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: China’s bitcoin crackdown contradicts Peter Thiel’s belief that it is a ‘financial weapon’ against U.S.

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Billionaire venture capitalist Peter Thiel made waves Tuesday when he suggested that bitcoin could be thought of as “in part a Chinese financial weapon against the U.S.,” because, he argued, bitcoin undermines the U.S. dollar’s status as the world’s reserve currency.

“From China’s point of view, they don’t like the U.S. having this reserve currency because it gives the U.S. a lot of leverage over Iranian oil supplies and all sorts of things like that,” the PayPal
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founder and Facebook
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board member said during a virtual event for the Richard Nixon Foundation. Bitcoin
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he added, “threatens fiat money, but it especially threatens the U.S. dollar, and China wants to do things to weaken it.”

Read more: China may be using bitcoin as ‘financial weapon’ against U.S., says Peter Thiel

Thiel’s past statements on bitcoin, along with China’s overall policy toward the virtual currency, may be at odds with his most recent analysis.

In 2018, for instance, Thiel told CNBC that he saw bitcoin as an excellent store of value, but not something that would likely be used for everyday transactions. “I’m not talking about a new payments system,” because transaction costs are too high, Thiel said. Rather, “it’s like bars of gold in a vault that never move, and it’s a sort of hedge against the whole world going falling apart,” he said.

Investors often liken bitcoin to gold, traditionally viewed as a hedge against inflation or a serious economic downturn, and some analysts have used gold’s current market capitalization as a means to calculate a price target for bitcoin over the long term. But conceiving of bitcoin as digital gold by definition means that it will not serve as a replacement for the dollar
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as a medium for everyday transactions.

As for whether bitcoin threatens the U.S. dollar as the world’s reserve currency, most economists are doubtful. “The dollar is the world’s premier reserve currency because it has a stable value (low inflation), a large supply of safe assets and the credibility of the U.S. economic and legal system,” said Agustin Carstens, general manager of the the Bank for International Settlements, said in a January speech.

“Investors can also easily access the U.S.’s deep and efficient capital markets, without worrying about capital controls” he added. “These factors are likely to
remain the primary drivers of global reserve currency status.”

Bitcoin does not share the traits listed above: it does not maintain a stable value and its fixed number of coins means that it can’t keep up with an insatiable global demand for safe assets like the U.S. debt market can. Indeed, investor willingness to fund more than $21 trillion in U.S. public debt, often at negative real interest rates, shows that the U.S. dollar continues to have massive appeal even as cryptocurrencies go mainstream.

Furthermore, China’s actions over the past decade show that it is deeply skeptical of bitcoin and likely sees it as a threat to the power of the Chinese Communist Party. In 2017, the People’s Bank of China and five other ministries banned financings using cryptocurrency, like initial coin offerings, and banned the exchange of fiat money for cryptocurrency, according to Rain Xie of the Washington University School of Law.

She argued that a primary reason for this ban was the result of China’s strict capital controls, aimed at preventing wealth from leaving China for other countries. To maintain these controls while allowing cryptocurrency transactions, Chinese banks would have been required to undertake “a technologically impossible mission of tracking and imposing limitations upon each encrypted, anonymous cryptocurrency transaction from every Chinese user.”

Such a crackdown on private cryptocurrencies can hardly be seen as useful to promoting bitcoin as a competing reserve currency to the U.S. dollar. Instead, China has built it’s own central bank digital currency, a digital yuan as a counterweight to popular digital payment platforms.

See also: Will China’s new digital yuan threaten King Dollar’s reign?

“A lot of financial activity in China is happening over platforms like AliPay and WeChat Pay, and the central bank and other regulators didn’t have a lot of visibility into that activity and that’s something the Chinese authorities don’t like,” Stephanie Segal, a senior fellow at the Center for Strategic and International Studies told MarketWatch on Tuesday.

Meanwhile, China’s economy relies heavily on the forbearance of state-owned banks, which roll over nonperforming loans to avoid the disruptions of economically important institutions defaulting. “That can be sustained as long as you have a constant funding source,” in the form of consumer deposits, but a growing system of private money could undermine that, Segal said.

China may chafe at the geopolitical power bestowed on the U.S. government by the popularity of the dollar, but cryptocurrencies appear to be a greater threat to the Chinese Communist Party’s hold on to power than to the dollar’s status as the world’s reserve currency.

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