Capital Note: China Clobbers Crypto

Chinese President Xi Jinping on a screen during an event marking the 100th founding anniversary of the Communist Party of China at the Memorial of the First National Congress of the Communist Party of China in Shanghai, China, June 4, 2021. (Aly Song/Reuters)

Welcome to the Capital Note, a newsletter about business, finance, and economics. On the menu today: the EU goes after Google, China clobbers crypto, and the hurdles to Bitcoin as digital gold. To sign up for the Capital Note, follow this link.

EU Google Investigation

A week after France’s $270 million fine against Google for alleged monopolistic practices on its ad platform, the European Commission has announced a formal investigation into the company. The Wall Street Journal reports:

The European Commission, the EU’s top antitrust enforcer, said Tuesday that its investigation, which has been under way informally since at least 2019, will look at a broad array of allegedly anticompetitive business practices around the Alphabet Inc. unit’s brokering of advertisements and sharing of user data with advertisers across websites and mobile apps—one of the newest areas of antitrust scrutiny for the company.

Some of the EU’s investigation will cover similar ground to a case filed last year against Google by a group of U.S. states led by Texas. Similar areas include Google’s allegedly favoring its own ad-buying tools in the advertising auctions it runs.

There’s an argument to be made that Google’s ad exchange requires a regulatory regime akin to that of financial-security exchanges. As both a broker and seller of ad space, Google has some level of price-setting power in an opaque market. The Commission’s statement, though, highlights the conflicting goals of antitrust: “Competition law and data protection laws must work hand in hand to ensure that display advertising markets operate on a level playing field in which all market participants protect user privacy in the same manner.”

A great deal of Google’s market power is derived from the granular data it gleans from users. Restricting access to such data strengthens Google’s market power. In the same vein, Apple’s recent privacy reforms — which restrict data gathering by third-party apps — no doubt reduces competition. As Ben Thompson points out:

The only way to square the circle of arguing that Google and 3rd-party advertisers ought to have equal access to user data even as they abide by overly broad privacy regulations is to argue that 3rd-party sites ought not make any money from advertising, and, in the case of the YouTube part, to argue that Google ought not be allowed to make money from one of the most consumer-surplus generating products in history.

In other words, there is an unavoidable trade-off between privacy and competition in the digital-advertising sector. Judging by their rhetoric, regulators want to have their cake and eat it, too: a world of increased privacy and increased competition. As antitrust efforts play out globally, eventually lawmakers will have to choose one of the two as their priority.

China Clobbers Crypto

Bitcoin has lost more than half its value since April, due in large part to a move by Chinese authorities to regulate crypto markets:

The original cryptocurrency has lost more than 50% from its mid-April high of almost $65,000, leaving it up marginally for the year. That compares with a 12% gain for the S&P 500 since the end of December. The coin started 2021 trading around $29,000 following a fourfold increase in 2020.

Chart-watchers said Bitcoin, which failed to retake $40,000 last week, could have a tough time finding support in the $20,000 range following its drop below $30,000. Still, Bitcoin had prior to Tuesday breached $30,000 during at least five separate instances this year but recuperated to trade above that level each time.


Representatives from Industrial and Commercial Bank of China Ltd., Agricultural Bank of China Ltd. and payment service provider Alipay were reminded of rules that prohibit Chinese banks from engaging in crypto-related transactions, according to a statement from the central bank on Monday.

The latest development is a sign that China will do whatever it takes to close any loopholes left in crypto trading. In May, China’s State Council – the country’s cabinet – called for a renewed crackdown on Bitcoin mining and trading activities. . . . Crypto activities “disrupt financial order and also breed risks of criminal activities like illegal cross-border asset transfers and money laundering,” according to the statement from China’s central bank.

China has been more zealous in cracking down on crypto than many market watchers expected: While it started with a ban on Bitcoin mining, the regulatory push has expanded to include trading and holding of cryptocurrencies. Because an estimated 65 percent of global Bitcoin mining is done in China, this push has had a significant effect on the processing power devoted to Bitcoin, and therefore on the functioning of Bitcoin markets.

While China has hinted at regulation in the past without following through, it seems this time is different.

