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Why China is cracking down on Bitcoin

June 21, 2021, 8:17 PM UTC

China and Bitcoin have had a strained relationship for years.

In 2013, China prohibited financial firms from handling Bitcoin transactions. Four years later, during a boom in “initial coin offerings,” or ICOs, a cryptocurrency cash-grabbing mania, China made such sales illegal, and it banned domestic cryptocurrency exchanges from trading fiat currency for crypto. (Over-the-counter trading desks were able to keep operating.)

China has lately been tightening its grip. Last month three regulatory entities reiterated the government’s long-standing position: Financial firms and crypto cannot mix. Chinese law enforcers have allegedly rounded up thousands of crypto money launderers in recent months. One by one, Chinese provinces have recently turned hostile to the industry. Coal-friendly Xinjiang and Inner Mongolia kicked off a crackdown on so-called Bitcoin miners; on Friday hydro-hub Sichuan joined the purge.

Videos of people packing up their crypto-farming data centers are circulating on Bytedance’s Douyin, China’s TikTok. You can see Bitcoin “miners”—the folks who set power-hungry computers up to the task of harvesting the cryptocurrency—powering down their machines, boxing them up, and shipping them off. Market watchers suspect that miners and other crypto-affiliated operations—fearful of running afoul of the government and facing penalties—are dumping coins, adding to a market-wide selloff. Bitcoin dropped as much as 7% to $32,600, and Ether, the second-highest valued cryptocurrency, fell 11% to below $2,000 on Monday. (The Fed’s recently hawkish comments didn’t help either.)

Investors rattled by these developments ought to keep something in mind: China was never going to let Bitcoin alone. The cryptocurrency posed a threat to the country’s strict capital controls, protective measures designed to prevent an outflow of wealth abroad. Bitcoin’s anti-censorship stance ran directly counter to the Communist Party’s media-scrubbing ethos. The most that can be said is China tolerated Bitcoin for a while—especially as it furthered the country’s aim to knock the U.S. dollar off its hegemonic global reserve currency pedestal.

Peter Thiel, the PayPal cofounder and contrarian investor, caused a stir when he pointed this out while speaking at a recent event. “Even though I’m a pro-crypto, pro-Bitcoin maximalist person, I do wonder whether if at this point Bitcoin should also be thought of in part as a Chinese financial weapon against the U.S.,” he said.

Thiel’s suspicions were right. But now that China has its own digital currency—the e-yuan, a tender that Thiel called a “totalitarian measuring device”—it is beginning to view Bitcoin as more harm than help. Let countries, like El Salvador, take over; China is concerned with the success of its own nationalistic project. Besides, for all Bitcoin’s potential as a thorn in the side of the western world, it has been worsening computer chip shortages, flouting environmental goals, and bequeathing riches on impetuous libertarian-minded folks and stability-upending fintech giants.

China has tallied up the pros and cons of cryptocurrency on its own private ledger. The government realizes, correctly, that it has more to lose—authority, control, power—by letting Bitcoin flourish at home than it has to gain. Don’t expect it to change its mind anytime soon.

Ironically, China may have harbored a boomerang that will come back for a thwack. As Fred Ehrsam, the Coinbase cofounder who left in 2017 to start Paradigm, a crypto investment firm, put it in a recent interview with Bloomberg, “I think crypto is the next internet-sized opportunity for the United States.”

Robert Hackett

@rhhackett

robert.hackett@fortune.com

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BEFORE YOU GO

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