Bitcoin for BRICS?

BlockchainAsia #64

Welcome back to BlockchainAsia. I am Coco. The Substack mobile app has added a new “Read-aloud” feature. Open a post on the app and click on the play icon at the top right to listen.

In the previous issue of BlockchainAsia, I shared observations from a trip to Hong Kong and Mainland China, highlighting a potential shift in China’s stance towards Bitcoin and cryptocurrencies. Since then, I haven’t been able to stop thinking about this change and trying to understand its underlying drivers. Ultimately, I want to find the answer to the question: How might China’s evolving stance impact Bitcoin and the broader crypto industry?

Image generated by Grok AI

Let me revisit what I wrote in the previous issue:

“A recent report dated Nov. 12 in the South China Morning Post deserves more attention. It highlights an interview with Dr. Feng Xiao, Chairman of HashKey Group, who suggests in his interview that Trump’s pledge to support the crypto industry and the sanctions on Russia via SWIFT may be the catalysts for the shift in China's crypto policies. Dr. Xiao estimates that the legalization of cryptocurrency assets in China could arrive within two years, otherwise, it could take up to five or six years.”

Other media reports have shed more light on China’s motivations which mostly stem from concerns over potential large-scale sanctions by the U.S. and its allies if China’s relations with the West deteriorate further.

The risks facing China primarily come from two areas:

1. China’s support for Russia: While sanctions are currently applied on a case-by-case basis, the U.S. has already added some Chinese companies to its sanctions list for supplying Russia’s military.

2. Tensions over Taiwan: Relations between Mainland China and Taiwan are increasingly strained. Recently, Beijing was irritated by Taiwan’s president visiting Hawaii to secure continued U.S. support amid the transition to a new administration.

According to the Wall Street Journal, the Chinese government has been closely studying Russia’s successes and failures in countering Western sanctions. One key takeaway is that “the moves by the U.S. and its allies to freeze Russian assets abroad following the Ukraine invasion prompted Beijing to more actively look for ways to diversify its stockpile away from dollar-denominated assets, such as U.S. Treasury bonds.”

The Numbers Tell a Story

China’s foreign exchange reserves, the largest in the world, stood at approximately $3.26 trillion as of October. Its holdings of U.S. Treasuries have steadily declined from a peak of $1.3 trillion in 2011 to $772 billion by September 2024. This downward trend began in late 2021.

Simultaneously, China has been quietly accumulating gold, a strategy it resumed in late 2024 after a six-month pause. By November, China held a substantial 72.96 million troy ounces of gold. Data on global central bank gold holdings reveals that China and Russia are expanding their gold reserves, while other major banks’ holdings remain stable or decline.

Chart 1 - China’s foreign exchange reserves since 2015

Chart 2 - China’s holdings since 2002

Chart 3 - China’s gold reserves since 2019

Chart 4 - Global Central Bank Gold Holdings

Why Bitcoin or Crypto?

This brings us to a key question: Why is Bitcoin or crypto part of the equation?

The answer lies in what Russia has been doing. Domestically, Russia has embraced Bitcoin and crypto through legislation and incentives, including:

• Encouraging Bitcoin mining

• Planning two national crypto exchanges to provide liquidity and enable Bitcoin/crypto-to-ruble conversions

• Contemplating allowing companies to use Bitcoin and crypto for international transactions

Internationally, Russia is exploring the creation of a blockchain-based stablecoin pegged to the RMB and other BRICS currencies. Additionally, BRICS has been discussing using Bitcoin and cryptocurrencies for trade settlements among member nations since last year. It’s unclear which approach is favored, but both could influence China’s policies.

The Ripple Effect on China

As a key BRICS member and an increasingly significant trade partner with Russia, China will inevitably coordinate with other members and adjust its Bitcoin and crypto strategies accordingly. Russia’s shift has likely pushed China to take Bitcoin and crypto more seriously and offered a playbook that China can take a page. The potential benefits are obvious:

• Reduced vulnerability to sanctions

• Facilitated cross-border payments without or reducing reliance on SWIFT

• Potential alternative assets for investment

In addition to dodging potential sanctions risks, China fully understands that Bitcoin and crypto have the potential to coexist with the fiat U.S. dollar, an asset China has long sought to challenge, and play an increasing role in global finance and trade. They potentially provide a level playing field for China to compete with the U.S. Trump’s pledge to support Bitcoin and crypto without a doubt gives China a sense of urgency.

From a Bitcoin holdings perspective, China isn’t far behind the U.S.

The Top Bitcoin-Holding Countries (July 2024):

1. U.S.: 213,246 BTC

2. China: 190,000 BTC

3. U.K.: 61,000 BTC

4. Bhutan: 12,573 BTC

5. El Salvador: 5,800 BTC

Note: Except for Bhutan and El Salvador, most of these holdings stem from seizures or donations.

The Road Ahead

While a definitive move into Bitcoin as an investment asset remains speculative, China is watching U.S. developments closely and evaluating Bitcoin and crypto's potential.

Over the next two years, Bitcoin's role in China's geopolitical and economic strategies will likely become clearer, potentially influencing the future trajectory of BRICS* cooperation.

These developments could redefine how Bitcoin and crypto are perceived—not just in China but globally. Bitcoin and crypto may grow beyond the realm as speculative investment assets, inserting themselves into geopolitics and global trade, and emerging as potential reserve assets alongside traditional options like U.S. Treasury bonds and gold.

* The BRICS countries account for 35% of global GDP, while the G7 only represents 30%. For more data, see here.

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I am Coco Kee, author of BlockchainAsia, host of BlockchainAsia Podcast, Co-founder of Kee Global Advisors, and a dog lover with a Goldendoodle.

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