Global central banks "encircle" Bitcoin: Will there eventually be a war with legal currency?

Bitcoin, which was "hot" last year, has shown no sign of cooling down since May this year, and has continued to attract attention in the virtual currency market. Especially after the price of each coin has been continuously refreshed to a high of $62,000, and has tested its own bottom line and is about to fall below $30,000, the European Central Bank, the Federal Reserve, the People's Bank of China, the Bank of Canada or the Ministry of Finance have successively issued policies, and the tone of the argument has also changed from general and tentative warning statements on Bitcoin to strict words of strengthening supervision, and even to public taxation and closing the mines that the former "depend on for survival".

As if they had agreed on it, central banks around the world have taken turns to warn against Bitcoin, showing a strong posture and a "blockade". But even so, despite the fact that Bitcoin is labeled as the "three original sins", central banks around the world still can't bear to step on the accelerator of the "Bitcoin removal plan".

"Surge and plunge" are the inherent properties of cryptocurrencies such as Bitcoin, but the situation is different now: global hot money is particularly agitated, and digital currencies occasionally accelerate. Stress response is at work, and central banks of various countries that turned a blind eye to the development of cryptocurrencies a few years ago have changed this attitude, and supervision is tightening and accelerating.

The European Central Bank, which has always been very concerned about risks, has long noticed this. At the beginning of this year, European Central Bank President Christine Lagarde took the lead in calling for global regulation of Bitcoin. She said that Bitcoin is a highly speculative asset and promotes money laundering. Any related financial loopholes must be filled and should be carried out globally. Lagarde's warning was not immediately responded to. However, as the price of Bitcoin continued to soar in March, it rushed to $60,743.04 on March 14. Countries seemed to suddenly realize that this problem might not be that simple.

The Central Bank of Egypt warned residents on March 28 local time not to engage in cryptocurrency transactions, especially Bitcoin, and reiterated that only official currencies approved by the central bank can be used in Egypt. "Since cryptocurrencies are not issued by any central agency of any country and are not backed by tangible assets such as gold reserves, their value will be extremely volatile and will have a negative impact on direct investment, stocks or real estate, and may have a negative impact on the country's economy."

In the Asia-Pacific region, on April 5, Tharman Shanmugaratnam, chairman of the Monetary Authority of Singapore, said in the country's parliament that cryptocurrencies are absolutely not suitable for retail investors. But he immediately added that Singapore's cryptocurrency market is still small compared to stocks and bonds, and the combined daily trading volume peaks of Bitcoin, Ethereum and Ripple in 2020 accounted for only 2% of the daily trading volume of securities on the Singapore Exchange.

From April to May, Bitcoin peaked and bottomed out, and GME and various MEMEs competed with each other. After repeatedly pointing out that Bitcoin and other cryptocurrencies have no intrinsic value and investors should be prepared to lose everything, Bank of England Governor Bailey spoke again on May 14 local time. The public may have seen the sudden surge in Bitcoin prices and US company stock prices, but no one knows the full picture so far. Under the popularity of cryptocurrencies is the rising profit-seeking behavior. People are looking for investment opportunities, but it has no value at all, which can be regarded as a warning signal.

Of course, from the spotlight of 62308.8 (April 13) to the current struggling support of more than 30,000 US dollars, Bitcoin has reversed many times, with such a large amplitude and speed that Bitcoin supporters have spontaneously organized a primary school-like activity, "If you haven't sold Bitcoin, please forward this article", in an attempt to build momentum. Cathie Wood, the founder of ARK, an American investment company focusing on the technology field, and Musk, whose discourse logic is somewhat different from that of ordinary people, rushed to help. The former firmly claimed that Bitcoin will still rise to 500,000 US dollars, and the latter released a picture and text tweet "Tesla has diamond hands", which can be understood as: not afraid of market fluctuations, hold positions until the goal", and then chose the latter in the "fiat currency or virtual currency" team.

The effectiveness of verbal warnings from global central banks cannot compare to actual actions.

On May 18, Beijing time, the China Internet Finance Association, the China Banking Association, and the China Payment and Clearing Association jointly issued the "Notice on Preventing the Risk of Virtual Currency Trading Speculation". "Financial institutions, payment institutions and other member units shall not use virtual currency to price products and services, and shall not directly or indirectly carry out virtual currency-related businesses." Subsequently, the Inner Mongolia Development and Reform Commission issued an announcement on May 19 that it would set up a virtual currency "mining" enterprise reporting platform to fully accept petitions and reports on virtual currency "mining" enterprise problems.

