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The Chinese state has chosen to embrace blockchain while trying to limit cryptocurrencies as much as possible, with state regulators seeking to make sure the average Chinese citizen has no access to cryptocurrencies. This has led to a strange world where the Chinese state censored posts against blockchain while the Chinese central bank voiced its will to “clamp down on cryptocurrency trading.”
It seems to be a strange contradiction at first: China is perfectly willing to embrace blockchains but not cryptocurrencies that are built on them.
It only makes sense when you realize that the Chinese state is afraid of cryptocurrencies because it is afraid of delegating control and power. It is afraid of the individual liberties cryptocurrencies represent: the idea of a check and balance on overwrought incumbents, whether they are centralized corporations or states.
The tenets that blockchain represents are those that appeal to China’s politicians, from Xi onwards: control, end-to-end tracking, and digitization. By taking the paper currency supply of Yuan and creating a digitized version, the Chinese state is looking to create a layer of rich financial data — revealing what foodstuffs are consumed and what toys are bought, but also what bookstores are frequented, what travel plans are, and who supports what pro-reform or dissident magazines.
The degree of nominal decentralization of data in a blockchain versus a centralized datastore is a useful fiction for a state that likes to play between the boundaries of state-owned, state-financed and state-controlled enterprises to advance its united interests. Many agents sharing about the same goal: that is as apt to describe any Chinese state blockchain strategy as it is to describe the current state of Chinese state economics.
The ideas that cryptocurrency places to the fore run straight counter to China’s identity as a state: privacy, at least in pseudonymous form, from over-bearing states and others who collect intrusive data and the ability to transact freely with the world rather than tight capital controls.
This is just the theory. In practice, cryptocurrencies undermine specific, tangible Chinese state objectives. Chief among them is control of capital inflows and outflows, an essential part of the Chinese economy. The Chinese yuan needs to remain within a certain range and is regulated by the People’s Bank of China, China’s central bank — which is ultimately accountable to the State Council and China’s political leaders, unlike in other nation-states where central banks have near-complete political independence.
Cryptocurrencies can help disrupt that flow, as digital currencies offer an alternative to a currency controlled by central monetary and political authorities, and which has strict limits on the amount of foreign capital that can be exchanged in a year ($50,000 USD).
The Chinese state is also concerned because in many ways, cryptocurrencies have become interesting retail investment options for the average Chinese investor — fueling a rise in speculation that the Chinese state doesn’t want to tolerate. These are the standard reasons why nation-states fear cryptocurrencies: transactions that flow outside their control and potential investment losses and overinflating bubbles.
These fears are amplified in China by two key unique factors: the large prevalence of cryptocurrency moguls and businesses focused on China’s fierce advantage in hardware innovation and compute power (at one point, China had up to 71% of Bitcoin mining hash power in the world concentrated in its borders), which makes for a rising economic class that may be hard to rein in, and a degree of delegated power, sometimes illusory but always friction-generating, seen in the “one country, two systems” in play in Macau and Hong Kong — and offered tentatively to Taiwan.
China’s central political authorities have made it a key point to bring the growing tech sector to heel, perhaps observant of how American technology companies have grown to dominate political discourse in the United States. One of China’s crown jewels in this regard, Bytedance (which owns TikTok), had its founder Zhang Yiming apologize deeply and publicly for having a “weak understanding” of Xi Jinping’s “four consciousnesses”. Perhaps it is prescient to wonder how decentralized web advocates, already prone to questioning power ideologically or for profit, might fare in comparison.
As for delegated power, China’s political core is wrapped in a sort of concessionary donut, keenly aware of the unpopularity of its undemocratic practices in periphery areas it considers part of its sphere of influence and scared at the slightest bruise from what it considers within itself as a result, whether that is in Mainland China or restive Hong Kong.
Perhaps nowhere is this more pointed than non-for-profit Hong Kong Free Press accepting Bitcoin, while Chinese state media dominates the market on the mainland.
Blockchain and cryptocurrency are wrapped in two heads of the same coin. You can have a blockchain without a cryptocurrency, but that is clearly not the ultimate goal of the Chinese state, which is looking to design a digital currency with some traits reminiscent of a cryptocurrency. What you see in one side versus the other on this fine point shows a lot, like a Rorschach test, of your own internal mental state and concerns.
The idea of blockchain is wrapped in enough centralized control for Chinese authorities, always keen to explore new technologies, to understand and to appreciate its key benefits in elongating their control, from transparency to traceability. A cryptocurrency-like “cat” is fine, so long as it “catches mice” for the Chinese state — and it’s the centralized, controlled blockchain that appeals to the Chinese state, not its related idea of cryptocurrency.
This is because the idea of cryptocurrencies casts all of the downsides and Chinese state concerns of individual liberty, over-speculation, evasion of capital controls, a restive new class of economic risers that may be hard to moor or control and finally, a true loss of control in order to gain temporary concessions — something the Chinese state is existentially afraid of.