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Strategies & Market Trends : Blockchain and Cryptocurrencies

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From: Glenn Petersen9/28/2021 3:44:12 PM
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How China’s Crypto Crackdown Could Backfire On Beijing

Tomio Geron and Benjamin Pimentel
September 28, 2021

China is run by a central committee, so it shouldn't be surprising that bitcoin and other decentralized digital currencies don't have many fans among the Politburo. The question is whether China's crypto crackdown risks going so far that it ends up popularizing crypto technologies that even the Great Firewall can't contain.

On Friday, China outlawed virtually any activities involving digital currencies, marking a crescendo in its fight against crypto. First there was the shutdown of crypto mining, then a ban on financial firms engaging in crypto transactions.

The crypto measures come as China moves to rein in Big Tech generally. And to the extent that crypto companies have a presence in the country, the crackdown is having an impact.

  • Exchanges Huobi and Binance as well as wallet provider TokenPocket are shutting off access to their services to new or existing users, according to Reuters.
  • Individuals who want to trade crypto in China will have to try to access overseas exchanges or use other methods such as peer-to-peer trading.

  • A smarter strategy for the government could be to co-opt crypto.
    Benefiting from blockchain innovations doesn't necessarily require engaging with the open internet.

  • Take NFTs: As Zeyi Yang reported for Protocol | China, NFT transactions are happening through private blockchains managed by companies and ultimately overseen by the government, or on public blockchains but filtered through a company's control.
  • China's digital yuan takes some inspiration from bitcoin, but it doesn't actually use a blockchain — instead, transactions will be kept on private databases more amenable to central government control.

  • But the risk to China is that innovation and capital will go elsewhere.
    That will mean a brain drain just as crypto-related industries like asset management are taking off elsewhere.

  • Crypto asset management firm Cobo just moved its headquarters from Beijing to Singapore.
  • Previous crackdowns in China resulted in outflows of capital from exchanges originating in China including Binance, Huobi and OKEx of $28.3 billion in the first half of 2021, a 62% increase, per Reuters.
  • "It's possible that the Chinese crypto market will be cut off from global innovation as companies avoid the market entirely," said Matthew Gould, founder and CEO at Unstoppable Domains.

  • If China loses, who benefits?
    Businesses that avoided China could look smart as they pick up more business. And ultimately, technologies that route around central government control could get more powerful.

  • Exchanges are a volume game. Binance, Huobi and OKEx still dominate the crypto industry, but a loss of Chinese customers could have some impact on their businesses.
  • Other countries are throwing down a welcome mat for crypto — see El Salvador's embrace of bitcoin as legal tender.
  • Then there's DeFi — self-running software programs for financial transactions that operate on blockchains and don't depend on a central intermediary. The crackdown only increases the attraction of protocols and apps that can't be abruptly shut down, said Ed DeLeon, founder and CEO of crypto company Anatha: "More than anything, this increases the utility and traffic of the entire DeFi ecosystem."

  • That's why China's crackdown may backfire on Beijing.
    When the music industry shut down Napster, file sharing didn't go away: It fractured into hundreds of programs and networks. China risks driving its crypto enthusiasts deeper into the DeFi camp, and unleashing their creativity on an ever-more decentralized financial infrastructure. In a speech proclaiming the People's Republic of China in 1949, Mao Zedong described the state system as a "weapon we must firmly grasp." But what if there's nothing to squeeze?

    — Tomio Geron

    How China’s crypto crackdown could boost DeFi - Protocol — The people, power and politics of tech
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