The Main Reason Behind China’s Crypto Ban
China banned the use of Bitcoin and other cryptocurrencies within its financial system and geographical space. Not only did it ban the use of cryptocurrencies, but it also moved to put a stop to all activities related to the new technology, including cryptocurrency mining and trading.
While the crackdown on cryptocurrencies continued, the Chinese government supported and encouraged the development of the technology upon which the entity was built, blockchain. While the mainstream cryptocurrency industry jostled with the developments in China, the country’s central bank, the People’s Bank of China (PBoC) pushed more and more towards the realization of its digital currency, a Central Bank Digital Currency (CBDC) called the digital yuan.
As these developments gained momentum, speculations arose as to the actual reason why China decided to crack down on Bitcoin and cryptocurrencies. Various reasons have been thrown in the air to explain this, including the government’s multiple reasons that include the pursuit of carbon neutrality, and the quest for proper supervision over the nation’s financial environment.
After several months, a former governor of the PBoC, Zhou Xiaochuan has come out to lend his voice as to the main reason behind China’s crypto ban. He believes that China’s reason to either support or ban the technology must not align with that of other countries, since every nation can find its way of implementing digital currencies, including China.
Xiaochuan says that while Bitcoin and other cryptocurrencies can be used as a store of value, they must remain very functional as payment systems. Without this functionality, Xiaochuan believes that the technology will be useless in the traditional financial system of any nation.
Therefore, given the scalability challenges of Bitcoin and cryptocurrencies, they at this point, do not appear to qualify as efficient payment instruments that can be applied in the mainstream. Placed side by side with the CBDC that is nearing full release, these cryptocurrencies will not qualify to serve as tools for payment in the mainstream economy.
Xiaochuan explains that the CBDC brings a lot to the table that you cannot find with Bitcoin and cryptocurrencies. The comparative benefits of the CBDC as enumerated include reduced cost, higher convenience, and stability in the payment settlement sector. According to him, the CBDC is more flexible and it will bring a lot of benefits to businesses by introducing them to a digitized economy. In addition, it will enable small businesses to create a more effective and simplified accounting framework.
Considering these givings, and the challenges that the decentralized cryptocurrency industry has faced in China in recent times, Xiaochuan describes the scenario as the “survival of the fittest”. Since the decentralized cryptocurrencies cannot compete in terms of convenience and efficiency as a payment system, they get knocked off by the government-backed digital yuan.
The problems faced by Bitcoin and cryptocurrencies as we know are mainly scalability issues that revolve around transaction fees, network congestion, and speed of transaction. If the actual reason is the “survival of the fittest” as suggested by Xiaochuan, one could have expected a level playing ground, where the people are allowed to choose what is most suitable for them, rather than forcing a particular choice down their throats.