Noelle Acheson is a 10-year veteran of company analysis, corporate finance and fund management, and is a member of CoinDesk's product team.
The following article originally appeared in CoinDesk Weekly, a custom-curated newsletter delivered every Sunday, exclusively to our subscribers.
The financial world saw history made last week when, for the first time ever, a Chinese head of state took the podium at the World Economic Forum's famed Davos conference in Switzerland.
Issued on 17th January, Xi Jinping's speech has since been interpreted as a response to rising protectionism – and an attempt to consolidate China’s position on the world stage.
But, it's worth examining in another light.
It is also likely to be indicative of the path Chinese authorities will take regarding the country's bitcoin exchanges.
A recap
While we've been focusing on the central bank's scrutiny (and its potential impact on bitcoin's network and price), this view masks the bigger picture.
First, a bit of background. Over the past weeks, we’ve seen clear evidence of China's weight in global bitcoin markets.
News of meetings between the People's Bank of China (PBoC) and leading exchanges sent prices tumbling.
The subsequent suspension of margin lending and the introduction of trading fees had dramatic effects on volumes, and many feared that the resulting dent in Chinese demand would dampen price growth.
Some interpreted the moves as an impending crackdown on bitcoin.
China needs to stem capital outflows, the reasoning went, and since bitcoin is an attractive vehicle for that, it needs to be stopped.
Feet wet
On the surface, this might make sense. Traditionally, the US has been the world’s champion of free trade while China has dragged its feet.
But now, the tables seem to be turning, China appears eager to position itself as a 'modern' economy with a flourishing FinTech ecosystem.
Part of that is seen in its interest in blockchain technology.
Earlier this week, local news sources reported that the PBoC had tested a blockchain-based digital currency and is establishing a related research institute. Furthermore, banks, startups, academia and consortia are working with international institutions to foster a bustling blockchain environment.
While interest in permissioned ledgers is not the same as support for digitized assets like bitcoin, a desire to participate in foundational change bodes well for the acceptance of alternatives.
And an understanding of how the technology works should prevent impractical measures. (The PBoC has not, to our knowledge, indicated an interest in banning bitcoin, nor is it likely to).
Most pronouncements have expressed a cautious interest, and trading restrictions are less an indictment than they are part of the central bank’s job.
Ebb and flow
Capital outflows, on the other hand, are a concern, but local experts downplay the threat to monetary policy. While most of the world’s bitcoin mining and trading takes place in China, the cryptocurrency’s market capitalization is minute compared to the overall size of the Chinese economy.
More broadly, the recent interest in bitcoin exchanges could well be part of a larger attempt to deflate asset bubbles.
This week, the PBoC asked banks to curb lending, ahead of what is traditionally the strongest quarter for growth in loans. The request stressed the importance of reducing mortgage allocations, with the hope of curtailing runaway real estate prices.
The central bank also raised interest rates for the first time in years, which some analysts interpreted as part of its objective to curtail speculation.
While the bitcoin-related moves do seem to inch towards regulation, few believe that would be bad for the sector. Most appear to focus on the legitimacy it would bestow and the confidence it would give the ecosystem.
Looking ahead, political and economic troubles could complicate things.
The possibility of a trade war or even a military conflict in the South China Sea could send the exchange rate lower, drive the BTC price higher and put increasing pressure on China's government to appear strong, especially in the run-up to its 19th party conference later this year.
Tables turned
Yet, as China heads into its week-long holiday for the Lunar New Year, the approach seems to be one of dialogue and further investigation.
In his Davos speech, President Xi quoted a Chinese proverb:
This not only is a fitting metaphor for China’s internal conflict between wanting to participate in (or even lead) global progress and at the same time keep things calm at home, it also seems to sum up bitcoin’s struggles to become an accepted medium of exchange in a world of shifting priorities.
And it should reassure us that, in China, bitcoin is not a target.
China passport image via Shutterstock