Chinese digital yuan, the force behind bitcoin mining crackdown

Emeh Joy
By Emeh Joy

The Chinese government broadened its crackdown on bitcoin mining as it entered the Digital yuan's testing phase. Last Sunday's latest crackdown on bitcoin mining got cryptocurrency crashing down to an all-time low since the beginning of 2021.

The Chinese digital yuan, the force behind bitcoin mining crackdown

Bitcoin has been down by about 20% in the last seven days. Ether also took a stumble, crashing below the $2,000 mark on Sunday.

China's intensified crackdown on bitcoin mining is why the recent significant decline in the cryptocurrency's rate. It all started in May when the Chinese government reiterated its warning on cryptocurrency trading.

Bitcoin fell as low as $31,760 on Monday, 21 June 2020, dropping below $32,000 for the first time since June 8. Why has the Chinese government continued to oppose bitcoin and cryptocurrency trading in the country?.

This is the third time that China is leading a crackdown on Bitcoin. In December 2013, the Peoples Bank of China warned that bitcoin is not a legal tender and that financial institutions should not trade in bitcoin.

In 2017, four years after the initial crackdown, Bitcoin price fell 40% from $5000 to $2900 after the Chinese government ceased trading in Bitcoin amid fears of financial problems that could ensue from bitcoin consumer spikes.

The Chinese digital Yuan

The digital yuan is a new digital currency developed by the Chinese goveernment

The Chinese digital yuan is a national blockchain digital currency developed by the Chinese government to facilitate online transactions and settle debts. The Chinese digital yuan is also known as the e-yuan.

China began developing the Digital Yuan in 2014 after witnessing the success of Alibaba, WeChat developer Tencent and Baidu in digital payments.

The institution at the forefront of developing the Chinese digital currency is the People's Bank of China (PBOC). The Chinese central bank digital currency aims to reduce the amount of cash circulating in the country, facilitate online payments, and tackle tax evasion.

China believes that creating e-yuan is an effective way for its central bank to digitalize banknotes as well as coins circulating in the country.

It's no news that the Chinese economy operates on a high-level cashless economy. Introducing the digital yuan could potentially make China independent of the U.S dollar benchmark.

It is safe to say that China's ban of initial coin offerings (ICO) and crackdown of bitcoin and bitcoin trading platforms is not a mere blanket move. Rather it was a preparation for things to come- its digitalised currency.

China is well underway to become the first country to develop its own digital currency - the Digital Currency Electronic Payment (DCEP) fully.

When will the digital Yuan be launched?

The Chinese government is yet to announce when it will officially launch the digital yuan. However, China has already started real-world trials of its digital currency.

China began trials of the digital Yuan towards the end of May 2020 in four cities - Suzhou, Shenzhen, Chengdu and Xiongan. The People's Bank of China also named some foreign consumer brands that participated in the initial pilot test, including McDonald, Starbucks and Subway.

A second trial of the Chinese e-currency was again initiated in Shenzhen in January 2020, which involved about 20 million yuan.

Since the digital yuan is still in its early stages of the trial, it is not yet available for trading. Also, from the Ministry of Commerce of the People's Republic of China (MOFCOM) plan for expansion of the e-yuan, it is speculated that the trial period will last up to 2023 or longer than that.

A report made by Hinrich Foundation and other Asian-based business organisations regarding the Chinese digital yuan showed that the earliest date for the commercial use of the digital currency should be around 2024 or 2025.

Does bitcoin rival the digital Yuan?

Bitcoin is a decentralised cryptocurrency while the yuan is to be controlled by a central bank

While the Chinese digital yuan is backed by the PBOS and seems to have gotten positive responses from the public, there are still ways it cannot compete with bitcoin.

First, the Chinese digital yuan is not decentralized like bitcoin. While a central authority (the PBOC) controls the e-yuan, bitcoin is not controlled by any central authority.

Also, while bitcoin is built on the 'blockchain' technology, it is not yet clear the type of technological makeup the digital yuan has. However, it is believed that it is developing using similar technology.

The digital yuan will have controlled anonymity. The PBOC already announced that agencies in charge of digital yuan services would submit transaction data to the central bank to enable the PBOC to keep track of necessary data. It stated that the reason is to prevent money laundering, tax evasion and reduce crime.

Also, unlike with bitcoin, concerns have been raised that the digital yuan might be used to increase citizens' surveillance. The digital yuan controlled by the central bank will most likely not compete with the value propositions of Bitcoin.

Can E-yuan displace the U.S Dollar?

It is unlikely that the e-yuan will displace the U.S dollar. However, it might pave the way for evading US sanctions

China has been competing with the U.S. for world economic power. No doubt, the U.S. dollar is very much above the yuan.

The U.S. dollar is one of the top 10 highest currencies globally and has also been tagged the World Reserve Currency. This means the US dollar, unlike the yuan, is accepted anywhere in the world and can be used to make payments anywhere.

China, still in the race with the US and in a bid to enhance the cashless system, came up with this concept of a digital currency.

Aside from reducing money in circulation, there are speculations that this move aims to reduce its dependence on a widespread dollar payment system while making the yuan go global.

