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China's crypto ban creates a golden opportunity for the US — if it doesn't mess it up

Bitcoin and China
China recently cracked down on cryptocurrencies including Bitcoin mining. NurPhoto/ Getty Images

  • With China's recent crypto crackdown, the US needs to position itself as the cradle of crypto innovation.
  • However, the US government's approach to crypto regulation has been clumsy.
  • If the US wants to maintain global economic dominance, it must embrace cryptocurrencies.
  • Dr. Sarah Manski is an assistant professor at George Mason University's School of Business and an expert in cryptocurrency and the blockchain. 
  • This is an opinion column. The thoughts expressed are those of the author. 

Last week, the Chinese government banned private use of cryptocurrencies, making all cryptocurrency-related business activities illegal. China's goals are twofold: to choke off the flow of Chinese currency, the yuan, into crypto as they launch a central bank digital currency, and to enable greater government power with the digital yuan's ability to track people and their spending in real time. 

China's crackdown is creating a unique opportunity for the US to step up and be the cradle of innovation in the crypto space, but our own government's clumsy approach to regulation means we may fail to seize the moment.

The US is bungling its crypto response 

Cryptocurrencies and decentralized finance are just a single application of distributed ledger technology (DLT), more commonly referred to as blockchains. In addition to finance, blockchains are completely transforming supply chains, property ownership and sales, copyright and royalty agreements, manufacturing, agriculture, government services, digital identity, and more. The biggest companies in the world are already using blockchain technology, including Amazon, Cargill, CVS, IBM, Seagate, and Visa. And many companies that are not currently using blockchains are developing plans to use them soon.  

Blockchains hold the potential to distribute power away from the state and other traditional institutions to the wider public. Like an open portal of internet communication, uncensorable cryptocurrencies are threats to the Chinese Communist Party's authority. Making DLTs illegal is not only an impossible attempt to completely maintain state control of communications, finance, and markets, but it will also cripple innovation in Chinese private industry. China was one of the world's largest cryptocurrency markets and now, Chinese developers, entrepreneurs, students, investors, and especially traders will leave the market, offering the US an amazing opportunity to leap ahead as the world's leader in blockchain innovation.  

Roughly one-fifth of the entire US population, 60 million Americans, already own cryptocurrency. Unfortunately, the US is off to a weak start with a disorganized regulatory policy towards cryptocurrencies and the hundreds of other industrial applications of this technology. The latest example of a wrongheaded US approach to cryptocurrencies are provisions contained in the current infrastructure bill.

These provisions mandate stringent and impossible counterparty reporting requirements for decentralized network validators and software developers who do not possess the information needed to comply. Recently, the Securities and Exchange Commission (SEC) threatened to sue Coinbase, the largest US-based cryptocurrency exchange, if it launched its planned Lend program, which would have let users earn 4% by lending out their digital tokens. The SEC said this type of business qualifies as an investment contract even though they have offered very little guidance to token-based companies. Without clear regulations for DLT companies, the SEC is creating a lot of confusion in the market and severely limiting innovation and economic growth. 

There is real potential in crypto tech

In the spring, China made a related move against Bitcoin mining, which impacted Bitcoin mining for about four months until the new mining rig operations came online outside of China. Similarly, China's total ban on cryptocurrencies has caused the prices of cryptocurrencies to fall. However, the price dip in Bitcoin and others recovered quickly because the global cryptocurrency system is extremely resilient. 

Many countries have also banned Bitcoin, including Algeria, Bolivia, Colombia, Egypt, Indonesia, Iran, Iraq, and Vietnam, yet adoption of Bitcoin is outpacing the adoption of the internet at a similar stage in its early development. So, despite other countries cracking down on crypto, its popularity is soaring, indicating real potential for wider adoption.

Yes, all cryptocurrencies are inherently outside of state control and, like most revolutionary technological innovations, challenge business models and entrenched institutional power. The US government could follow the Chinese state in its attempts to restrict digital innovation, but this would be a tragic mistake and a fundamental threat to the long-term health of our economy and to the strength of American business. Central banks will not be able to stop the rise of privately issued digital money, and governments will have to adapt with new monetary policies, but the economic and social benefits — lower transaction fees for consumers and businesses and instant settlement — will far outweigh the challenges.

If the US wants to maintain global economic dominance and attract top talent, it needs to listen to the technology experts and business leaders' recommendations on the best practices to reimagine US technology strategy and policy. The Blockchain Research Institute recently released a report outlining five areas where American policy should change including: facilitating the security, privacy, autonomy, and citizen-owned identities; embracing digital currencies; retooling government service delivery to meet world-class digital standards; engaging citizens and holding elected officials accountable; and including a diversity of entrepreneurs in decision-making. American business and the broader public benefits from US technology policy that supports innovation, freedom, and democracy. 

Opinion Cryptocurrencies China

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