However, for staunch Bitcoin holders who are accustomed to such scenes, May 18-19 was a terrible and exciting day, but it was also a day when central banks "increased their ammunition" with their eyes wide open.

After falling to $42,000 per coin, on May 19, Beijing time, Bitcoin continued to test the price, effortlessly breaking through the "railings" of $40,000, $38,000, $36,000 and $32,000, and was even about to lose the $30,000 mark, heading south without any obstacles.

Within nearly 24 hours of that day, more than 510,000 investors across the entire network had their positions liquidated, with the liquidated funds reaching US$6.283 billion, and the liquidation amount in one hour was US$148 million; the cryptocurrency trading platform Binance also suspended some cryptocurrency trading on the same day; the market value of more than 7,000 cryptocurrencies has shrunk by more than US$600 billion in the past week, sliding to the current US$1.9 trillion.

Around 22:00 on May 19, Bitcoin began to recover slightly and gradually stabilized to around US$40,000.

It is generally believed that it was the document issued by the three departments of the People's Bank of China that caused the above-mentioned Bitcoin to plummet by 31.22% within the day. As a result, even though Bitcoin has just gained some respite and barely stopped at 400 million US dollars, it is still far from the previous normal.

Faced with this situation, ECB Vice President Guindos once again said on the same day that cryptocurrency assets should not be considered as real investments because it is difficult to identify their potential value. "The fundamentals of crypto assets are very weak. When it is difficult to find the true basis of an investment, then it is not a real investment. Investors should be prepared for large price fluctuations." His British companion Bailey also reiterated that "investors are destined to lose money."

However, the ECB, which has always paid particular attention to financial supervision, did not increase its warning intensity. After pointing out the repeated loopholes, the ECB immediately stated that because cryptocurrency assets are still not widely used for payments and the exposure of eurozone financial institutions to cryptocurrencies is very small, the financial risks seem to be limited.

The Norwegian central bank has a similar view. Torbjorn Haegeland, executive director of the financial stability department, said, "If banks continue to increase their investment in cryptocurrencies, the latter's sharp price fluctuations may cause trouble for the banking system. We do not consider these fluctuations to be a major threat to financial stability, but if the risk exposure continues to increase, it may pose a threat."

The North American region on the other side of the strait is not so ordinary, with a little more intention to prepare for a rainy day. On May 20, local time, the Bank of Canada stated in its annual financial risk assessment that the volatility of cryptocurrency assets is a new vulnerability facing the country's financial system. The Bank of Canada also emphasized the risk of stablecoins. "To reduce volatility, stablecoins are cryptocurrencies pegged to a more stable asset, but if the former is also widely used, it may disrupt the central bank's monetary policy mechanism," the Bank of Canada said. "Unless stablecoins are fully pegged to the Canadian dollar, their widespread use will inhibit the central bank's ability to implement monetary policy and act as a lender of last resort." As early as in the 2019 financial stability risk assessment, cryptocurrencies were included by the bank.

The Federal Reserve is a key player in the global central bank team.

On the same day that the Bank of Canada and the Norwegian Central Bank spoke out, Federal Reserve Chairman Powell, who has been active in major conferences recently, pointed out in a video released by the Federal Reserve that the growth of so-called stablecoins (private digital currencies pegged to the US dollar) could pose a threat to the financial system. At the same time, Powell accelerated the digital dollar argument and said that he would launch a public consultation on the "digital dollar" project.

On the same day, the U.S. Treasury Department said it would take stricter regulatory measures on the cryptocurrency market and related transactions to prevent illegal activities such as tax evasion. The day before, Michael Hsu, the new acting director of the Office of the Comptroller of the Currency (OCC), said that after taking office, he would begin to review the main regulatory standards and the agency's pending matters, including explanatory letters and guidelines on crypto assets and digital assets. The Biden administration then also proposed a new proposal that cryptocurrency transfers exceeding $10,000 must be reported to the U.S. tax authorities.

Under repeated pressure, Bitcoin, known for its "extreme resilience", has been rarely seen hovering around $40,000, with no significant changes.

On May 21, Beijing time, taking advantage of the victory, the Financial Stability and Development Committee of the State Council (hereinafter referred to as the Financial Committee) emphasized at its 51st meeting that it will strengthen the supervision of financial activities of platform enterprises, crack down on Bitcoin mining and trading, and resolutely prevent individual risks from spreading to the social field.

