CCP China’s closing mining operations isn’t about “climate”; it’s about control of the Chinese people and economy.
Sovereign control of currency is a fundamental element of nation-states, going back to Westphalia. Such control is imperative for a totalitarian CCP China, it's also import for all nations.
Bitcoin et.al. directly threaten state sovereignty and won’t be tolerated.
Cryptocurrencies have largely “flown under the radar” by banking, treasury, and tax officials. That is changing rapidly as governments recognize the threat to national interests, Westphalian sovereignty, and security.
We think national economics regulators, state environmental regulators, and municipalities troubled by "mining" raising local electrical rates - will sweep cryptos away like a tsunami.
What to do when life starts closing in on you?
Rowan Jordan/iStock via Getty Images
NEW YORK (July 22) - Back in April, we warned that the CCP’s new central bank digital currency, the e-RMB, would eclipse bitcoin. CCP China has since moved rapidly to ensure that happens. Other governments and central banks – including the Fed, the ECB, the BOJ, and BOE - will likely do the same because it is in their national interests.
At the end of February, CCP China took steps to shut down bitcoin mining operations in Inner Mongolia under the guise of cutting back on the stress of the electrical grid.
Inner Mongolia is among the foulest places on earth. Friends who are natives of CCP China tell me that much of the country’s interior - far from the shimmering coastal cities that most Westerners see - is an unsafe, filthy, nearly dystopian industrial and agricultural abyss, with dead, polluted lakes, and lands and air pollution so thick that flights have to be cancelled from time to time. It thus seems to us that the sustainability of the electrical grid and the coal-fired plants that power it seem to be the least concern for the CCP Politburo.
Instead, the bitcoin mining shutdown coincided with – and obfuscated – what we believe is CCP China’s actual objective: to undermine bitcoin as an alternative to the RMB and the e-RMB, to increase the cost of mining bitcoin, and to maintain control over the Renminbi vis-a-vis other global currencies, crypto and de jure.
CCP China’s – And Every Nation’s - Vital Interest
Sovereignty requires a nation’s governing entity to control its national borders and internal affairs. It has been thus for nearly 400 years, since the Peace of Westphalia (1648), a series of treaties that ended the 30 Years War and the dominance of the Holy Roman Empire over much of Europe.
Controlling internal affairs also includes controlling the means of exchange and the financial system within national borders. For a totalitarian state like CCP China, this is more important than for democracies, but it is important for democracies nonetheless.
Some early-stage adopters of bitcoin and others with vested interests in bitcoin, like Twitter’s Jack Dorsey, as well as some radical libertarians and futurists, have spoken of the internet as the world’s “Eighth Continent”, and using the blockchain technology underlying bitcoin as a global disruptor allowing such things as direct democracy. They contend that bitcoin will be the “native currency” of this new “continent.”
Other, better grounded, commentators, such as Professors Chris Demchak and Peter Dombrowski of the US Naval War College, have spoken of the internet as requiring a “digital Westphalia” imposed by nations:
“If, as we expect, current states develop for cyberspace the necessary authorities, domestic institutions, and international regimes for (the) exercise (of) political sovereignty, ‘territoriality,’ and non-intervention/mutual recognition, then the existing Westphalian system will have to adapt. Thus, states will have to assert their prerogative over domestic and transnational competitors - ranging from criminal organizations to multinational corporations - while at the same time they reach a modus vivendi with other like-minded, similarly capable states.”
The two go on to quote Edward Newman - who described a real-world failed state as one that has “a poor capacity to control public order within its territory, is unable to consistently control its borders, cannot reliably maintain viable public institutions or services” - in saying that such a state would be unlikely, unwilling, or unable to successfully participate in this new way of life for the digital world. (Perhaps that’s why hyperinflationary Venezuela announced that it would treat bitcoin as legal tender for exchange. Reuters describes Venezuela’s President Maduro as, “losing control over parts of Venezuela, which is suffering from a deep economic crisis and a protracted breakdown of the rule of law”.)
The Looming Wave Of Regulation
Prior to the pandemic and particularly this year, bitcoin - with some exceptions - had been a relatively obscure asset outside its small, mostly male, and mostly under-30 trading community.
It has benefited from new highs and, in our view, from the tendency of that demographic to be overconfident risk-takers, as described in “Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment.” Indeed, we’ve snarked on these pages that there seems to be no such thing as “bad news” for bitcoin; its adherents will spin any news as leading to bitcoin appreciation. (Our exact quote was, “Just remember: No matter WHAT happens, it's ALWAYS GOOD for Bitcoin! (Insert ROFLMAO emoji here.)”)
But the spike in bitcoin prices this year also brought a spike in scrutiny from governmental authorities in addition to (or because of) more holders.
