The Intersection of Law and the Cryptocurrency Market: How China’s Increased Ban on Bitcoin Effects the Global Digital Currency Market

By Mitchell Purdy

When one thinks of innovation, it is unlikely the first instrument to come to one’s mind is currency. However, as has become apparent to anyone interested in finance, that is precisely what Bitcoin and other cryptocurrencies did: the emergence of digital currencies innovated the global currency market.[1] Whereas before, reserve currencies like the U.S. Dollar (USD), the Euro, and the Chinese Renminbi were essential cornerstones of international commerce,[2] there was an unsatiated demand for viable alternatives to these national and regional currencies.[3] In 2009, into this void came Bitcoin, the first decentralized cryptocurrency.[4] Since that point, a multitude of other “coins” have followed, though in many respects Bitcoin has remained the “gold standard” for cryptocurrencies.[5] A relevant actor in Bitcoin’s unique history, the People’s Republic of China (China), was once seemingly a strong proponent of digital coins.[6] However, this early support has seen a total change in position, as China has recently banned the mining of Bitcoin in a number of its provinces.[7] While it does not appear likely that this change in stance will have a significant impact on the long term value of Bitcoin,[8] the apparent motivations behind the ban do call into question the continued existence of decentralized digital currencies, and potentially threaten the benefits experienced by developing nations who have endorsed such units of commerce.

Because it is not uncommon for the average person to be unfamiliar with what exactly cryptocurrency is, it would be beneficial to provide some insight into the nature of digital currency. To that end, cryptocurrency can best be defined as: “a digital currency in which transactions are verified and records maintained by a decentralized system using cryptography, rather than by a centralized authority.”[9] In this context, terms like decentralized and central authority refer to the fact that the currency is not regulated by a national government, meaning that the global supply and the market value of decentralized digital currencies are not determined by nations. Given that the market value of an asset is related to its global supply, it may be helpful to state that the global supply of Bitcoin and similar coins is determined by the demand for the currency. This general principle is accomplished through an action referred to as “mining,” which is a technical term for when an individual authenticates a Bitcoin transaction and is issued Bitcoin as compensation for verifying the transaction.[10]  Essentially, this means that under the current system, the more transactions that occur, as long as there are miners to verify the transactions, the global supply of the digital currency increases. A general economic principle that should be noted is that there is a direct relationship between the rate at which a particular currency is used to complete a transaction and the demand for the currency.

Armed with this basic understanding of what Bitcoin is, it is relevant to review China’s history with the digital currency. In 2019, Chinese President Xi Jinping expressed his support for blockchain technology,[11] which is the technology behind how Bitcoin transactions are authenticated.[12] This endorsement resulted in an immediate spike in the value of Bitcoin and was followed by high levels of mining being conducted within China.[13] For reference, in September of 2019, 75.5 percent of the power used to mine Bitcoin.[14]

Given the apparent enthusiasm for Bitcoin mining in China, the recent provincial bans of Bitcoin mining in some of the highest Bitcoin-producing provinces[15] may come as a surprise to some. However, when the ban is considered in tandem with the fact that China introduced its own regulated digital currency,[16] the surprise likely dissipates. However, the impact of this change in policy seemingly was short lived: while Bitcoin initially experienced a significant decrease in value, it recovered.[17] One of the more impactful questions that this change in policy implies, however, is: what does this mean for the future of decentralized digital currencies?

The answer to this question is likely most relevant to developing countries who have enthusiastically embraced cryptocurrencies as a means of reducing economic reliance on the current geopolitical economic hierarchy.[18] This reduced reliance takes the form of developing nations recognizing digital currencies as acceptable legal tender, which reduces reliance on a nation’s official national currency, many of which have fixed exchange rates with the USD.[19] This ultimately results in a degree of economic liberalization, as countries with traditionally weaker economies get to experience the benefits of not being as dependent on the established economic powers of the world. These benefits, however, could be threatened if those same economic powers collectively followed China’s example and banned the use of decentralized digital currencies in favor of state-regulated alternatives.

