than it has today.

Not only will it be able to “print” as much digital currency as it desires… it will be able to “see” and tax every transaction as it sees fit. And with a little imagination, we can envision that digital currency being used to incentivize desired behavior as determined by the Chinese Communist Party.

I can see it now. “Do this to earn a few eYuan, do that and get a few more, do this and pay a steep fine that will be immediately removed from your digital wallet.”

State control embodies absolute power. To anyone who believes in a free, open, and non-discriminatory society, this should be frightening.

And while this all sounds bad, it is actually great for the industry. Prior to the ban, more than 53% of all bitcoin mining was performed by a small handful of companies in China. Theoretically, that could have led to collusion and control of the Bitcoin blockchain. That would not be good.

Almost overnight, the Bitcoin blockchain network became more distributed, and as a result, more resilient. That’s the direction we like to see.

Much of the blockchain industry has also been working toward a “cleaner” infrastructure as well. Blockchain technology is an information technology. It is a network of computing systems, and that means energy is required to run them.

More than 60% of all Chinese cryptocurrency mining was powered by electricity from coal. Needless to say, that’s something that we all want to move away from. Again, the immediate shift out of China into other markets is having a marked improvement on the carbon footprint of these blockchain networks.

This move by China certainly didn’t go unnoticed by the U.S. government.

Days ago, the Federal Reserve (Fed) Chair, Jerome Powell, spoke out clearly in testimony before the House Financial Services Committee that the Fed has no intention to ban cryptocurrencies.

This was followed up yesterday by Securities and Exchange Commission (SEC) Chair Gary Gensler, who also said that the U.S. will not ban cryptocurrencies. The focus of the SEC will simply be to provide consumer protection, tax laws, and anti-money laundering regulations with regards to cryptocurrencies.

Great – then let’s get it done. Now is the time to provide regulatory clarity and, hopefully, a light hand when it comes to regulation around blockchain technology and cryptocurrencies.

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