Preventing capital flight, CCP cracks down on virtual currencies

Cryptocurrencies, represented by Bitcoin, have attracted increasing attention in recent years for their security, secrecy and decentralization, with the value of Bitcoin and other major cryptocurrencies trending upward amidst significant fluctuations. In particular, the value of multiple cryptocurrencies has soared in recent months, driven by Bitcoin, and the total market value has now soared to $2.5 trillion from a few hundred billion dollars.

Data shows that the unit price of bitcoin once topped $60,000; despite a recent drop in value, as of May 9, the unit price of bitcoin was still as high as $58,600, with a market cap of $1.1 trillion. As the price of bitcoin and other virtual currencies has risen, the resources devoted to the so-called virtual currency mining industry around the world have increased substantially.

The China Youth Daily reported in 2018 that in the five years between 2013 and 2018, the total network-wide computing power to mine bitcoin increased 240,000 times, already exceeding the combined power of the world’s top 100 supercomputers by a factor of 100,000.

On the other hand, the impact of cryptocurrencies is increasingly daring countries and multinational consortia and institutions around the world to look down on them, with many tycoons and financial institutions going from early denial to cautious observation, and governments beginning to pay increasing attention to the issue. Among them, the Chinese government has been the most aggressive, with the Communist Party not recognizing virtual currencies on the market, taking steps to ban trading, and introducing the digital renminbi, which is officially controlled by the government itself. Virtual currencies like Bitcoin, on the other hand, have instead become a major problem for the CCP because of their security and secrecy advantages. Yu Jianing, the rotating chairman of the Blockchain Special Committee of the China Communications Industry Association, believes that “it is inevitable” that the Chinese Communist Party authorities will definitely have stricter regulations on cryptocurrencies.

While the Chinese Communist authorities ban the trading of cryptocurrencies such as Bitcoin, they do not ban the mining of cryptocurrencies.

Chinese miners make up the majority of Bitcoin’s global mining industry.

According to a paper published by several Chinese academics in Nature Communications on April 6 of this year, Chinese miners accounted for more than 75 percent of the Bitcoin network’s computing power by the end of last year.

A study cited by Deutsche Welle shows that China accounts for 70% of the total energy spent on bitcoin mining, based on the amount of electricity consumed during the mining process.

According to a study published in February in a Chinese media outlet, “at least 60% of the network’s computing power is in China.

Mining, in the case of Bitcoin, is the process of putting arithmetic power into a computer and receiving Bitcoin as a reward and transaction fee when it is confirmed by a proof mechanism. According to this study above, the daily revenue of the bitcoin mining industry on February 21 of this year could be as high as 380 million yuan ($58.8 million).

In the mining process, not only does the operation of computers consume large amounts of electricity, operators also need to constantly update and develop supercomputers for mining in order to increase the arithmetic power, and a variety of special purpose integrated circuits (ASIC) mining machines are constantly being introduced on the market. The formula for calculating the benefit of mining is: benefit = value of cryptocurrency obtained – (electricity used + cost of miner).

Chinese miners of virtual currencies are mainly concentrated in the west. Most of the small miners are in the mountainous areas in the west, which sounds quite strange, but very logical when you think about it. Because there are many small and medium-sized hydropower stations in these areas, because of the mismatch of power distribution equipment, a lot of hydropower is wasted, especially in the summer flash floods, hydropower stations hate to send electricity to people for free. Electricity is cheap, because it is inside the mountains, the temperature is still low, so a large number of small and medium-sized miners into. There are even hydropower plant owners who simply became miners themselves. While taking the government green energy subsidies, while mining with cheap electricity.

And the big mines, with huge investments, are usually concentrated in Inner Mongolia and Xinjiang, greedy these places cheap electricity and cold enough climate.

China mining not only accounted for a large share of the mining machine manufacturing is also developing rapidly.

“Two bitcoin mining giants, Jia Nan Technology and Yibang International, will be listed in the U.S. stock market in 2019 and 2020.

Bitmain, a Chinese supplier of integrated circuits and equipment for bitcoin mining, has also placed an order with Taiwan’s chip manufacturing giant TSMC for its highest-end 5nm chips, and production is expected to begin in the third quarter of this year, according to mainland media reports.

In other words, the most people in the world mine in China, the most electricity is used in China, the most mining machines are used in China, the most advanced mining machines are made in China, and the most bitcoin is controlled in China, but bitcoin is something that is not legal in China.

At the National People’s Congress in March, the Chinese Communist Party explicitly proposed to “build a new advantage in the digital economy” and “actively participate in the development of international rules and digital technology standards for data security, digital currency, digital taxation, etc.”

The CCP hopes that the digital economy, including blockchain, will contribute to China’s GDP and turn the CCP into a “global leader”. This is the reason why the CCP does not ban mining.

As we all know, blockchain technology originated from Bitcoin and is a technology to manage and protect data through encryption and decentralization. Currently blockchain technology is mainly used in cryptocurrencies including Bitcoin.

The Chinese Communist Party is vigorously developing blockchain technology, wanting to control the discourse in the future global digital technology, but the original decentralized concept of blockchain technology is just contrary to the totalitarian and authoritarian nature of the Chinese Communist Party, especially especially suitable for secret transfer of funds and money laundering, etc. That’s why the Chinese Communist Party is starting to do its best to suppress other digital currencies.

In addition to scrutinizing several major commercial banks and online financial platforms owned by tech giants such as Ali and Tencent, the CCP authorities have recently been moving to tighten regulations on cryptocurrencies, mainly to prevent domestic funds from being laundered through cryptocurrencies or transferring huge sums of money overseas.

