As China continues to strictly prohibit cryptocurrency trading and mining activities, a development from the China International Monetary Institute (IMI), a Chinese government-backed think tank, has unexpectedly ignited market speculation about a possible subtle shift in China's official stance on Bitcoin (BTC).
Recently, IMI forwarded a report titled "The Case for Bitcoin as a Reserve Asset" on its official WeChat account, with comments pointing out that, against the backdrop of the declining attractiveness of the U.S. dollar and new challenges facing gold, Bitcoin is gradually shifting from a "speculative asset" to a "strategic reserve asset," and its position in the global reserve system deserves continued attention. Although this is not an official policy statement from IMI, given IMI's official background and its past remarks, which are often seen as the "forerunner direction" of Chinese government policies, this move undoubtedly leaves a huge space for imagination in the market. Does this mean that China, as the world's second largest holder of Bitcoin (although mainly from seized assets), is re-evaluating the strategic value of Bitcoin and may send more positive signals about its reserve status in the future?
Bitcoin’s uniqueness
The China International Monetary Institute (IMI) is affiliated to the School of Finance of Renmin University of China. Most of its committee and advisory group members are senior officials and senior researchers from core government agencies such as the People's Bank of China (PBOC), the Ministry of Finance, the National Development and Reform Commission, and the Ministry of Foreign Affairs. Such a personnel composition makes the research results and public statements of IMI often interpreted by the outside world as having a certain degree of official color, and may even reflect the policy direction being brewed or considered within the Chinese government.
IMI often expresses its views on sensitive and important issues such as the internationalization of the RMB, the promotion of the digital RMB (e-CNY), and how to deal with international financial sanctions. Therefore, its views are often regarded as the "forerunner wind direction" or "stress test" of official policy trends. This time, IMI forwarded and positively evaluated a report exploring the value of Bitcoin reserves. Even if it emphasizes its unofficial policy statement, it is inevitable that it will attract widespread attention and in-depth interpretation from the market.
In the context of the current high pressure on cryptocurrency trading and mining activities in mainland China, the official think tank's attention to the strategic reserve potential of Bitcoin highlights the potential role that Bitcoin may play in countering the hegemony of the US dollar, coping with global currency risks, and exploring new reserve assets. This seems to suggest that although China is unlikely to change its overall strict regulatory policy on cryptocurrencies in the short term, at the strategic level, China may be re-examining the value of Bitcoin with a more open and pragmatic attitude.
It is worth noting that the report forwarded by IMI was written by former White House economist Matthew Ferranti and was originally published at the end of last year. The core argument of the report is that Bitcoin can be used as a hedging tool for central banks in developing countries, especially for those countries affected by the "weaponization" of the US dollar (i.e., the United States uses its dominance of the US dollar to impose financial sanctions). The report elaborates on the potential reasons for Bitcoin as a reserve asset from multiple angles:
Historical status and evolution logic:
The report traces the birth of Bitcoin to the Industrial Revolution, arguing that electricity has changed the economic production model. The mining, refining and circulation of traditional hard currencies (such as gold) require a lot of physical strength, while Bitcoin represents an innovation that relies on electricity to "generate" and "verify" currency. In a modern society based on electricity, it is a logical evolution to generate a medium of value storage by consuming electricity.
Bitcoin uses the "Proof-of-Work" mechanism, where miners consume electricity to mine new coins, solving the difficult-to-eradicate counterfeiting problem of gold. It is also verifiable, and every transaction and generation is recorded openly and transparently on the blockchain.
While other proof-of-work cryptocurrencies have similar properties, Bitcoin’s originality as the first gives it unique status and legitimacy, similar to how gold has become the primary reserve asset due to its historical status rather than other equally rare and stable precious metals (such as platinum).
Performance during the crisis:
One of the core characteristics of reserve assets is to provide an "insurance benefit" during market turmoil. The report acknowledges that Bitcoin's short-term volatility is higher than other traditional reserve assets. For example, in March 2020, at the beginning of the COVID-19 pandemic, the price of Bitcoin plummeted by nearly 45% in 10 days. However, the report also points out that no asset can cope with all types of crises. For example, traditional U.S. Treasury bonds are difficult to fight inflation. Bitcoin, on the other hand, performs well in specific situations, such as the U.S. bank collapse crisis and the geopolitical shock caused by large-scale U.S. sanctions, where Bitcoin provides an alternative insurance benefit.