While the loss of a significant percentage of all Chinese Bitcoin miners did have an initial impact on global supply, the slack was quickly compensated for by other countries.[20] While this kind of market correction is the type that the basic laws of supply and demand would dictate, the long-term political and economic ramifications of a growing regional power, verging on global power, like China makes one wonder about the future of decentralized digital currencies. If China’s policy shift with respect to Bitcoin is indicative of a future trend amongst the economically elite nations, the potential consequences for the developing economies of the world will be most interesting. Will developing countries continue to embrace decentralized digital currencies while the developed economic powers attempt to benefit from blockchain technology through centralized digital currencies, forcing competition between the state controlled and free-market digital alternatives? Will the economic powers of the world relegate decentralized cryptocurrencies back to being a shadowy mode of exchange commonly associated with criminal action, as Bitcoin once was? Ultimately, the best indicator of what the future holds for decentralized digital currently will be if the printers of the other reserve currencies decide to follow China’s example and create their own centralized digital currency.

[1] See Camomile Shumba, Cryptocurrencies are taking the developing world by storm, with more users now in Nigeria than in the US - 2 experts lay out how bitcoin is changing emerging-market finance, Markets Insider (July 17, 2021), https://markets.businessinsider.com/news/currencies/cryptocurrencies-are-taking-the-developing-world-and-nigeria-by-storm-2021-7.

[2] See Raul Amoros, Charting The Most Powerful Reserve Currencies in the World, HowMuch.Net (Sept. 4, 2019), https://howmuch.net/articles/worlds-top-reserve-currencies-2019.

[3] Shumba, supra note 1.

[4] Ryan Haar, What is Bitcoin?, NextAdvisor (Aug. 12, 2021), https://time.com/nextadvisor/investing/cryptocurrency/what-is-bitcoin/.

[5] See Julia Beyers, Why Does Bitcoin Have Such A Big Influence On Other Cryptocurrencies, CommPro, https://www.commpro.biz/why-does-bitcoin-have-such-a-big-influence-on-other-cryptocurrencies/ (Last visited Sept. 9, 2021).

[6] Arjun Kharpal, With Xi’s backing, China looks to become a world leader in blockchain as US policy is absent, CNBC (Dec. 15, 2019), https://www.cnbc.com/2019/12/16/china-looks-to-become-blockchain-world-leader-with-xi-jinping-backing.html.

[7] MacKenzie Sigalos, China’s war on bitcoin just hit a new level with its latest crypto crackdown, CNBC (July 7, 2021), https://www.cnbc.com/2021/07/06/china-cracks-down-on-crypto-related-services-in-ongoing-war-on-bitcoin.html.

[8] Ryan Browne, Bitcoin sinks to two-week low as China intensifies crypto mining crackdown, CNBC (June 21, 2021), https://www.cnbc.com/2021/06/21/bitcoin-btc-price-drops-on-china-crypto-mining-crackdown.html.

[9] Jake Frankenfield, Cryptocurrency, Investopedia (Aug. 9, 2021), https://www.investopedia.com/terms/c/cryptocurrency.asp.

[10] Id.

[11] Bitcoin Spikes as China Embraces Blockchain, Forbes (Nov. 3, 2019), https://www.forbes.com/sites/cryptoconfidential/2019/11/03/bitcoin-spikes-as-china-embraces-blockchain/?sh=481f867b15c8.

[12] Frankenfield, supra note 9.

[13] Forbes, supra note 11.

[14] Ryan Browne, China’s share of global bitcoin mining plunges while Kazakhstan climbs to third place, CNBC (July 15, 2021), https://www.cnbc.com/2021/07/15/china-share-of-bitcoin-mining-falls-while-kazakhstan-surges.html.

[15] Sigalos, supra note 7.

[16] Dain Evans, China’s digital yuan could pose challenges to the U.S. dollar, CNBC (July 24, 2021), https://www.cnbc.com/2021/07/24/the-us-is-deciding-how-to-respond-to-chinas-digital-yuan.html.

[17] Browne, supra note 8.

[18] See Shumba, supra note 1.

[19] See id.

[20] Browne, supra note 14.