In an unpredicted turn of events, it seems like the Chinese government is slowly, but surely starting to promote the adoption of the blockchain alongside the implementation of a crypto-run digital economy.
Unfortunately, though, it needs to be said straight away that this doesn't mean the ban on ICOs as well as crypto exchanges will be lifted anytime soon. And if it is, then there will be extremely limited availability of tradeable cryptocurrencies on these platforms.
Based on the inner politics of Mainland China and the policies the CCP uses to run its economy, it's absolutely impossible to correlate it with the decentralized nature of most cryptos on the market, especially those that can be perceived as investment assets rather than utility tools.
How the rumor of legalization started
The rumor started on October 25th when President Xi Jinping announced during a politburo meeting that the investments and emphasis on the development of the blockchain technology in China's digital platforms need to be prioritized in the upcoming policies for the People's Republic of China.
Even though President Xi's commitment to the idea of expanding the blockchain in China is enough to have it done, the head of the People's Bank of China's technology department, Li Wei also emphasized his support towards adopting the blockchain technology on not only state-run banks, but also commercial ones at that.
This is a clear indication that the Chinese government is preparing for the digitalization of its economy, which will be much easier to handle. This includes arguments such as the reduction of money laundering and the outflow of funds from the Mainland.
The outflow of funds needs to be particularly emphasized here, as it has been a serious issue in the country for a while now. Chinese manufacturers and business owners that managed to accumulate huge amounts of wealth over a small time period, quickly realized that keeping it localized would not necessarily be a good investment. Thus, they were looking for methods to spend it outside of the country.
Most Chinese millionaires decided to do so in Canada and Australia, mostly purchasing real estate and qualifying for the citizenship of that country.
Furthermore, it was investigated by Chinese special agents that billions of dollars worth of wealth was being funneled outside of China towards Australia due to several AU casino bonuses and promotions which were clearly in violation of local regulations.
Therefore, the digitalization of the local economy would easily make these violations visible to the local government and stopped before they're performed rather than investigated after the fact.
But, that's not the only reason as to why the Chinese government doesn't want their local population participating in a risky market such as cryptocurrencies.
History of risky trading
China has always been a boiling pot of trading and commerce, but the presence of a large population alongside industrialization and peace boosted the country's productivity immensely over the last couple of decades.
Companies were being listed on exchanges almost the moment they were founded as business-wise they were performing extremely well.
Almost all of the Western companies moved to China for cheaper manufacturing costs, the minimum wage increased and thus introduced a lot of potential traders to the local markets.
Chinese stock exchanges were bustling with activity after people were not only given the opportunity of larger income, but also the opportunity to invest in local companies that were growing extremely fast.
The fact that companies like Alibaba, Tencent, and various other tech companies were local, gave Chinese traders an edge over having fast access to information that the companies were releasing nearly every week.
This naturally gave them the opportunity to place early trades and thus generate fortunes without ever having to involve themselves with the bustling economy.
Soon enough, the growth started to slow down a bit, which left all the traders now used to high-risk/high-reward trading wanting for better options on their favorite stocks.
In come CFDs that managed to increase the leverage to significant levels, thus allowing more experienced traders to trade with the same velocity as they were years ago.
Unfortunately, though, the product of such trades wasn't newly enriched Chinese citizens, but quite a lot of traders that were slowly going broke due to a slowed-down economy and an overly risky trading strategy.
This forced the government to issue warnings about CFD trading multiple times, asking the traders to somehow limit the risk they'd associate with.
But, it's not like they could simply ban the activity as it was extremely profitable for local companies to continue offering these services, and the funds still remained within the country, thus ensuring a weak Yuan (a necessary component for China's exporting dominance).
Nowadays, due to a relatively stabilized economy, issuing such a warning is not necessary as both new and old traders have adjusted to such market patterns.
Cryptocurrencies would contradict this stability
Aside from being a decentralized currency, cryptocurrencies tend to be quite the volatile asset to invest in, thus re-introducing the craze that was CFD trading in the past for Mainland China.
The government really doesn't want to bother with holding the hands of their traders again. Furthermore, considering that most of the cryptocurrencies available in the current crypto market are located on foreign crypto platforms, it would ensure that funds would start funneling outside of the economy, and significant funds at that.
This would most likely not affect the Chinese Yuan too much, but it definitely was not worth the risk for the CCP, thus the ban on ICOs and crypto exchanges since 2017.
Several government agencies have also thought about placing a ban on crypto mining as well, but considering the number of funds it brings to the local economy and doesn't damage the local population, it would be quite counter-productive to do so.
Why rely on foreign cryptos when you can make your own
We already know that the PBoC is in the process of developing their own digital currency, which is likely already completed.
Therefore, why would the Chinese government bother with allowing other cryptos like Bitcoin and Ethereum as a medium of exchange, when they can create their own, more reliable one instead?
The creation of the CBDC (Chinese Bank Digital Currency) is going to revolutionize Chinese finance as it will support the digitalization of the local economy.
Distributing the coins to several large banks alongside some tech companies like Alipay and Tencent would also ensure some outbound volumes as well.
Furthermore, it's unlikely for the Chinese government to place a cap on the number of coins they will produce, as the maintenance of its inflation would be the state priority. Much like the CNY ensures Chinese export dominance, the CBDC would have to take on the same role as well.
And considering it will be much more easily trackable, it's going to do a much better job at it than a banknote.
Overall, the CCP's decision on not re-introducing cryptos to the local economy hinges on its risk to local investors as well as the disruption of a carefully constructed economic plan for the foreseeable future.