Long-term value storage and inflation protection potential:
As for whether Bitcoin can effectively fight inflation in the long run, the report believes that there is still controversy. Even gold has experienced decades of downturn (for example, between 1980 and 2001, the price of gold adjusted for inflation fell by 86%).
Gold's role as a store of value is based on centuries of history. Bitcoin, with its supply cap (21 million coins) and a mechanism that halves its production every four years, theoretically has the potential to fight inflation. Studies have shown that there is a certain correlation between Bitcoin prices and expected inflation, especially in line with the upward trend of online price indices.
Effective portfolio diversification tool:
The report cited research from the Federal Reserve Bank of New York, pointing out that changes in Bitcoin prices almost only respond to news related to inflation, and have no significant correlation with macroeconomic news such as interest rates, GDP, and employment data. This is different from the fact that gold prices react to all kinds of news. Therefore, in a portfolio that already includes gold, Bitcoin can provide additional diversification.
Before the COVID-19 pandemic, the correlation between Bitcoin and the stock market was almost zero; the correlation increased significantly during the pandemic, which may be related to the synchronized operations of institutional or retail investors; but by 2023, this correlation had fallen back.
No default risk:
Unlike bonds or stocks, Bitcoin itself does not represent any claim to future cash flows, so there is no default risk in the traditional sense. The security of Bitcoin mainly comes from its underlying encryption algorithm and decentralized miner network.
Financial sanctions can be seen as a selective “default”. The Bitcoin network, due to its decentralized nature, is naturally resistant to sanctions. As long as there are miners willing to process transactions (even if these miners are located in non-sanctioned countries), the blockade can be bypassed.
Another potential "default" risk comes from the "custodian" of the assets. For example, the gold of the Central Bank of Venezuela was once frozen by the Bank of England. Bitcoin provides a self-custody option that can reduce this third-party risk, but it also places higher requirements on the information security capabilities of the holder.
Highly Liquid Assets:
Although the Bitcoin market is not as deep as U.S. Treasuries, its liquidity is sufficient to accommodate multi-billion dollar transactions, comparable to the gold market and even better than the currencies of some countries that impose capital controls. Studies have shown that Bitcoin can help residents of emerging markets circumvent capital controls. The case of Argentina shows that the use of local cryptocurrencies has increased significantly amid increased foreign exchange restrictions.
Geopolitical Dispersion Factors:
The International Monetary Fund (IMF) has pointed out that geopolitical tensions could lead to the fragmentation of the global financial system, threatening financial stability, capital flows and international trade.
Academic research has found that countries with close arms trade with China and Russia have a relatively fast growth in their gold reserves. In 2022, the amount of gold purchased by global central banks hit a record high, with major buyers including China, Turkey, India and Middle Eastern countries.
The study also found that Bitcoin’s price and volatility are significantly correlated with the geopolitical risk index, making it the only crypto asset with this feature, further reinforcing its potential position as a geopolitical risk hedging tool.
China’s potential considerations
The report concludes that Bitcoin and gold are not the best reserve options for all central banks. Central banks will consider a variety of factors when allocating reserve assets, such as import and export structure, foreign debt currency, exchange rate system, etc. However, Bitcoin does have unique properties that can help fight multiple risks such as inflation, geopolitical risks, capital controls, sovereign defaults, banking crises, and financial sanctions. In some ways, Bitcoin, like gold, has the potential to become a reserve asset.
For China, although it has a severe crackdown on private transactions and mining activities of cryptocurrencies, from a national strategic perspective, some characteristics of Bitcoin may be attractive. Against the backdrop of increasingly complex global geopolitical landscapes and the continued risk of the weaponization of the US dollar, exploring the diversification of foreign exchange reserves and reducing dependence on a single sovereign currency is a common issue faced by many countries (including China). As a digital asset with global liquidity that is independent of any sovereign state control, the potential value of Bitcoin in this context cannot be ignored.
Although IMI's move to forward the report cannot be interpreted as a clear signal that China's official policy is about to undergo a fundamental change, it at least shows that in China's policy research circles, the discussion on the strategic value and potential application scenarios of Bitcoin has not completely stopped. Whether and how China will incorporate Bitcoin into its broader national strategic considerations in the future remains to be seen. But what is certain is that as the attitudes of major economies around the world towards Bitcoin evolve, the role and status of Bitcoin in the global financial system will continue to attract attention and discussion. IMI's "unspoken position" may be a footnote worth pondering in this big chess game.
