Analyst weighs the odds of a China-style Bitcoin scenario in the United States

China’s crackdown on cryptocurrencies, by some accounts, is aimed at strengthening the digital yuan and giving the state maximum control over payments. The United States, though trailing behind China and the EU, is nonetheless joining the race to develop CBDC.

For ForkLog, EXANTE’s chief strategist Yanis Kivkulis assessed the probability that the United States would follow the Chinese scenario in Bitcoin regulation.

What Bitcoin Means for the Digital Yuan

For years, China’s policy toward digital assets has looked like an attempt to kill the goose that lays the golden eggs. For a time, the country led the world in cryptocurrency turnover, then in mining. The community even began to fear that Chinese authorities would seek to take Bitcoin under control.

But year after year, China tightened its measures against cryptocurrencies, and the recent crackdown on miners forced many to migrate en masse, notably to the United States. The country’s payment systems are forbidden from providing cryptocurrency services, and banks scrutinize customers for involvement with digital assets.

What prompted China to take such steps? The most plausible version is that the crackdowns on cryptocurrencies are designed to clear the field for the digital yuan. At first glance, the main competition to a fast and stable digital yuan comes from stablecoins like Tether, rather than the volatile, slow Bitcoin with seven transactions per second and annual price swings. But the first cryptocurrency is not controlled by states, and in some cases citizens would prefer to make payments in it or in fully anonymous coins such as Monero.

All transactions of the digital yuan are overseen by the People’s Bank of China, and the fewer payment alternatives the public uses, the greater the reach over the financial system. New prohibitions won’t halt clearly illicit businesses, but could significantly curb ordinary people’s use of cryptocurrency for payments.

Having control over most financial flows in the country, the People’s Bank of China could deliver very high stability to the digital yuan and challenge the weakening dollar. By forgoing Bitcoin, China would have a chance to strengthen not only its digital currency but also its international standing.

Why the US is unlikely to follow the Chinese path

On the surface, the development of a digital dollar could lead the United States to the same consequences as in China—the competition with cryptocurrencies. However the American situation differs in several respects. With a high probability, the United States will seek not to abandon digital assets, but to use them to advantage.

• Argument One: The push toward legalization is already under way

If China’s stance toward cryptocurrencies has always been legally precarious, in the United States Bitcoin has been recognized as a commodity traded on exchanges since 2019. Since 2020, Ethereum has been similarly legalized. These currencies can be bought on official exchanges such as Bakkt and ErisX, and their clients include large institutional investors, including pension funds.

By March 2021, institutional capital accounted for half of Bitcoin’s market capitalization. The Nasdaq-listed Coinbase exchange went public. A 180-degree turn and a ban on cryptocurrencies for the US administration would now be tantamount to a loss of face and a blow to major financial players.

• Argument Two: The yuan and the dollar occupy different positions.

Despite its enormous reach among the population, the yuan is primarily China’s national currency. It has a relatively stable exchange rate, and among Chinese there is little appetite for seeking alternatives. As for the dollar, it is the world’s leading currency, and it is currently exposed to rising inflation.

In 2020 the money supply in dollars grew by 20%, and that growth continued in 2021. For many Americans, cryptocurrencies proved the best hedge against dollar depreciation, and those capital inflows largely stay within the country.

Limiting Bitcoin could allow China to craft a stable and highly transparent digital yuan. For the United States, discarding Bitcoin, by contrast, would hurt the national economy and currency system. With limited opportunities to invest in cryptocurrencies amid a hot stock market, Americans would be forced to shift capital from the dollar into other currencies more often. Digital dollarisation is unlikely to help here.

• Argument Three: Bitcoin could become a ‘semi-national’ currency for the United States.

Capital flight threatens the United States less than it does other countries. In 2020 Americans earned $4.4 billion from crypto investments, while Chinese residents earned $1.1 billion. For other countries, the figure is even lower. The crypto market is contributing to US wealth, and largely on a legal footing.

If for countries such as Turkey or Venezuela capital outflows from falling national currencies into cryptocurrencies were a protest—a vote of no confidence in authorities—then a similar outflow from the dollar would look more like ordinary currency-risk hedging.

If the United States also deprives China of the status of the world’s mining hub, many crypto assets could become, albeit decentralised, largely ‘American’ currencies. Depending on the circumstances, citizens might store funds in dollars or Bitcoin, but much of the profits from crypto turnover would end up in the United States.

Conclusion

CBDCs are often framed as instruments for states to exert total control over financial flows. Yet national particularities matter. What China can do, at least domestically, seems utopian for the United States or the EU, not only because of a supposedly less organised populace but also due to the wider global acceptance of the dollar and the euro.

To preserve global leadership, the United States does not require total control over the dollar, especially its use abroad. A legally recognised Bitcoin could prove a more advantageous instrument and a ‘reserve currency’ for the United States than a tightly regulated digital yuan for China.

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