That which is Caesar’s: The People’s Republic of China and Crypto-Currencies
Charles W. King
The recent ban on Initial Coin Offerings (ICOs) of new cryptocurrencies by the People’s Republic of China and the possible closure of all cryptocurrency exchanges in the country are being heralded as a success by some cryptocurrency advocates. They believe that the ban demonstrates how crypto-currencies like BitCoin disrupt traditional government issued currencies like the Yuan and Dollar. For a portion of the cryptocurrency community the most important feature of these new mediums of exchange is not their security, but their inability to be observed or regulated. The nature of the technology that underpins all cryptocurrencies, the blockchain, makes important kinds of government intervention difficult or impossible: taxation, seigniorage, and monetary control.
The distributed nature of the block chain and fact that cryptocurrencies are only observable during digital transfer makes it difficult for the IRS or any other tax collecting agency to know whom has what for the purposes of taxation. In addition the fact that cryptocurrencies can also be transferred physically on something as innocuous as a keychain make them similar in the eyes of governments to Bearer Bonds and Krugerrands, two now defunct mediums of exchanged deeply associated with terrorism, money laundering, tax fraud, and Apartheid.
Cryptocurrencies by their nature make government seigniorage and monetary control impossible. The minting of new units of crypto-currency is controlled by an algorithm and the ability of users to perform complex mathematical computations. When a new unit is created it is owned by the computer that completed the computation, a profit for the user, at the cost of computing power. Traditional seigniorage means the issuing government makes a profit of the difference between the cost of minting and the face value, for cryptocurrencies ‘miners’ receive the seignorage. This also means that governments have no control over the number of units in circulation, and are therefore unable to increase or decrease the monetary supply. This is a key feature of some cryptocurrency advocates who oppose on principle the very existence of Central Banks and their role in regulating economies. The rate of inflation in cryptocurrencies is controlled solely by the mining algorithm, how much computer power is dedicated to mining a given currency, and how much users are willing to pay for a unit. This obviates methods of economic intervention that have been key for government's recovery efforts from the Great Depression, the Stagflation of the 1970s, and the 2008 Financial Crisis.
The Chinese is government is understandably concerned about the increasing prevalence of mediums of exchange beyond its control, like BitCoin and other cryptocurrencies. That the strict regulation of the Yuan incentivizes their use is another important issue. In the case of cryptocurrencies, the Chinese government and the Chinese Communist Party is remembering the events that began what is known as the “Century of Humiliation”. In 1839 the British Empire had not yet successfully smuggled a live tea plant out of China and was paying of millions of tons of silver to China annually for exported tea. To alleviate this trade imbalance the British sought to sell opium from the British Raj in China, where it was illegal. The British and Chinese fought two wars, 1839 to 1842 and 1856 to 1860, that transferred control of Hong Kong to the British, legalized opium, and gave the British and others the access to Chinese markets and exemption from internal tariffs. With the loss of these wars the Qing Dynasty was weakened in many ways, including the fact that the reversion of the balance of trade up-ended the Chinese economy, and foreign trader’s protections from imperial regulation would continue to extract wealth from the country. The inability to intervene in their own economy devastated the Qing.
Cryptocurrency advocates are correct to believe in the potential disruptive power of crypto-currency technology. The People’s Republic of China has made a decisive move against this disruption, but this should be understandable given some crypto-currency advocated see their invention as a method to dismantle the state and the history of China.