On April 22, CITIC Bank issued an announcement stating that any accounts of the bank used for transactions such as Bitcoin and Litecoin would be cancelled in order to prevent money laundering risks.

The announcement comes after the Communist Party’s central bank issued CITIC Bank its first fine of the year of 28.9 million yuan ($4.49 million) for ineffective anti-money laundering, along with 14 people in charge, mainly for cryptocurrency-related money laundering.

As of April 12, the central bank had fined financial institutions and principals a total of 178 million yuan ($27.67 million) this year, mostly related to money laundering and cross-border transfers through cryptocurrencies, while China’s cumulative anti-money laundering fines for last year reached 628 million yuan ($97.63 million).

Li Bo, deputy governor of the Communist Party of China’s central bank, made it clear at the annual Boao Forum for Asia conference on April 18 that the bank is studying rules to regulate cryptocurrencies such as bitcoin.

He began by defining that cryptocurrency is not legal tender but a crypto asset, and stressed that it is “important to ensure that crypto assets do not trigger serious financial risks.”

In fact, as early as December 2013, the Communist Party’s central bank and five other ministries jointly issued a notice requiring financial institutions and payment institutions not to conduct business related to bitcoin. in April 2014, 13 banks, including China’s five largest banks (Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank, and Bank of Communications of China), also announced that their accounts were banned for bitcoin and Litecoin, among others. Only back then, cryptocurrencies were still in their early stages, unlike today, when they are highly liquid and have trillions of dollars of market cap space.

Chinese media have repeatedly reported that cryptocurrencies are used by individuals and businesses as a tool to transfer large amounts of assets overseas and for money laundering, and that it is difficult to track and regulate this method. In the Regulations on Prevention and Disposal of Illegal Fund Raising, which became effective on May 1 this year, cryptocurrencies are listed as one of the illegal forms of fund raising to be prevented and disposed of.

Cryptocurrencies such as Bitcoin have a high liquidity that even the stock market can’t match.

According to data given by Liang Xinjun, one of the founders of Fosun Group, the market capitalization of Bitcoin was only US$158.9 billion in April 2020, which is 3.5% of the HKEx’s market capitalization of US$4,517.9 billion, but the annual trading volume of Bitcoin is equivalent to three times of the HKEx’s trading volume.

This high liquidity of cryptocurrencies provides very convenient conditions for huge amounts of money to be transferred across borders. The latest data as of May 8 shows that Bitcoin has a 24-hour liquidity of $66.7 billion, with a unit price of $58,580 and a market cap of $1.1 trillion. That compares with a total global cryptocurrency market cap of $2.44 trillion.

According to blockchain security firm PeckShield’s 2020 Annual Virtual Currency Anti-Money Laundering Report, the value of unregulated cross-border liquid virtual currencies (cryptocurrencies) in China reached $17.5 billion last year, up 51 percent from $11.4 billion in 2019, and still growing rapidly. Due to the secretive and hard-to-track nature of cryptocurrencies, it may be difficult to judge the comprehensiveness of these data from the outflow side of the funds alone.

However, the change in the size of global digital funds under management provides a more comprehensive view of the speed and development scale and trend of traditional funds flowing into the crypto asset market.

According to Yu Jianing, the rotating chairman of the Blockchain Special Committee of the China Communications Industry Association, virtual currencies have the characteristics of anonymity, complexity and transnationality, so both the black industry such as money laundering and underground money laundering, and the gray industry such as “running score platforms” in mainland China have started to enter the cryptocurrency field.

Reports in the mainland media confirm that instead of decreasing due to the strict control by the authorities, the transfer of assets from China’s territory to abroad through virtual currencies and the laundering of illegal funds through virtual currencies are increasing.

According to PeckShield’s calculations of the amount of money flowing, the number of bitcoins flowing from China’s domestic virtual currency exchanges to foreign countries ranged from 89,400 to 166,900 per month between January and October 2020, before the official clampdown began. But by November and December of last year, after the crackdown began, the number of bitcoins flowing abroad had increased to 231,700 and 254,100, respectively, up nearly 40% from the previous highs.

If we calculate on the basis of a single bitcoin price of $50,000, the amount of money flowing overseas in the form of bitcoin from within China in November and December of last year was $10.58 billion and $12.7 billion, respectively, a huge amount of money involved, and it continues to trend upward.

In the process of money laundering, there are also “running platforms” that use users’ WeChat and Alipay payment codes or bank cards to collect money for others and earn commissions from them. Because the settlement is made in virtual currency, cross-border money laundering can be conducted very stealthily.

A “running platform” investigated in Hangzhou, China, in September 2019 was found to have flowed more than 50 billion yuan (about $7.77 billion) in the previous three months alone, providing an average of nearly 10 billion yuan (about $1.56 billion) in “laundered” funds per month. (about $1.56 billion) per month.

There are many countries in the world that are suppressing virtual currencies, such as the United States, the United Kingdom, Switzerland, India, etc. According to Guo Wengui, a Chinese tycoon in exile in the United States, all of these countries are afraid that virtual currencies will challenge their legal status as sovereign credit currencies. But only the Chinese Communist Party, is afraid that the domestic money run out. Because now in mainland China, the richer people are, the more insecure they are and the more they need to move their assets safely and stealthily outside the country, and virtual currencies are basically the best way to do that.

I think this analysis makes sense. Virtual currencies like Bitcoin are essentially decentralized currencies, somewhat similar to gold, and modern sovereign currencies are credit currencies that governments can make, which is the key to digital currencies. The digital yuan that the Chinese Communist Party has made, which uses blockchain but retains all the disadvantages of central control and credit money, is not well received by most Western financial experts.