Trump’s pro-crypto stance could be another thorn in US-China relations 

Bitcoin’s recent surge past historic highs comes amid significant changes in the cryptocurrency landscape, particularly related to the incoming second Trump administration and the campaign promises to deregulate the industry. Coinbase stock jumped 28.6% immediately after the elections, and the cryptocurrency industry’s campaign contributions, exceeding US$100 million, suggest growing political influence.

Meanwhile, Chinese authorities are maintaining their ban on cryptocurrency trading. The contrasting stances on crypto can worsen US-China relations if evolving US policies and institutional adoption create new pressures on Beijing’s control over capital flows. The potential US policy shifts raise questions about both opportunities and challenges for both superpowers, with implications for global financial centres.

China’s approach to cryptocurrency reflects broader concerns about capital outflows in an ailing economy. As part of the policy package to boost economic growth, China is trying to boost domestic consumption as a way to potentially transform its production-driven economy structurally.

With a lower focus on exports to the US, and indeed with the anticipation of imminent tariffs and an escalating trade war, China may increase capital outflow restrictions in its balance of payments. Around one-third of Chinese funds using the Qualified Domestic Institutional Investor (QDII) scheme allowing investments in foreign assets have been suspended — partly to curb capital flight.

The challenge for Beijing intensifies as a weaker economic outlook with limited domestic investment opportunities, increased government intervention in the market exacerbating policy risks, anticipation of future tightening of capital controls, and potential violations of property rights, increase the incentive for capital outflows — exacerbating the so-called “hot money” flows.

Unlike US regulations such as the Foreign Account Tax Compliance Act (FATCA), which enforces global compliance through the threat of banning banks from dealing with the US dollar, China’s cryptocurrency restrictions face practical enforcement challenges. Chinese citizens continue to access foreign crypto exchanges to channel funds facing existential risk to financial centres like Hong Kong, Singapore and Dubai. 

Recent developments in China’s cryptocurrency landscape underscore these paradoxes. While the US moves toward institutional adoption, Chinese retail investors will likely increasingly turn to crypto despite — and perhaps because of — stringent regulations.

This divergence creates an interesting dynamic: as US policy potentially shifts toward treating cryptocurrency as a strategic asset requiring oversight, Chinese restrictions inadvertently increase crypto’s appeal as a tool for capital movement. The contrast between official policy and market behaviour in both countries suggests that cryptocurrency’s role in international finance may be shaped more by practical necessity than regulatory intent.

These developments create complex strategic considerations. As US-China technology competition intensifies, cryptocurrency’s role in capital flows and financial innovation becomes increasingly relevant.

While China leads in central bank digital currency development, the global cryptocurrency ecosystem’s evolution may require Beijing to reassess its current restrictions, particularly if digital assets become part of broader strategic competition with the US.

Current US technology restrictions focus primarily on AI-related chips and national security concerns, leaving cryptocurrency as a potential unexpected front in technological competition.

Beyond government policies, there are also other reasons why this bout of cryptocurrency enthusiasm may be a “second spring” — cryptocurrency has been institutionalised in various forms.

Traditional financial institutions have adapted technologies developed in decentralised finance to existing financial frameworks rather than disrupting them. Major banks like HSBC now use digital ledger technology for over-the-counter trading. Payment networks Visa and Mastercard have integrated blockchain capabilities into their existing infrastructure. And the approval of Bitcoin exchange-traded funds (ETFs), which saw record-breaking inflows, represents perhaps the clearest example of this institutional absorption. 

Although this institutionalisation of cryptocurrency marks a significant departure from Satoshi Nakamoto’s original vision of a decentralised financial system, it makes the incentive for Chinese capital outflows through cryptocurrency even worse. The institutionalisation reduces fears of Chinese users that they are participating in a rogue system.

While cryptocurrency prices often outpace adoption rates, the underlying technology continues gaining traction in regulated financial markets. This institutional adoption differs markedly from the 2017 crypto boom, driven largely by retail speculation and initial coin offerings.

The integration of cryptocurrency into traditional financial systems also raises questions about regulatory approaches. While Trump’s administration might signal a “light-touch” regulatory environment, the reality could be more complex.

If Bitcoin indeed becomes viewed as a strategic asset, regulatory oversight might actually increase to protect national interests. (Although it probably needs to be implemented through automated compliance, which comes with some limitations.) This could create a regulatory framework fundamentally different from both current restrictions and the completely free market some crypto advocates envision.

And while the call to build a US strategic reserve of Bitcoin is likely farfetched, it would also be a move that capitalises on domestic Chinese use of cryptocurrency for capital flight (but also one which may indirectly support other illegal black markets activity). A government purchasing Bitcoin and potentially driving up its price would incentivise Chinese cryptocurrency use for capital control evasion even more!

Regional implications extend beyond mainland China. Hong Kong’s measured opening to cryptocurrency trading, exemplifies the complexity of managing digital asset markets in a connected global economy. It must balance the global market and national political pressures. Singapore’s continued role as a cryptocurrency hub, despite recent market turbulence, demonstrates the ongoing importance of regulatory arbitrage in the crypto ecosystem.

The market’s current optimism may signal a second spring for cryptocurrency, but one fundamentally differs from previous cycles. Rather than challenging traditional financial structures, cryptocurrency increasingly appears to reinforce them, creating new dynamics in domestic and international policy dynamics. The technology’s absorption into mainstream finance suggests a future where blockchain innovation continues within established institutional frameworks rather than disrupting them entirely.

For observers in Asia, these developments suggest a complex period ahead. The interaction between US policy shifts, institutional adoption, and regional regulatory responses will likely determine the future of cryptocurrency markets. While price volatility continues attracting attention, the more significant long-term impact may be how digital assets reshape financial infrastructure and cross-border capital flows.

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