the money game

What Can the U.S. Learn From China’s Crackdown on Crypto?

Workers move cryptocurrency mining rigs at a facility in central China in March, prior to the government’s decision to ban bitcoin mining in June. Photo: AFP via Getty Images

On Friday, China’s regulatory agencies cracked down on all cryptocurrency-related activity, including a ban on transactions and overseas crypto exchanges. The agencies announced “new systems” to monitor crypto threats and said they would slowly begin to shut down all of the country’s crypto-mining facilities. Friday’s announcement was the most intense volley in a series of tough regulatory measures China has implemented against cryptocurrencies going back as far as 2013.

China’s announcement comes as U.S. regulators continue to signal a desire to rein in the crypto industry here at home. Recently, Treasury Secretary Janet Yellen has talked about the need for some oversight of stablecoins (i.e., crypto tokens pegged to the value of the dollar), and SEC chair Gary Gensler has called digital currencies the “Wild West.” “I think the public can get a better deal. Crypto, if it was within the regulatory perimeter clearly — these platforms should come in and register with the appropriate authorities,” Gensler told Intelligencer’s Jen Wieczner last week. Intelligencer spoke with Scott Galloway, co-host of New York Magazine’s Pivot, to get his read on what the Chinese and the U.S. governments are hoping accomplish and how digital currency stakeholders might react to this regulatory offensive.

This isn’t the first time China has tried to shut down crypto trading, but it’s probably the most robust action it has taken. Why the ongoing game of whack-a-mole? 
On a geopolitical level, the central banks and sovereigns lose a lot of power if their currencies are not the default currency. The institution that has the most to lose from crypto is probably the U.S. government. The strongest part of this country’s soft power is the fact that the U.S. dollar accounts for two-thirds of reserve currency around the world. If you want to do business in dollars, it has to be transacted through a series of institutions or networks where it’s likely that those flows are transparent to one or more governments. If you try to wire funds overseas, it doesn’t happen instantly because there are regulations, which is Latin for “other people need to look at it.” What that means is that the U.S. government has tremendous visibility into flows of power and funds. When Rwanda puts sanctions on a country, they can say, “Okay, we’re not buying products from you.” But when we put sanctions on a country, we can stop other nations from buying from them. We control the operating system for the global economy. Additionally, China doesn’t like the idea of flows of influence and power being outside the Chinese security apparatus’s purview. That’s part of the reason people like crypto though: It’s a decentralized network that’s not subject to the visibility or controls of a government or bank. Sovereigns have this authority — whether it’s righteous or autocratic authority — over the visibility into flows of government-issued currency.

So the U.S., as a sovereign, should be equally motivated to crack down on crypto.
I think the most underreported story is that America’s number one comorbidity is arrogance. We generally think that anything Europe or China does is either weak or autocratic and there’s nothing to be learned. Our way is always the right way. If you’re in Congress and there’s a program that’s working in Norway, you’re remiss to bring it up because people think that looking like Europe is an insult. And you never want to say, “The Chinese have been very successful with this economic program, we should look at it.” What we fail to realize is that, while there’s some very troubling things about China, they have lifted three-quarters of a billion people out of poverty over the last several decades. No economic system has ever achieved anything like that on that scale. At a minimum, we should acknowledge that learning from them doesn’t necessarily mean that we agree with them.

What’s most interesting is what they have clearly learned from us. It seems pretty obvious that China looks at the U.S. and says, “Okay, what has technology done there?” What they’ve decided is that technology has resulted in a system where national interest has been subverted by economic interest. Specifically, by this kind of innovation class of technology entrepreneurs. In the U.S., we know Facebook has research showing that an increase in depression, self-harm, and suicide in teenage girls is probably correlated with the growth of Instagram. What do we do? Forty-four states ask (i.e., beg) Facebook not to move forward with Instagram for kids. That’s where we are. Our elected representatives have to ask Facebook not to do something which seems abhorrent. Facebook has made no signals or concessions whatsoever that it’s not going to move forward with a form of Instagram for children. [Editor’s note: On Monday morning, Facebook announced it is “pausing” Instagram for kids.] Then China looks at our antitrust and sees a concentration of power that has resulted in fewer start-ups in the fastest growing parts of our economy. They see income inequality, partially enforced by higher-education institutions, so they move in on the tutoring-industrial complex — an industry with a $100 billion market cap — and say, “We’re not going to let our universities be like the U.S. and become the enforcers of a caste system.” They see video games and screen time having all sorts of negative impacts on young people. So what do they do? They have put limits on time spent playing video games and viewership of TikTok during the week.

Now, they’ve also learned from Mohammed bin Salman, in terms of tactics. The U.S. government has not disappeared Mark Zuckerberg. But Xi Jinping did disappear Alibaba founder Jack Ma for a while. And he has since gone strangely quiet. The government moved in on Didi — China’s biggest ride-hailing company — and said, “Okay, we don’t like what you’re doing with the data.” Now, we don’t know if that’s because they were concerned with people’s privacy or because Didi wrapped itself in this global-innovators blanket and said, “We’re not sharing our data with the China security apparatus.” We don’t really know what happened. But they just moved in and said, “Fine, we’re going to kneecap you.”