The IRS, which has been setting rules on bitcoin since at least 2014, now has a whole page of FAQs on cryptocurrencies.
The Treasury Secretary, Janet Yellen, has said she would welcome a new regulatory structure to govern bitcoin and cryptos because “(T)here are issues around money laundering, Bank Secrecy Act, use of digital currencies for illicit payments, consumer protection and the like.”
In June, the Basel Committee recommended a 100% reserve for banks holding bitcoin and cryptos.
The scrutiny is unlikely to fade.
Last week, the Financial Times opined that the tentacles of the US financial regulatory system were so fragmented, from the Comptroller of the Currency, to the Fed, to the SEC, to the Commodity Futures Trading Corporation, that “neither fish nor foul” hybrids like crypto coins which are – what? commodities? currencies? securities? - can easily “fall through the cracks”.
The Times notes that another hybrid, credit default swaps (CDS), which helped wreck the financial system in 2008 “...were hard to characterise (sic), being a form of insurance that was not regulated as such, and were seen by their advocates as being too cool to be overseen by mere bureaucrats.”
To quote Yogi Berra, “It’s like deja vu all over again” with bitcoin. Except this time, it won’t be “all over again”.
Having been “once burned, twice learned” by the unregulated CDS fiasco, we believe a whole barrage of regulation - from currency reporting, to banking reserve requirements, to national and state environmental controls on crypto mining, to local concerns about boosted electrical costs from crypto mining, even when electricity is from hydropower - awaits bitcoin and cryptos, even stablecoin. (Today's WSJ reports the Fed is concerned stablecoin may have a destabilizing effect on the financial system.)
And this is not just a US view:
Last week, the Financial Times reported that, Binance, the self-proclaimed "world's largest crypto exchange", has been admonished by the UK, Germany, Italy, Hong Kong, and Lithuania for its now-shuttered stock token exchange. The Times speculated that the shutdown "may further limit Binance’s ability to link up with the traditional financial system."
CNBC reported in May that Andrew Bailey, a board member of the Bank of England, warned cryptos "'have no intrinsic value' and people who invest in them should be prepared to lose all their money."
ECB President Christine Lagarde said in January that there needed to be "global regulation of bitcoin."
Another ECB board member, Isabel Schnabel, claimed in April that bitcoin “does not fulfill the basic properties of money", and warned that the value of cryptos could crash to nil, quickly, and disrupt the entire financial system. (We made a similar observation back in March.)
We believe it's only a matter of time before national and international regulation sweeps over - and subsumes - cryptos like a tsunami.
An End Times For “Greater Fools”?
In Jewish mythology, the Guf is the source of all souls. Some believe the Guf has a finite number of souls and when the last soul is depleted, the stage will be set for the arrival of the Messiah and the End Times.
Those of us who acknowledge the market for bitcoin is mostly comprised of “greater fools” are now seeing an end time for bitcoin because the “guf” of greater fools has been culled by bitcoin’s price volatility and the overwhelming losses suffered by the poor FOMO fools who bought into bitcoin at its high point this spring. This chart from Arbor Research & Trading, LLC (see the link as it may be under copyright) that was tweeted by Keith McCullough of Hedgeye Risk Management last week shows that “bitcoin mania” likely ended on May 9th.
The “cool kids”, of course, Elon Musk and Jack Dorsey - who both hold bitcoin and other cryptos - fill “the Guf” of FOMO greater fools using their celebrity rich guy status on social media and their “B-word” conference.
Musk's comments yesterday - including a 180° turnabout saying that Tesla would likely soon again start accepting bitcoin for its cars - undoubtedly helped move the price needle to the favor of bitcoin holders. His Twitter feed seems to be the leading indicator of bitcoin's price direction. Ditto Dorsey's (@Jack on Twitter) who keeps the bitcoin pot stirred globally - nice trick, but you need to be CEO of a global social media platform.
Wiser heads have, for the most part, exited the bitcoin playing field or, more likely, never took it. Nevertheless, the crypto cult has built an infrastructure of social media, purported bitcoin “news” websites, and trading platforms that continue to feed the frenzy as the FOMO crowd buys into the notion that there really is gold if they follow the rainbow.
As P.T. Barnum said, “There’s a sucker born every minute” and greater fools - mostly young, male, millennials and their juniors - continue to rush into the blockchain Monopoly money, following the lead of Musk, Dorsey, and others who continue to refill the Guf of new crypto true believers, albeit at a lower rate and smaller numbers.
Governments around the world – which have mostly ignored bitcoin because it had a relatively miniscule influence – are now “woke”, as it were, and moving to regulate bitcoin and to assert Westphalian sovereignty over what is money within their jurisdictions.
For bitcoin and the cryptos, we believe the walls are closing in.
And you’ve been warned.
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