WEEKLY - China’s likely crypto policy shift
also, retail CBDCs and the ECB, Snoopy
Hi everyone, I hope you’re all doing well!
You’re reading the free weekly version of Crypto is Macro Now, where I reshare/update a couple of articles from the week.
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In this newsletter:
China’s likely crypto policy shift
Retail CBDCs: the ECB has the secret
Some of the topics discussed the past week:
Macro signals
The mood uplift
BTC’s narrative relative to gold
China’s likely crypto policy shift
Turning up the heat
Supply chain threats
BRICS fireworks later this month?
Ethereum’s application use
Newsletter stuff
Retail CBDCs: the ECB thinks it has the secret
Thailand’s tokenized distribution is popular
Jobs day!
SWIFT and tokenized settlement
Visa and onchain cash
China’s likely crypto policy shift
China’s approach to crypto assets could be about to change.
At a high-level economics conference last weekend, Zhu Guangyao – former vice-minister of China’s Ministry of Finance – said that he thought China should re-think its approach to cryptocurrencies.
We’ve heard former Chinese officials and academics publicly suggest policy changes before, but this one feels different. Often, the comments come from those looking to boost their public image or perhaps feed a frustration. Zhu doesn’t check those boxes.
He is no longer at the Ministry of Finance, but he appears to still be a high-ranking Party official – the website of a Chinese think tank lists him as Counsellor of the State Council, China’s highest executive body.
So, he’s not speaking off the cuff here, and it’s unlikely that he’s radically departing from Party thinking. Rather, it’s possible that he was tasked with gently getting a message “out there”.
Why?
According to media reports, he mentions two motives:
To compete with the US. His translated comments highlight the “gap” with the US in terms of crypto market participation, mentioning the spot ETF approval and pointing out that “we don’t participate”. (Notice the incongruous parallel in Trump’s invocation of Chinese competition in his advocating for greater crypto support in the US.)
To be able to use cryptocurrencies “for production”. I’m not sure what this means, but Zhu references the “digital economy”. He also acknowledges the risks, but insists they can be dealt with through regulation.
So, it appears that China is warming to the idea of embracing its crypto ecosystem.
What would this look like?
Three possibilities come to mind:
We could see authorization of Chinese investor participation in Hong Kong’s spot ETFs.
These meet the minimums for AUM – this was recently lowered from HK$1.7 billion to HK$550 million (US$71 million), and the two largest have net asset values of just over US$140 million and US$100 million respectively. What’s more, both are issued by the Hong Kong arms of large Chinese fund managers, which should help.
(chart via The Block Data)
However, President Xi Jinping has made clear he does not want speculation to return. And he wants to foster investment in Chinese assets. So, if this happens, it is likely to be with limits. But even tiny participation from the Chinese market would be significant.
We could soon see proposals for the licensing of crypto exchanges.
Trading was officially banned in 2021, but did not disappear. Bloomberg recently published a report on the strong growth in Chinese over-the-counter (OTC) crypto trading.
This could itself be an incentive to license exchanges: with easy-to-use venues open to all types of investors, not just large traders, crypto trading could both migrate to and grow on platforms that can be monitored.
(chart via Bloomberg)
With this, Chinese authorities could end up taking a page from Nigeria’s playbook – walk back your opposition to crypto exchanges so you can monitor/control who trades crypto and why. Many crypto enthusiasts could balk at the greater surveillance – but if you ask any non-crypto person who lives in China, they’ll tell you that most of their compatriots don’t object, it’s what they’re used to. And the potential market is massive.
Is there demand for crypto access? Most likely, yes, as evidenced by the strong growth in the limited OTC activity. Plus, BTC, ETH and other tokens offer a potential hedge against currency depreciation that does not funnel funds back into the US dollar system, something the monetary authorities could get behind.
Also, risk-on is back: the Chinese Shanghai Composite index is up more than 20% over the past couple of weeks as investors digest the recent stimulus measures. And gambling is thriving – Bloomberg reported earlier this week that Macau gaming revenues in September were up over 15% year-on-year.
Support for mining could come back.
This, too, has continued despite the ban, although it is difficult to extract reliable data on what percentage of hashrate is generated in the region. But ongoing operations are small-scale and vulnerable.
Official support could reignite interest – before the ban, most Bitcoin mining was in China. This would not only generate industrial activity and employment, both in need of a boost. It would also build the flywheel effect of miners supporting BTC interest and liquidity and in turn benefitting from it, while giving China greater expertise in the “digital economy” Zhu referred to.
What’s more, China has significant underused hydropower potential, the largest in the world according to a study reported by the South China Morning Post last year. Encouraging the construction of Bitcoin mining rigs to improve the efficiency of renewable power generators would make both economic and strategic sense, supporting China’s goal of becoming a world leader in renewable energy while boosting its crypto footprint.
Of course, there’s also the possible appeal of state mining of BTC for reserve diversification purposes.
The bigger story
Bottom line, a crypto thaw in China would arguably have an even greater impact on markets than one in the US. Both are likely, with the degree of a US shift dependent on the outcome of November’s election. China’s shift doesn’t depend on any election – rather, it depends on longer-term economic strategy as well as on current growth needs. And the potential liquidity boost, given the size of the total market relative to current involvement as well as the compelling currency diversification use case, is likely to be much larger.
Xi Jinping himself almost certainly hates the idea of a return to anything resembling a crypto frenzy. The country’s current malaise was triggered by moves to curtail real estate speculation, and he is unlikely to allow the country’s traders and investors to encourage a bubble in anything.
