China has good reason to be concerned about Bitcoin

The cryptocurrency world has been roiled by China's broad crackdown. China had emerged as a key player in this new financial ecosystem, and Beijing's actions could be the tipping point for a broader regulatory crackdown on cryptocurrencies and crypto assets by regulators worldwide.

 This would be regrettable. Cryptocurrencies have many flaws, but the underlying technology has a lot of potential.

China had previously prohibited initial coin offerings, the cryptocurrency equivalent of a company's initial public offering of stock. The government then took steps to restrict Chinese financial institutions' dealings with cryptocurrencies and crypto assets. The most recent move is much broader. Domestic cryptocurrency transactions are now illegal. In theory, such transactions can be carried out without the government's direct knowledge. However, few Chinese citizens or financial institutions are likely to risk the wrath of the government.

Beijing's actions demonstrate how national governments and central banks are increasingly concerned about cryptocurrencies destabilizing their financial systems and having other negative consequences. They have reason to be concerned.

Bitcoin, the original cryptocurrency, was once used to fuel illicit transactions on the dark web and is now used to facilitate ransomware attacks. Meanwhile, it has become clear that Bitcoin does not work well as a medium of exchange for everyday transactions. Its value is volatile, and the Bitcoin network is incapable of handling a large volume of transactions quickly and cheaply.

Governments are concerned about the prospect of households channeling their savings into crypto assets, leaving them vulnerable to a speculative bubble burst. The Chinese government clearly did not want to be a part of this, especially since it is already under fire for attempting to cool the speculative bubble in housing markets, which it once encouraged.

Beijing was also concerned about cryptocurrencies interfering with its control over domestic payment systems. This concern is reflected in the government's crackdowns on Ant Financial and other tech behemoths that have come to dominate domestic retail payments, rendering central bank money increasingly irrelevant. Beijing is also wary of new cryptocurrencies known as stablecoins, which maintain stable value by being backed by fiat currency stores and could serve as payment alternatives to those same fiat currencies.

Despite all of these serious flaws, the blockchain technology that underpins Bitcoin has the potential to have far-reaching benefits. The technology is already finding applications in other fields of finance. It will soon be possible to conduct a wide range of transactions, including the purchase of a house or car, without the use of traditional intermediaries like lawyers and real estate brokers. Furthermore, the rise of cryptocurrencies has prompted central banks to develop digital versions of their own fiat currencies. Such trials have already begun in China. Japan and Sweden have done so, and many other countries are planning to do so soon.

Cryptocurrencies' future as financial assets is uncertain. However, the revolution they have sparked will make low-cost digital payments widely available. If allowed to develop further, these new technologies will also help to broaden access to basic banking and financial services, even for low-income households and others who are underserved by existing financial institutions.

The right lessons should be drawn by cryptocurrency supporters from China's crackdown. Instead of opposing regulation and oversight or claiming that technology will allow the industry to police itself, they should collaborate with governments and regulators to design effective regulation. As a result, the industry will gain more legitimacy and stability.

Via: barrons.com

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