The Age of Crypto-Currencies in China

By Shrrijiet Roychowdhary

Crypto-currency is a simple piece of technology that easily bypasses the mediator, but yet does not fail in maintaining an infrastructure that allows strangers to trade amongst each other. This decentralized system tries and creates trust by operating outside a regulatory institution. It works on the basic principle of blockchain which stores information of date, time and amount of transaction. This kind of digital currency has advantages for countries in matters of international trade and transactions, but coping up with the drawbacks is a big issue.

China being one of the strongest economies is also persistently progressive in terms of the policies it opts. On the other hand, the economy in the United States of America is currently at a very slow state taking into consideration the recent escalating tensions of heavy tariffs and the withdrawal of American troops from conflict zones, which lacks a political dialogue. The Chinese republic gives a tough fight withstanding the taxes imposed by the profit-driven economy of President Trump along with expanding its infrastructural capabilities overseas and competing for foreign powers in the maritime battle of the South China Sea quest for the biggest oil reserves in the world.

The Chinese government had taken unceasing efforts of asking local governments to “actively guide” Bitcoin-mining operations to “orderly” quit business in the near past. The Central bank, according to a report by the official securities times, had ordered financial institutions to stop providing banking services or funding for any activity related to crypto currencies[1]. China, during the initial years of cryptocurrency functioning, found it imperative to “step up” measures to remove offshore platforms for virtual currencies trading or Initial Coin Offerings (ICO)[2]. The Chinese very well noticed the negative repercussions of inculcating such a new and complicated system. As far as the domestic transactions were concerned, the decentralized currency left room for a lot of risk for the monetary system due to the unlawful issuance of crypto-currencies, which may also involve multi-level marketing and Ponzi schemes to scam less crypto-savvy citizens out of their hard-earned money[3].

But is that the only reason why China did not have a positive approach to the digital currency? One of the simplest arguments against such a system is that it is not being originated out of the central authorities, thus lacking both regulations in times of crisis and control for the central bank to exercise its policies over a system that can be false and fabricated in the process. Companies still find the process very easy as there are no tax regulations or bindings of documented proof with the central government. This is an inconvenience as the People’s Bank of China (PBOC) has to maintain such data from the other virtual currency platforms, which might get unnoticed sometimes. The use of multiple layers of Virtual Private Networks (VPNs) can easily blanket the excessive amounts of cross border transactions that might not be healthy for the economy.

While China’s trade system still has important protectionist elements, those who argue that “China is a closed economy” fundamentally misunderstand the dramatic transformation that has occurred in China since the late 1970s.The amount of trade and Foreign direct investment (FDI) has skyrocketed in the 21st century where the “open door” policy of China has expanded to the One Belt One Road Initiative (OBOR). The OBOR has three main policy drivers, these include, firstly, that China is faced with an oversupply of domestic products which are required overseas, especially to build infrastructure in support of the OBOR project, secondly, that China has developed expertise in constructing cost-saving basic infrastructure which would help increase China’s influence around the world and lastly, that the OBOR provides a chance for China to demonstrate its financial strengths by providing alternate financing sources[4].

The One Belt One Road Initiative can use this digital currency as one of its major assets. The blockchain information storage system helps decentralize transactions and employment histories across a web of storage bases and essentially atomizes talent search. This is a strategic human resource’s industry destination for entry of international talent, especially for fresh locations in Central Asia. Blockchain has the potential to tear through all of that simply by directly linking employers with the necessary talent and eliminating the time and cost of the middlemen in grassroots industry sectors like construction, infrastructure, and utilities which are a major part of the Belt and Road project. This can be crucial in eliminating the unnecessary barriers between multiple parties given that the potential employer can access the employment and skills history of required talents through the blockchain contracts history[5].

Imminent risks still prevail, as although adopting such a system might be immensely advantageous for China, we cannot forget the countries which have fallen into the debt trap of the private investors from the Chinese republic. Countries that are termed as least developed or developing still lack the skill to deal with such transactions. These dealings can be fabricated and push stumbling economies to matters of fraud and issues of cybersecurity. One of the best examples of such debt traps could be the Hambantota port in Sri Lanka. The government of Sri Lanka, a country where Chinese firms have also financed and constructed railways, roads and power stations, allegedly failed to repay Chinese loans to build the port and were then forced to lease it to China, which covers the port as a naval base[6].

An inference obtained from the study emphasizes that governments should first satisfy the immediate requirement of a license provider for crypto-currency companies which would help them in proper recognition and monitoring transactions. This procedure would also generate a certain level of trust for customers as cases of theft still pile up undermining one of the greatest advantages of crypto-currencies. An international forum is also recommended as the increased cross border transaction in the digital currency might ignite international friction. Platforms like the dark web instigate non-state actors to receive funding through these platforms who then initiate violence in war-torn regions and encourage third parties to carry out their profit-based motives. Unauthorized activities also help these non-recognized groups to multiply and spread the word of chaos and disorder and opt for unlawful means to achieve their goals.

Another facet of the series of problems is the Anti-money laundering (AML) reforms which are the peer-to-peer transaction authentication, created to permit coin holders to bypass institutions intermediaries who are supposed to serve as essential gatekeepers to the global AML regime. The potential for mutual anonymity can thus frustrate the Know your customer (KYC) and the customer identification procedures (CIP), thus a focus pertaining to this topic is highly required.

A cryptocurrency system for prospering the idea of increased investment works very well, by the number of regulations makes these processes far more expensive. Underdeveloped economies might benefit from such a system, but an influx of investment comes with a lot of regulations and bypassing the layer of paying taxes is something which is not possible.

References

[1]Ling, Sidney. “Beijing Bans Bitcoin, but When Did It All Go Wrong for Cryptocurrencies in China?” Beijing Bans Bitcoin, but When Did It All Go Wrong for Cryptocurrencies in China?, 5 Feb. 2018, https://www.scmp.com/news/china/economy/article/2132119/beijing-bans-bitcoin-when-did-it-all-go-wrong-cryptocurrencies.

[2]Sharma, Rakesh. “China To Crack Down On International Cryptocurrency Trading By Its Citizens.” Investopedia, Investopedia, 25 June 2019, https://www.investopedia.com/news/china-plans-crack-down-international-cryptocurrency-trading-its-citizens/.

[3]Seth, Shobhit. “Is Bitcoin Banned in China?” Investopedia, Investopedia, 25 June 2019, https://www.investopedia.com/news/bitcoin-banned-china/.

[4]Sooksripaisarnkit, Poomintr, and Sai Ramani. Garimella. Chinas One Belt One Road Initiative and Private International Law. Routledge, 2018.

[5]“Blockchain, Cryptocurrencies and Their Role in Central …” Blockchain, Cryptocurrencies and Their Role in Central Asia — The BRI Connection, 16 July 2018, https://herbertrsim.com/blockchain-cryptocurrencies-and-their-role-in-central-asia-the-bri-connection/.

[6]Sautman, Barry. The Truth about Sri Lanka’s Hambantota Port, Chinese ‘Debt Traps’ and ‘Asset Seizures,’ 6 May 2019, https://www.scmp.com/comment/insight-opinion/article/3008799/truth-about-sri-lankas-hambantota-port-chinese-debt-traps.

Image source: CNN

Shrrijiet is in his second year pursuing a Bachelor’s in Global Affairs at Jindal School of International Affairs.

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