Bitcoins and many other cryptocurrencies that are not backed by a central bank could soon see their boom times come to a crashing end. Boosters and speculators, who have enriched themselves on the bitcoin wave, have started to sell off their holdings after the Chinese government sent a strong warning earlier this week. China’s Vice Premier Liu He reaffirmed Beijing’s pledge to shutdown Bitcoin mining operations in the country, while exerting stiffer pressure on Chinese banks, payments firms and financial services companies to curb crypto-currency transactions.

China’s Cabinet, the State Council, has weighed in and expressed grave concerns over the wild fluctuations of cryptocurrencies on trading platforms with one Bitcoin surging above US$40,000 in value last April. Chinese President Xi Jinping has proposed to embark on stronger eco-friendly policies for the nation but crypt–mining requires a huge uptick in coal-powered electricity to produce the ethereum used for the production of bitcoins. The People’s Bank of China (PBOC), China’s central bank, has introduced the Digital Yuan and that could serve as more reliable player in the cryptocurrency markets.

Shifting away from Bitcoins

Bitcoins were first popularized at around 2013 when its promoters were touting its anonymity and convenience to carry money beyond foreign borders. Let’s say you are a United States citizen with plans to move to the United Kingdom and stood reluctant to pay the high costs of currency exchange fees, as well as assuming the risks of carrying cash and transferring the funds to your new home in London. It was believed you could buy bitcoins in US dollars and resell it to British pounds when arriving in the UK. That sounds amazing but the bitcoin turned very complicated.

There had always been tremendous risks involved with bitcoin trading even if intended for convenience, such as a person moving to a different country. A buyer could pay US$40,000 for a bitcoin but if that person took a long-haul flight to London it was possible the bitcoin value could drop to $30,000 while in mid-flight and that’s a huge investment loss just for the person carrying money across a foreign border and passing through Customs.

Meanwhile, criminal gangs and terrorist organizations were using cryptocurrencies for money laundering purposes, knowing it was much more difficult for law enforcement agencies worldwide to track them. So it makes sense for sovereign foreign governments including China to place stricter regulations on cryptocurrencies to halt tax evasion and illicit financial transactions. We also have to take into consideration that global governance mechanisms have called for sovereign governments to put forth greater efforts into curbing money laundering and to collect taxes in order to deter criminal activities worldwide.

Crypto-mining’s messy affairs

Additionally, China has long faced criticisms from the West and much of the world for having high air pollution levels. Beijing has signed on to the United Nations Climate Change pact and China promised to reach net zero emissions by 2060 after hitting peak emissions by 2026. President Xi has vowed to curb coal mining and shut down many coal-powered plants, but crypto-mining operations have proven to be very lucrative in the isolated regions of China’s Inner Mongolia and Xinjiang and that has also led to tragic circumstances.

65 percent of all bitcoin mining in the world can be found in China’s rural regions, according to estimates disclosed by the University of Cambridge in April 2020. Residents of impoverished villages have welcomed the opening up of illegal coal mines and crypto-mining as it creates new jobs for local communities but it comes at the expense of the environment. Coal is inexpensive, but idled mines have been restarted posing serious safety risks and at time causing deadly accidents. In April, 21 people got trapped in a coal mine that had a business relationship with a crypto-miner in the surrounding area. Xinjiang accounts for 36 percent of bitcoin mining capacity.

The Regional Government of Inner Mongolia has issued urgent alerts ordering the public turn informant and contact them to report illegal activities, such as unregistered coal and bitcoin mines opening up in the region. Local officials were place more vigilance into shutting them down for a greener tomorrow.

Reigning in cryptocurrencies

Beijing will utilize its government agencies to tamp down on cryptocurrencies. The National Internet Finance Association of China, the China Banking Association, and the Payment & Clearing Association of China have threatened impose economic sanctions on non-complying firms connected to cryptocurrency transactions, as reported by the Wall Street Journal.

The Chinese government holds deep concerns over social stability and to prevent boom & bust cycles in the domestic economy. The bitcoin craze closely resembles the tulip mania that spread across Europe a few centuries ago when the masses of investors were buying tulips hoping to resell them at much higher prices and eventually tulip prices crashed when they started to sell them off but new buyers refused to purchase them. Many families had lost their fortunes over de-valued tulip possessions and we are witnessing a somewhat similar scenario come into play with cryptocurrencies, while Elon Musk, the founder of Tesla Motors, electronics vehicle manufacturer, announced consumers could no longer exchange bitcoins to purchase Tesla models.

Beijing is not alone at looking to enforce stronger punitive measures against cryptocurrencies not backed by a central government.

Digital Yuan to the rescue

Not all hope is lost if bitcoin fades into the sunset. If anything, cryptocurrencies played a crucial role to encourage sovereign governments to moved forward on their own digital currencies but with upgraded and more-secured versions. The big weaknesses of bitcoins are that they can be susceptible to fraud, hacking and excessive pricing volatility. And just try to take your bitcoin to buy groceries at the local supermarket. Other than providing opportunities for speculators and traders, most crypto-currencies do not make for safe investments. The PBOC believes the introduction of a ‘Digital Yuan’ can be the game-changer here.

According the Entrepreneur magazine, the Yuan Pay Group (YPG) stands as the only recognized licensed firm in China to issue Digital Yuan to foreign investors and they have enjoyed tremendous success thus far. The company has reported over 100,000 active daily users and it doesn’t charge trading fees and accepts transactions from virtually all major financial institutions. The Digital Yuan is backed by the PBOC and its value is the same as the Chinese yuan in the forex currency exchange markets，because it is the digital form of the Chinese sovereign currency. Owners of the Digital Yuan can also purchase goods and services at locations in China where digital payments are commonly accepted.

Turning the tide

The Chinese government is taking the right approach to place tougher restrictions on bitcoins and other crypto-currencies. The bitcoin has risen in value but that’s creating a bubble and in the market all bubbles do pop. Beijing intends to deflate the bitcoin bubble by giving warning, so crypo-currency investors have time to walk away from it and in China they can shift their cash into the Digital Yuan instead, which serves as a safer bet.

The article reflects the author’s opinions, and not necessarily the views of China Focus.