Assessing China’s Crypto Ban Three Years Later

In May 2023, I examined the impacts of China’s cryptocurrency ban on the bitcoin network. China’s ban provided a great natural experiment for analyzing how decentralized networks react to hostile nation-state policy interventions. (The full study can be found here; an abbreviated version was adapted as a chapter in National Security in the Digital Age). This study yielded four key findings with implications for policymakers:

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1. Nation-state policies may impact cryptocurrency values over the short-term, but bitcoin recovers from price drops and retains its value over time.
2. Bitcoin’s difficulty adjustment embedded in its core software makes it highly resilient to adverse events.
3. The use of proxies and other technologies to obfuscate the locations of various cryptocurrency network-related activities complicates geolocational data analysis and presents a policy enforcement challenge.
4. Despite the ability to obfuscate their locations, network participants still factor the anticipated local regulatory environment into their decision-making calculus. 

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Above and beyond price recoveries, bitcoin’s hashrate hit new all-time highs just months after the ban. Perhaps more importantly for the security of the network, available geolocational data indicates the bitcoin network became more decentralized as the share of total network hashrate spread more evenly across several locations. 

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Three years later, some question whether China truly “banned” bitcoin in the first place. This contention is based on unclear language in the People’s Republic of China’s (PRC) policy statement in September 2021 and evidence (both quantitative and anecdotal) that large-scale bitcoin miners are still quite active in China. However, it is clear that at the very least, the stated intent of several top regulating agencies in China was to ban both the exchange and mining of cryptocurrencies. 

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The “ban” is best understood in the broader context of the PRC’s policy history with blockchain technology. For starters, this is not the first time the PRC cracked down on cryptocurrency activity in a way that suggested an all-out ban might be imminent. In 2013, the People’s Bank of China specifically prohibited the use of bitcoin as a payment instrument for goods and services, and in 2017, they prohibited the exchange of fiat currency for cryptocurrency and barred Chinese financial services industries from facilitating such cryptocurrency trading in China. What is commonly referred to as the “ban” in 2021 really consists of three separate actions taken by the PRC:

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1. May 2021: After a surge in bitcoin’s price and trading volume, a joint statement from three Chinese financial regulatory bodies expanded and specified exactly what constituted “business related to virtual currency” which “financial institutions, payment institutions and other member units” were disallowed from participating in. Three days later, the Financial Stability and Development Committee of the State Council announced a forthcoming crackdown on Bitcoin mining and trading. News reports indicate at least four provinces (Sichuan, Qinghai, Xinjiang and Inner Mongolia) shut down miners at this time. 
2. June 2021: The “ban” on cryptocurrency mining across all of China is instituted.
3. September 2021: All forms of cryptocurrency exchange are prohibited by the PBOC. 

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The PRC’s commitment to enforcing their stated policy intention is another question. Data from the Cambridge University’s Centre for Alternative Finance (CCAF) (which uses various methods to estimate the environmental footprint and geographical distribution of Bitcoin mining) suggests that miners in China either went to new lengths to obfuscate their locations or stopped mining bitcoin altogether for some time. CCAF attributed no hashrate to mainland China during July and August, but saw a significant resurgence in Chinese mining in September 2021 – the same month regulatory agencies released strong statements about their intent to ban various cryptocurrency activities. 

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The real question here is: Why would several regulatory agencies of the Chinese government coordinate in announcing a ban for which they either had no intention, will, or means to enforce? I am admittedly not an expert in deciphering the master plans of the Chinese Communist Party (CCP), but these cryptocurrency restrictions are consistent with several other trends:

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1. Historically, China has maintained a restrictive disposition regarding currency control. PBOC laws expressly forbid anyone outside the Chinese central bank from “printing or issuing token tickets which could replace renminbi.” It is worth noting that the 2017 crypto restrictions coincided with depreciation of the renminbi and large capital outflows which led China’s State Administration of Foreign Exchange (SAFE) to place a cap on the amount of foreign currency its citizens could exchange annually. Contrast this with the U.S. following a long-standing precedent of recognizing other legal currencies or mediums of exchange. The dollar remains the country’s legal tender, but the law does not require exclusive use of dollars in the exchange of goods and services. 
2. China has taken steps to erode “dollar dominance.” The United States can take a more laissez-faire approach to currency control when they enjoy the exorbitant privilege of the dollar being the world’s preferred unit of account and medium of exchange. The U.S. Dollar is the global reserve currency and the currency of choice for trading/investment in key commodities (e.g., oil). The CCP understands the enormous economic advantages this brings to the United States and seeks to level the playing field through: some text
   1. Bilateral currency swap agreements with foreign central banks/monetary authorities
   2. Efforts to price key commodities and derivatives in yuan 
   3. The Belt and Road Initiative leads to other nations becoming economically reliant upon the PRC
   4. Increased participation in global markets through the establishment of new international financial institutions (e.g., Asian Infrastructure Investment Bank, New Development Bank). These serve as alternatives to more traditional institutions dominated by Western influence (e.g., International Monetary Fund, World Bank)
   5. Increased investment in gold reserves
3. All the above reinforces a state-dominant approach to blockchain tech development.
   1. eCNY: While Alipay and WeChat are still popular, the PBOC has made a concerted effort to roll out a digital yuan (eCNY) central bank digital currency (CBDC). Widespread adoption of the eCNY domestically and/or internationally would give the CCP an unprecedented degree of surveillance and control over this very efficient form of digital cash.
   2. BSN: China leverages corporate partnerships to maximize innovation and development of their state-run Blockchain-based Service Network (BSN). This is a sort of digital version of the Belt and Road Initiative, encouraging nations and corporations to build systems that rely on a digital ledger they dominate under the guise of decentralization. 

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China’s approach to bitcoin is consistent with that of other authoritarian states imposing heavy restrictions on cryptocurrency use. Such states understand the dangers of disintermediation. The bitcoin network responded as we might expect a truly decentralized, transnational, and adaptable network to respond to an exogenous shock – in this case, an adverse policy intervention from a nation-state. No CEO or board of governors needed to vote on a change to its core code; mining difficulty adjusted as advertised and hashrate recovered as miners became more geographically dispersed than before. This is why some human-rights advocates argue bitcoin is a tool for financial freedom in defiance of authoritarianism. 

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But any exuberance among Bitcoiners about the impotence of the China “ban” lacks perspective of their broader goals. As adoption of Chinese state-run blockchain networks or CBDCs grow, so too will their network effects. The rate of bitcoin’s adoption and the growth of its market cap (~$1.17T, currently) since inception is impressive, but it pales in comparison to what’s required to play a significant role in the global financial system (total value of U.S. Treasury securities ~$25.8T). China will continue to make their case that money and information can flow most efficiently on rails that they control/influence. 

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As lawmakers in Congress and various bureaucratic agencies in the United States wrestle with how to maintain dollar dominance in a post-blockchain world, the PRC will press their advantage. Passing bills is difficult – even bipartisan crypto bills face an uphill battle. Calls for a national Bitcoin reserve in the U.S. must be grounded in a sobering understanding of just how far along the CCP is in shaping the future of money to be compelling to lawmakers. Bitcoin-related policies should be framed in the broader context of China’s head-start in the blockchain space and the “future of money” to be taken seriously.