China's Crypto Ban Drives Digital Yuan Push Amid US Rivalry

China has enforced a comprehensive ban on cryptocurrency mining and trading since 2021, focusing instead on promoting its central bank digital currency (CBDC), the digital yuan. This move comes as the strategic rivalry between China and the US intensifies, with both nations vying for dominance in emerging technologies such as Artificial Intelligence and Cryptocurrencies. While China adopts a centralized approach to cryptocurrency regulation, the US, under the Trump administration, has made significant strides in pro-crypto regulatory frameworks, including the creation of the US Crypto Strategic Reserve. This development has raised concerns in China about potential US dominance in global finance through dollar-pegged stablecoins.

In a recent article, Ming Zhang, the deputy director of the Chinese Academy of Social Sciences, reflected on the Communist Party’s stance on digital currencies, including Bitcoin, Central Bank Digital Currencies (CBDCs), and Stablecoins. The Chinese Academy of Social Sciences (CASS) is a state research institute that aligns with the Communist Party’s views through its research. Zhang highlighted that the value of cryptocurrency is determined by computer algorithms rather than sovereign credit or other financial assets. However, he noted that Bitcoin’s significant price volatility makes it unsuitable for use as a pricing scale or medium of exchange. Zhang argued that Bitcoin is not a true currency but a unique financial asset with investment value, often seen as a risky asset due to its price fluctuations but also as a safe-haven asset that can hedge against US dollar fluctuations.

Despite the ban on Bitcoin trading and mining, China’s influence on Bitcoin remains significant. Reports suggest that Chinese miners continue to operate using VPNs and off-grid setups, contributing to Bitcoin’s hashrate. Additionally, the Chinese government holds a substantial amount of Bitcoin, mostly seized from criminal cases, making it one of the world’s largest holders. This paradox highlights China’s complex stance on Bitcoin—publicly anti-Bitcoin but strategically engaged with it behind the scenes.

Zhang also discussed the potential impact of stablecoins on the international financial system. He noted that US dollar-pegged stablecoins could strengthen the US dollar’s international currency status by linking traditional currency circulation with the virtual world. This development could consolidate the US dollar’s hegemony in global finance. In response, Zhang suggested promoting the construction of China’s stable currency and expanding the use of digital tokens on Internet platforms to better combine the sovereign credit of the RMB with global application scenarios. Chinese authorities are accelerating the development and expansion of the digital yuan (e-CNY) to maintain financial sovereignty and counter the influence of foreign digital currencies.

Zhang believes that the central bank’s digital currency is a sovereign currency in the virtual world, with a stronger reputation and lower risks. However, its competitiveness ultimately depends on the country’s real currency. He suggested that China should take a three-pronged approach to digital currency development, focusing on cryptocurrency, stablecoins, and central bank digital currencies. This strategy aims to maximize the dividends of digital currency or digital asset development. Zhang also proposed expanding the replacement range of digital RMB from M0 (cash) to M1 (cash plus demand deposits) and even M2 (cash plus all deposits) to fully expand the application scenarios of digital RMB and promote its internationalization. The flourishing of various digital currencies is seen as a better alternative to the US dollar monopolizing the development track of digital currencies, with e-SDR helping to promote the diversification of the international monetary system.