On crypto, where they see exceptional volatility and a threat to sovereign power, in terms of controlling the currency, they’ve said, “Regardless of how innovative you think you are and how many companies or people might get rich from this, we see it as a risk to society and our control, and we’re banning it.”

So you think there is a lesson for the U.S. in there? 
The easy and logical argument is that that’s not how we do things in America. We want there to be true systemic change that involves laws, thoughtful debate, and representation of these entities at the table. That’s how we’re supposed to do things in a democracy. But what I find fascinating is that China looks at us and says, “We’re just not going to let that happen here.” It’s very telling that, arguably the world’s most robust economy, looks at us and says, “Big Tech is a real danger and we need to move in and prevent what has happened in America from happening here.” Crypto is just one example of that.

In the U.S., you have this gestalt from crypto, which is the same narrative you get from the majority of innovators, including social media, that talks down to the government and other industries and says, “Oh, we’re special. We’re innovators and we’re responsible for economic growth and innovation. Anyone who thinks we should be subject to any sort of regulation or scrutiny is a boomer and doesn’t get it.” I think China has essentially said “Fuck that.”

SEC chair Gary Gensler is somebody who understands crypto and is saying these platforms should “come in and register” and essentially offer themselves up to regulation. Do you think he’ll be successful? 
Even if Gary Gensler gets it — and I think he does — and even if the law is on his side, he’s under-resourced. We don’t have the autocratic power to make decisions by fiat. What Amazon, Google, Facebook, and Uber have taught the CEO of Coinbase is to ignore current regulation and laws. Do whatever is required to scale — whether it’s starting to offer ride-hailing in a nation without even applying for a business license or knowingly engaging in activities that create radicalized young men and depressed young women, or implementing dark psychological tricks on your trading platform (i.e., Robinhood) to addict young people. They know these things are wrong, but the algebra of deterrence is no longer in place. If you’re Facebook and you know you’re doing something that is going to get you in trouble, but the fine is 25 cents on a $100 of incremental shareholder value, the smart, shareholder-driven thing to do is to continue to break the law. The algebra of deterrence has totally been flipped. Right now, the legal remedies are anemic. With a small amount of resources and basically a perp walk, that problem would largely be solved. In China, they are recalibrating the algebra of deterrence.

Bitcoin’s value dropped 7 percent on the news. What do you think China’s increased vigilance will mean for its value in the long run?
China can take the tutoring industry companies down 50 percent, but it can’t take crypto down 50 percent. Crypto, as an asset class, is probably bigger than any one sovereign. Every time there’s been an aggressive move against crypto, it’s been a short-term dip which has, quite frankly, just been a buying opportunity. You have a perfect storm of good things for crypto. You have an entire generation coming into their income earnings, and who look at the government bailing out every company, and not letting stocks or bonds drop to their natural levels. In 2008, I had an opportunity to buy Amazon at $120 a share because the government didn’t come out and bail out everybody in 2008. The result was that people coming into their income-earning years had a chance to buy stocks on sale. Unless you let the gale forces of disruption blow, you’re basically reducing opportunity for the next generation of buyers.

What’s happened is that an entire generation of investors has created their own asset classes and they like volatility. Bitcoin’s genius is that every hour it gets harder to mine a coin and people believe it’s going to stop at 21 million. Nobody believes that the Fed or the European Central Bank has the will to actually stop printing. That scarcity of credibility has leaked from sovereign to bitcoin.

These corrections have usually been buying opportunities. The volatility of regulation moving in does give people pause, but it doesn’t chase them from the asset class. Rather, it chases them into who they perceive to be the survivors or the winners. Remember when Elon Musk said he was worried about the energy consumption and crypto crashed — and then bounced back? It’s funny that the supposedly most decentralized asset ever is centralized to the id of one person expressing his id in 280 characters. I would argue that, in many ways, it’s the most centralized asset class we’ve ever seen.

If I were advising Janet Yellen or Jerome Powell or the president, I would tell them to play offense as well as defense. You have to regulate these guys. Every industry says the same thing when they’re booming in the beginning: We’re innovators and you don’t want to stop this innovation. It’s all a narrative for why they should continue to explode their wealth in an unfettered fashion. Ultimately, we decide that’s a bad idea. There needs to be some sort of regulation, even if the industry creates a net good for society. Fossil fuels in my view are a net good, so are pesticides. But we have emissions standards and the Environmental Protection Agency.

The same is true of crypto. The CEO of Coinbase basically comes out and says, “You don’t get it. You’re not cool, we’re the cool kids. You don’t get it, dad.” I think that’s a dumb strategy. I don’t think Gary Gensler is going to go, “Oh no, the people don’t like me or think I’m cool.”

What Can the U.S. Learn from China’s Crackdown on Crypto?