But support for Bitcoin and other crypto assets has strategic as well as economic value. A more liquid and robust crypto market will help allies even more than it will help the US, especially if politicians across the ocean continue to prioritize protection over growth.
Zooming out, a shift in China’s crypto policy will galvanize authorities throughout the region, and beyond.
Of course, it’s not certain we’ll hear anything soon – China’s governing bodies no doubt have plenty of other pressing issues to focus on. But we could, we should, and if we do, crypto markets enter a new phase.
See also:
Retail CBDCs: the ECB thinks it has the secret
I finally got around to looking at a paper from the European Central Bank (ECB) published a couple of weeks ago, on how to make a retail CBDC appealing to users. None of the current issuers (Nigeria, China, India, Bahamas) have managed this yet, but that’s probably because they weren’t “doing it right”. But the ECB has done some research on this, and it is here to help.
Never mind that over the past few weeks, Canada and Australia both announced the end of their retail CBDC exploration, given the lack of a “clear public interest case”. Is the European market really that different? The ECB seems to think so.
The study dove into payment preferences, and found that people prefer to stay with the familiar if it works well (you don’t say). So, the trick to getting people to use a CBDC would be to make it as similar to current systems as possible. In other words, it’s a design issue, and combining the advantages of cards (speed and convenience) with those of cash (privacy and expense tracking) should boost the appeal.
But that still doesn’t lay out a convincing path for adoption – if current systems satisfy consumer needs, why would they incur the effort cost of understanding the new system and setting up new processes?
No worries, surely good communication can help? Of course:
“…with the right targeted information, consumers might find it easier to make the switch to a CBDC”. (my emphasis)
I’m not sure what “right” means here, but presumably the ECB will know when the time comes.
And then there’s the network effects, where adoption spread generates more adoption spread. The growth of mobile payments has created an “environment favourable to new payment methods”, which the authors seem to think will make people more likely to switch again to a CBDC. Yeah, I don’t get it either.
So, the success of a retail euro CBDC will depend mainly on design issues, but also on communication, and on people’s curiosity about new payment methods. Good to know, and this all sounds fairly harmless.
But, tucked away in a paragraph towards the end that looks at “other” potential influences, is the part that worries me:
“it is likely that other important factors could boost CBDC adoption, such as the role of legislation in ensuring its distribution and obliging merchants to accept it at the point of sale.” (my emphasis)
The authors are saying the quiet part out loud. Regular readers will know that I think the launch of a retail euro CBDC is likely but, short term, no-one will use it. This may suggest that we should therefore not be bothered what they do.
However, it’s the “whatever it takes” consequence that we should be concerned about. The ECB cannot afford to fail at euro CBDC issuance – its reputation and relevance will be on the line. So, after seeing that users aren’t interested, they will come up with ways to ensure adoption, such as mandating tax payments in the digital currency, insisting that all travel expenses have to be routed through your euro wallet, etc. And if we have to have the CBDC wallet on our phones anyway, then sure, we might as well use it for other stuff, right? The ECB has promised that privacy will be respected, and of course they would never use the CBDC to nudge behaviour, so what could go wrong?
Bottom line, it’s not about convenience for the user. It’s about central bank survival. I’ve written before about public statements to this effect – “we need to remain relevant in a changing world!”. (Not an actual quote.)
Here’s a direct quote from a BIS conference earlier this year, uttered by Bundesbank president Joachim Nagel:
“If your core product is losing attractiveness you have to think about a new product.”
The authors of the paper also recognize this up front, by opening with the assumption that public money is essential for the functioning of society.
“While cash use is losing ground to digital private payment methods, the role of public money in payments remains crucial.”
But, why? Banks handling all payments is not the global nor historical norm, and we can question whether it is good for either banks or financial resilience. Interbank payments, sure, central banks should handle those – it’s a function that requires centralization and trust. But retail payments don’t need to be handled by banks, and the insistence that they do reflects more the growing uncertainty within central bank departments than it does any understanding at all of what consumers and businesses want.
Stepping back, rather than focusing on what the paper says, let’s focus on why it was written. It feels like the EU is getting closer to announcing a decision to issue a retail CBDC, and papers like this aim to reassure the public (individuals and businesses) that this will go well, and that it is for the “greater good”. We can expect the “communication” prong of the adoption strategy to continue to ramp up in coming months. Many will see them as helpful – some of us will see them as warning flares.
See also:
HAVE A GREAT WEEKEND!
Yesterday was a nostalgic anniversary: on October 4, 1950, Snoopy made his first appearance on the printed page.
(by Charles Schulz - Google Images, Fair use)
For those who didn’t grow up with Snoopy comics, TV specials, pyjamas, movies and more, the beagle emerged from the hand of Charles Schulz as one of the four founding characters of the popular Peanuts strip. He evolved over the years to think in thought balloons, stand on his hind legs, dream big, and win us over with his simple expressions, grand ideas, and best friend Woodstock.
But there’s more to Snoopy than perseverance, character, loyalty and grumpy cuteness. For the past 50 years, he has been the mascot for NASA’s manned spaceflights.
(image via @NASA)
Snoopy has literally been to the moon (DOGE was not the first canine there!), and is expected to join the astronauts on Artemis II when it flies around the moon in 2025 (delayed from November this year), going further into deep space than any manned craft to date. Man’s best friend, going where no man has gone before.
(image via @Snoopy)
DISCLAIMER: I never give trading ideas, and NOTHING I say is investment advice! I hold some BTC, ETH and a tiny amount of some smaller tokens, but they’re all long-term holdings – I don’t trade.