Because about 70% of "mining" takes place in Sichuan, Xinjiang and other places in China, the tightened supervision from the Financial Committee has once again caused Bitcoin, which had just gotten a little respite, to tremble. Within less than 10 minutes of the news being released, the price of Bitcoin fell by more than $2,000, falling below the $40,000 mark that it had finally recovered.

Also on May 21, the Hong Kong SAR government proposed that cryptocurrency exchanges operating in Hong Kong must obtain permission from the Hong Kong market regulator and can only provide services to professional investors. It plans to submit a draft law amendment to the Hong Kong Legislative Council to establish a mandatory licensing system for virtual currency exchanges before the end of 2022. According to the new regulations, only licensed exchanges can legally provide virtual currency trading services in Hong Kong in the future.

The aftermath of the blow continued to ferment over the weekend. To the extent that Huobi Mall said on May 23rd, Beijing time, it had decided to suspend its mining operations in China. Bitcoin then continued to fall, hovering around $35,000.

China's regulation is enough to significantly affect the price trend of Bitcoin and cannot be ignored. According to ByteTree data, it divides Bitcoin trading patterns into trading sessions dominated by Asia, Europe and North America. The sessions show that in recent periods, Asia has been the buying area of ​​Bitcoin, while Europe and America are dominated by selling operations.

As public opinion has developed to this day, Bitcoin’s “unacceptable shortcomings” are obvious. Money laundering and fraud crimes, extremely high carbon footprint that is extremely unfriendly to the environment, and the property of rapid rise and fall have become the “three original sins” attached to Bitcoin.

In its Financial Stability Review published in May, the European Central Bank compared the recent surge in cryptocurrency prices to the "Tulip Mania," saying that the former's risks and speculative attributes, excessive carbon footprint, and possible links to illegal activities are all worrisome. The U.S. Treasury Department also believes that cryptocurrencies facilitate a wide range of illegal activities, including tax evasion, thus constituting a major security vulnerability.

The above allegations seem to have been proven. The rising popularity of cryptocurrency has led to a sharp increase in fraud in this field. Data recently released by the Federal Trade Commission (FTC) of the United States showed that between October 1, 2020 and March 31, 2021, investors lost more than $80 million in cryptocurrency fraud, with a median loss of $1,900. Among them, more than $2 million of the losses were caused by Musk's impersonators.

"Compared with the same period last year, the value lost due to cryptocurrency investment scams increased by about 10 times. In a six-month period, more than 7,000 scams in this area were reported, 12 times that of 2020," the FTC said. "Scammers set up complex websites to make it seem as if virtual cryptocurrency investments are increasing in value in the eyes of investors."

The "celebrity effect" is a magic weapon for the success of cryptocurrency scams and crimes, and Singapore, which boasts strict financial supervision, has not been immune. Its Prime Minister Lee Hsien Loong was involved in a token scam caused by a blockchain social media platform BitClout in April. The latter established a social account to sell proprietary cryptocurrency without Lee Hsien Loong's permission. The account had a total of 27.3955 tokens, each priced at US$357.85.

"The creator of the website is anonymous, but I have posted a public tweet demanding that my name and photo be removed immediately. I have nothing to do with the platform," Lee Hsien Loong said. "I urge everyone to be vigilant when dealing with cryptocurrency transactions, as cryptocurrency transactions are not regulated by the Monetary Authority of Singapore, and investors dealing with them will not be protected by any relevant laws."

As for Bitcoin's remarkable volatility, its ups and downs are well known and will not be elaborated on here.

However, volatility is not only manifested in sharp rises and falls, it also hinders Bitcoin's ambition to become a currency. If it intends to compete with legal tender, with the potential for huge ups and downs, who will immediately accept and pay for Bitcoin? And how can it become another future of currency?

Even though there are frauds and illegal activities in any financial field, and the stock market still has its ups and downs, the extremely high carbon footprint of Bitcoin mining is particularly criticized by society. So much so that Musk, a "hardcore fan" of cryptocurrency, announced that Tesla would stop accepting Bitcoin as a payment method for purchasing cars due to the high pollution of Bitcoin from mining to trading.

Especially, at a time when countries are preparing for the 26th United Nations Climate Change Conference (COP26).

On May 20 local time, the Biden administration issued an executive order requiring domestic banks and companies in the United States to disclose the climate change risks they face today in order to enhance the resilience of the domestic financial system to climate change. It is reported that British Prime Minister Johnson will announce a new commitment in the coming days to reduce emissions by 78% from 1990 levels by 2035, while the previous goal was to reduce emissions by 68% by 2030.

