Every bitcoin crash has many parents. In the current bloodletting (total cryptocurrency market cap is down 40% in less than two weeks), China’s recent threat of a crackdown on cryptocurrency certainly seems to be one. But feeding a crypto crash was strictly a side effect of a much broader story: a quest for total control over the financial lives of Chinese subjects.
Over the past year to two years, China’s rulers have engaged in a series of moves clearly designed to clamp down, not on cryptocurrency specifically, but on open financial systems more generally. That included a brutal rebuff of Jack Ma, one of the world’s richest men, as well as the development of the digital yuan, which reportedly has strong built-in surveillance and censorship features.
David Z. Morris is CoinDesk's chief insights columnist.
In the past, China’s crypto hesitancy has often seemed at least partly about protecting its populace from scams and theft. But in the context of this broader maneuvering for financial control, the latest round of clampdowns could be seen as a turning point as the state shifts its focus from defending its people to defending its own power.
To start with the current facts: On May 18, China reiterated existing restrictions on crypto for banks and payment providers. On Friday, May 22, Chinese Vice Oremier Liu He hosted a meeting of an important financial regulatory committee. In a subsequent statement, Liu and the committee called for a crackdown on “cryptocurrency mining and trading activities” in China. The statement on mining and trading was both novel and notable for Liu’s high rank.
It has had an immediate effect: Mining businesses, including HashCow and BTC.Top, had begun to wind down mining operations by Monday, according to Reuters and Al Jazeera. Scattered rumors suggest that Chinese miners are relocating to nearby sites, including Kazakhstan, and that mining equipment is showing up at local auctions in large amounts.
(Bitcoin’s network hash rate, a measure of the number and power of machines mining bitcoin, has also dropped by roughly 15% in the past week. However, it seems likely that just a small portion of that is due to China’s policy shift because dropping bitcoin prices always push less-profitable miners off the network worldwide. Matthew Graham of China-focused blockchain investment fund Sino-Global Capital, for one, says the hash rate drop-off isn’t due to the crackdown.)
You might notice something strange in the timeline of Liu’s declaration: No laws have been passed, no formal legislative processes put in motion. Just a statement from a committee meeting in the form of a mere policy recommendation. In the U.S., such a statement would be seen as an opportunity for a legislator to stake a position or a way to signal firms to prepare for future change.
But in China, the statement often effectively is the policy: the instant declaration of a new status quo. That’s why Chinese miners started going offline within days of the committee declaration instead of waiting for any more formal process. (I seriously doubt any of the Chinese Communist Party nomenklatura who set the regulatory and legislative agenda in China are doing a lot of working through the weekend.)
The risks of failing to read such tea leaves were on stark display in November when the CCP jerked the leash of one of the most powerful men on the planet, Alibaba founder Jack Ma. Ma had been readying an initial public offering of Ant Group, a fintech spin-off of Alibaba, when people suddenly noticed he hadn’t made a recent public appearance. Then, on Nov. 6, at nearly the last possible moment, authorities summarily cancelled the expected $34 billion offering. In addition to investor losses, the intervention personally cost Ma billions of dollars.
The cited reason for the halt was the need for tighter regulatory scrutiny of financial markets and technology, presumably including Ant Group’s hugely popular Alipay app, a predecessor to Apple Pay and similar services. But it was also seen as a symbolic smackdown of Ma, who just a month before the IPO gave a speech strongly critical of Chinese financial regulators.
When even a multibillionaire like Jack Ma can be taken out of the game at any time, a system that nobody controls becomes even more valuable.
Ma’s mysterious disappearance ultimately lasted three months; he finally resurfaced in a brief video in January 2021. One observer described that short clip as “like a hostage video,” and it may almost literally have been. This is the CCP’s treatment of a man with a net worth of about $46 billion as soon as he looks like a threat to its control.
Something notably similar, though both milder and weirder, happened to Justin Sun, founder of Ethereum imitator Tron, after he paid $4.6 million to have lunch with Warren Buffet. Sun heavily touted the lunch as a victory beforehand, inviting skepticism when Sun later announced that he would have to delay it because of kidney stones.
It didn’t make things more reassuring when Sun declared himself recovered the next day. Subsequent reporting found that the real sickness was Communism, with heavy CCP pressure reportedly figuring in Sun’s cancellation of the lunch. In a subtitle to its reporting, The New York Times bluntly described China as a place “where executives sometimes vanish.”
Sun later issued a statement apologizing for being, in effect, too shameless a promoter of his company. Some read this as a sign that putting Sun on punishment was largely an anti-scam effort by the CCP at a time when a lot of Chinese people were getting ripped off by pyramid schemes and other fraud. The dinner finally took place in February 2020.
China crypto truths
All this speaks to two important truths to remember about China and cryptocurrency.
First is the regulatory landscape. When observed from a distance, China can resemble a modern nation-state operated according to the rule of law. But it is, ultimately, an authoritarian one-party state, and increasingly over the past decade a personal dictatorship under Xi Jinping. That means changing stances from either the CCP or Xi don’t necessarily have to pass through any real legislative process to become the new rule on the ground. Instead, what would be considered informal or preliminary signals elsewhere – such as committee minutes – are treated like gospel and acted on immediately by any CEO who doesn’t want to wind up in a literal dungeon.
One generous interpretation of this is that Chinese policymaking is “experimental,” allowing for more flexibility than a rule of law-based approach – because, of course, all these proclamations can be reversed any time. But it also means private sector businesspeople, including most entrepreneurs, lack predictable conditions for planning. Overall, it’s hard not to infer that China’s lack of democratic due process increases the risk and volatility of doing business there.
Second, and closely related, China is engaged in a much broader attempt to create an innovative economy within an authoritarian society. The case of Ant Group shows how difficult that is: Would-be innovators have to judge exactly how much they can dare to innovate while relying not on clear-cut laws and policies but a more numinous sense of the prevailing sentiment among CCP leadership at any given moment. They seem to be moving closer to deciding that cryptocurrency isn’t entirely compatible with that fine balance, but that, above all, means more opportunity for innovators in more free societies.
China’s new pullback may justify short-term caution among global cryptocurrency investors – it seems at the least to have reshuffled the playing field. But if anything, the broader pattern shows why bitcoin and crypto are so important and attractive in the long term. When even a multibillionaire like Jack Ma can be taken out of the game at any time, a system that nobody controls becomes even more valuable.