by Liam Kelly
In a recent interview, associate professor at the Finance Academy of Social Sciences Institute of China, Zhou Ziheng, discussed China’s tough regulatory attitude, the digitization of the economy, and the two great forces of any economy; the public and the private.
Cryptocurrency in Limbo
Ziheng spoke with associates of Chinese press 8btc.com in regards to the recent market closure on cryptocurrencies in China. Naturally, those in China are concerned, but also due to the ways in which the country can affect the global economy, many others are concerned about the future of cryptocurrencies worldwide. The discussion revealed no concrete answers, but instead implied a greater economic revolution than, “the marketization, liberalization, and globalization of [the global] economy.”
Despite the great sway that this idea has, government officials are wary with the ways in which it can upend a country. On the one hand, Ziheng explains, the advent of cryptocurrencies is bringing in enormous opportunities to innovate financial technology as well as technology on the whole. The downside comes from the capacity for these new technologies to threaten credited monetary and financial institutions that keep national infrastructures intact.
The difficulty thus comes from the limbo that private economies have when exploring new territories that have yet to be regulated by government bodies. Governments also recognize the destabilizing features of these types of innovation, and in the case of China, regulatory officials took stringent measures to guard against these threats.
To put it simply, Ziheng underlined the fact that “private digital currency or quasi-digital currency has developed into an “unstable force” within the socio-economic system, which in turn constitutes a real threat or a real impact on financial stability.”
The move to strictly regulate such an unstable force also marks the end of an era. As far as China is concerned, the professor believes that “the era of private digital currency or quasi-digital currency dance is over, and the innovation of money digitization will evolve around the legal digital currency and there is no other way to bypass it.”
The Shortcomings of Digital or Quasi-Digital Currency
Despite the tendency for free markets to push innovation, in a non-liberal business state like China, there are many downsides to digital currency. For one, the currency cannot be publicly used. Zieheng asks, “Specifically, can a private digital currency be used to pay taxes? Can it be used as a financial expenditure? Can it become a company’s assets and be included in the financial statements?” This feature makes the currency weaker to its legal fiat counterparts.
Though many enthusiasts fantasize over this exact idea, the decentralized and non-regulated aspect of cryptocurrency, Ziehung’s conclusion explains how this may be the Catch-22 preventing digital currency from fulfilling its revolutionary promises. He concludes, “private digital money or quasi-digital money is not “strong” enough for the monetary authorities to tolerate or even accept it as a legal currency.”
The interview ends positively but to the chagrin of cryptocurrency purists. Ziehung iterates the greatness and future of digital currencies, as long as it enters the market in the same way that other currencies have in the past. The convenience will come from the fact that, “A digital currency allows the transaction to be timestamped, which means a transaction or an economic decision takes place only at one particular time. It is the greatest guarantee of efficiency and freedom. The existing banking system cannot deliver such feature. A transaction involves multiple timestamps and cannot entertain the requirement of digitalized economy.” Anything more than the convenience it has over banks, spells the end of digital currency in Chinese markets.
Generally speaking, this is another example of the differences between the economic structure in China and the rest of the world. Ziehung’s argument that cryptocurrencies are not capable of existing in the public space, for instance, does not apply to the realty market in the Czech Republic, nor does it stand in accord with Columbia Business School economists. It does show, however, that it is a threat to conservative economic systems in that it can develop faster than government regulations can manage.
The recent crackdown on trading platforms have the market wondering whether the mining industry will be scrutinized next, contributing to weakness in BTC-USD recently, which has traded below the $4000 handle. China has also made some interesting moves with its trading partners by exchanging oil for Yuan, instead of the US dollar. The crackdown on bitcoin seems to be part of a broader, long-term plan to introduce a central bank issued digital currency. Increasing the attractiveness of the Yuan for foreign central banks to freely conduct trade also lays the foundation for a Chinese digital currency to attain reserve status.
Ultimately, governments will have to answer these questions for their own country. The future of efficiency and freedom, according to many, including professor Ziehung, lay in digital currency. The primary objective now is how best to legitimize and regulate the currency according to a country’s best economic interests.