But Bitcoin does not seem to be included in the explicit discussion. In a previous interview, Topping, a high-level advocate for climate action in the UK, said that Bitcoin is unlikely to appear on the agenda, but at least it now exists in the broader policy discussion. "Mining" is one of the culprits of climate problems, and people who are worried about the climate are very frustrated. Mining is just a stupid idea that runs counter to what we want to do."

According to data from the International Energy Agency (IEA), Bitcoin mining consumed 50 to 70 megawatt hours in 2019, which is roughly equivalent to the consumption of a country of Switzerland (63 terawatt hours per year). The real-time data from the Cambridge Bitcoin Electricity Consumption Index is even more worrying. As of May 23rd, Beijing time, Bitcoin's total energy consumption was between 40 and 445 megawatt hours (TWh), with an average of about 116.57 MWh. The electricity consumed by "mining" in a year exceeds the electricity consumption of countries such as the Netherlands and the Philippines, accounting for 0.54% of the world's total electricity consumption.

At this rate, Bitcoin's total electricity consumption in 2021 is likely to soar to more than 130 MWh/hour, while technology companies such as Microsoft and Google consumed 10 and 12 MWh respectively in 2020.

However, in the eyes of Bitcoin supporters, energy consumption is not completely one-to-one equivalent to carbon emissions, and Bitcoin mining can contribute almost nothing to the latter. Bitcoin will become a powerful force in the future, enough to drive greener power grids and help make renewable energy such as solar and wind power more economical. Crypto asset company CoinShares estimates that 74% of the energy used in Bitcoin mining comes from renewable energy.

"About 70% of the computing power of the entire network is in China" seems to have become a highlight sentence. Research shows that about 65% of cryptocurrency mining activities are carried out in China. Since coal accounts for about 60% of China's energy structure, even if about 74% of miners use some kind of renewable energy, the proportion of renewable energy in total energy consumption is still less than 40%.

On April 22, ARK, a US investment company and one of the strongest Bitcoin supporters, and Square, a major Bitcoin holder, jointly released a report questioning the mainstream view that "Bitcoin mining is extremely destructive to the environment" and pointed out that Bitcoin is actually a key driving force for the future of renewable energy. Bitcoin mining, like renewable energy, promotes energy transformation.

“Our model shows that integrating Bitcoin mining can transform intermittent electricity resources into power stations with baseload capacity. As a result, all else being equal, renewable energy can economically provide a significant proportion of electricity anywhere through Bitcoin mining,” the report said. “As a secondary effect, the cost of renewable energy will fall faster, making its mining more economically competitive.”

Bitcoin is reportedly already encouraging the transition to renewable energy. For example, DMG Blockchain's operations in British Columbia are already completely dependent on cheap hydropower from dams. The Crypto Climate Accord, launched by non-profit organizations and blockchain companies in early April, aims to use 100% renewable energy for cryptocurrencies by 2025 and achieve net zero emissions by 2040, 10 years earlier than the Paris Agreement. So far, about 45 companies and organizations around the world have joined the Crypto Climate Accord, which is also supported by the United Nations Framework Convention on Climate Change Climate Champions (UNFCCC Climate Champions).

The debate over the three major criticisms of Bitcoin continues. If we look at it from another perspective, and put it in the context of the accelerated digital currency projects since last year, the global central bank's round of blocking Bitcoin seems to be somewhat reasonable. It is hard to believe that this is a coincidence, but rather a "premeditated" one.

For example, Powell, who had always been reserved about the digital dollar, rarely accelerated his digital dollar rhetoric in his recent warning against Bitcoin and stablecoins. Before the Egyptian authorities announced their rejection of the use of cryptocurrencies this year, they also stopped a digital currency project that started in 2019 and was expected to be completed in 2020. When the Norwegian Central Bank warned of the risks of Bitcoin, its Deputy Governor Ida Wolden Bache said that the Norwegian Central Bank was also exploring various options, such as launching its own digital currency.

But a series of questions arise: How should countries unify the definition of virtual currency; whether Bitcoin can successfully separate itself from other virtual currencies and continue to be popular; whether digital currency and virtual currency can coexist appropriately; and how to measure the pollution of "mining".

The numbers are not accurate and trends are changing all the time. Some questions will never have answers, while some questions just have no answers temporarily.

At present, what can be roughly confirmed is that the war between fiat currency backed by the central bank and Bitcoin has begun.