Many commentators have said that the idea behind this new digital payment system is to break the dollar monopoly. So now, the question is, "can the digital yuan displace the dominance of the US dollar and US sanctions?

The Chinese digital yuan will most likely overthrow the likes of Tencent's WeChat and Alipay, which have dominated China's fintech market. There should also be expected global implications to this recent development.

Some analysts are of the opinion that the yuan cannot displace the U.S. dollar, considering that only about 4 per cent of the global trade uses the Chinese yuan as an exchange medium while up to 88 per cent of world trade are in U.S. dollars.

Moreover, they argue that the world lacks confidence in the yuan currency.

An article on the Wall Street Journal maintains that new payment methods won't transform a currency that foreigners don't want to hold into one that they do.

The digital yuan might ease transactions within the Chinese territory, but immediacy is not the only factor international businesses consider.

The use of the digital Yuan as a store of value could be hampered by China's capital controls, making it hard for international businesses to trust it as a medium of exchange.

The dollar has maintained its dominance because of its easy transferability and relative stability. However, while it might be hard for the digital yuan to displace it, the e-yuan might offer a bypass to the U.S. sanctions.

China's digital currency would permit direct transfer between global banks to bypass the US government's SWIFT monitoring system and still have a backup of a central bank. This makes it possible for countries that are under U.S sanctions to trade with China.

Another article on Wall Street Journal reads:

"The digital yuan could give those the US seeks to penalize a way to exchange money without US knowledge. Exchanges wouldn't need to use SWIFT, the messaging network that is used in money transfers between commercial banks and that can be monitored by the US government."

China seemly has much interest in bypassing SWIFT as the US continues to sanction more and more Chinese individuals, politicians and top companies.

Bitcoin's future and mining alternatives

Nothing is certain in the world of cryptocurrencies, not even bitcoin future. Bitcoin's peak earlier this year spotted a market value of over $2 billion. However, a 50 per cent plunge not long after this peak has sparked a debate about the future of cryptocurrencies, particularly bitcoin.

While bitcoin enthusiasts view bitcoin as digital gold, critics of the cryptocurrency have maintained that its long-term value won't be worth the current hype.

Some argue that its limited use for transactions makes it prone to collapse. There are also concerns that bitcoin's verification process is much less efficient than systems controlled by a central authority.

The fact that bitcoin transactions run on the ground of anonymity also makes it an easy mode of transaction for illegal activities such as money laundering and drug peddling.

Cryptocurrency is here, and it will most likely stay.

Another flaw in bitcoin is that its mining has been tagged bad for the environment (this was why Elon Musk gave for pulling out his electric car company from bitcoin payment acceptance shortly after endorsing dogecoin).

Even though bitcoin continues to lead in the crypto world, these flaws seem to be gradually setting the stage for other alternatives such as Ethereum.

Bitcoin mining requires a lot of energy. According to the Cambridge Bitcoin Electricity Consumption Index, it consumes more power than entire countries like Switzerland and Finland.

Bitcoin and Ethereum have relied on proof of work (PoW) to provide network security and process transactions.

Essentially, cryptocurrency miners use advanced purpose-built computers to solve complex mathematical problems that enable crypto transactions to go through. In return, they get paid in cryptocurrency for their efforts.

Ethereum, which is regarded as the second-largest cryptocurrency, is now devising mining that requires less energy. According to the Ethereum Foundation, Ethereum will now use 99.9 per cent less energy than before.

Since the PoW blockchain mining requires high energy, Ethereum has shifted from PoW to PoS (proof-of-stake), eliminating the need for mining. Perhaps, bitcoin miners should also look into other energy-conserving alternatives like Ethereum did.

Asides the Ethereum, other digital currencies that can stand as an alternative to the bitcoin include:

  • Litecoin
  • Bitcoin Cash (BCH)
  • Cardano (ADA)
  • Chainlink
  • Stellar (XLM)
  • Binance Coin (BNB)

The fact is blockchain technology is here now, and it has come to stay. Although PoW consumes a lot of electricity and there are doubts regarding the stability of the bitcoin, there is no denying that the bitcoin offers an effective and efficient way of exchanging value.

There have been rapid developments in the crypto industry as miners, and other participants are looking into reducing energy use and making the system more secure.

The U.S stance on the Chinese digital Yuan

According to people who are au fait with this digital yuan matter, US officials have the reassurance that China doesn't intend to use the e-yuan to bypass the American sanctions (China officials have maintained that the main intentions of the e-yuan are to reduce circulatory currencies and use of cryptocurrencies and not to displace the US dollar).

Also, there is no concrete report that the Biden administration is taking any action to counter future threats from the Chinese digital yuan. However, the development and trial of the e-yuan seemed to have renewed the interest of American in creating a digital dollar.

Facebook once announced that it would launch its own cryptocurrency- the Diem Diem (formerly called Libra). US Securities and Exchange Commission voiced support for this move as the commissioner, Hester Pierce, opined that such stablecoin answers China's e-yuan.

Jerome Powell, the US Federal Reserve Chairman, also warned that it's not just about being the first to launch a national digital currency; rather, the most important thing is to do it right.