Around the Web

Soho House plans an IPO

The group, which is switching its name to the Membership Collective Group as part of the initial public offering, is targeting a valuation of about $3bn, according to people familiar with the matter.

Founded by UK entrepreneur Nick Jones and backed by US billionaire Ron Burkle, the hospitality group became known as a haunt for celebrities ranging from Damien Hirst to Prince Harry. It intends to open another 18 new venues by the end of 2023, adding to the 28 it already has, according to a filing with the US Securities and Exchange Commission on Monday. Its long-term plan is to open between three to five new sites each year.


MercadoLibre’s e-commerce revenue grew 90% in 2020 as Covid accelerated the shift toward online shopping, according to Bloomberg Intelligence. The number of buyers on its marketplace grew 40%, to 65 million, in the 12 months ended on March 31. “We moved forward three to five years, depending on the country,” says Marcos Galperin, the company’s co-founder and chief executive officer. “There’s no going back.”

If MercadoLibre is changing the way Latin Americans shop, investors seem even more excited about how it’s changing the way they pay. Payment volume at MercadoPago, the company’s financial tech arm, increased 75% last year, to $50 billion, as merchants incorporated the ability to pay through smartphone apps or QR codes. The company also more than doubled the portfolio of its lending business. In 2018, Goldman Sachs Group Inc. estimated that 40% of MercadoLibre’s value came from its financial-services arm; today it’s 60%.

Random Walk

Zach Pandl of Goldman Sachs makes the case for Bitcoin as digital gold:

To understand bitcoin, it is best to begin with gold. Gold serves a unique function in the global financial system. It is both a useful commodity and a money-like, “store of value” asset. However, unlike conventional money mediums, it is not issued by a government and does not denominate any transactions in goods or assets. In effect, gold serves as an alternative fallback money instrument for adverse states of the world—when investors are unsure about the safety of conventional assets or fiat money in general (e.g. due to the risk of inflation or confiscation). In foreign exchange markets, gold behaves like an “inverse currency”: its price tends to fall when the fundamentals of major currencies improve, and tends to rise when the fundamentals of major currencies worsen. Over time, the most important driver of nominal exchange rates is the relative rate of inflation between two economies. Because gold has a quasi-fixed supply, its nominal value tends to rise at the rate of inflation in major markets. These correlation and store of value properties allow gold to play a very useful diversification role in portfolios.

When inflation accelerated in the mid-20th century and investors sought out options to protect the real value of their assets, gold was the natural choice. At the time, major currencies were pegged to gold via the US Dollar through the Bretton Woods gold exchange standard, and, before the Great Depression, most currencies, as well as most US Treasury notes, were directly backed by gold. The US government provided an official price of gold in Dollars, which changed only twice in the nearly two centuries between the 1790s and 1970s. During the 1960s, under the gold exchange standard, gold trading above its official stated price was the clearest way to observe depreciation pressure on the US Dollar. In short, over much of the post-WWII period, there was a close association between the price of gold, currency stability, and the real value of money—making it the obvious inflation hedge for portfolios.

After Nixon broke the dollar’s peg to gold in 1971, the link between gold and money broke down. The end of the gold standard made the use of gold as an economic hedge rather arbitrary:

This is where bitcoin comes in. Any alternative medium would need to be secure, privately held, have a fixed or quasi-fixed supply, and be transferable, ideally outside the traditional payments system. In our modern globalized society, where a substantial portion of social interaction and commerce occurs online (especially among younger people), it may also need to be digital. But, most importantly, it would need to have the potential for widespread social adoption—anything can be money, as long as it has that. Bitcoin is therefore a plausible alternative store of value medium to gold and, at the moment, the best candidate among cryptocurrencies with a similar structure because of its broader social adoption (i.e. its “name brand”).

The volatility that makes Bitcoin exciting is also a significant hurdle to its use as a store of value:

In equilibrium, a store of value as volatile as bitcoin would not be very useful. But cryptocurrencies are in their infancy; it is better to think of today’s prices as reflecting some probability that bitcoin or another coin/token could achieve greater adoption in the future, at which time its price could be extremely high. Therefore, small changes in those probabilities can result in high price volatility today. Bitcoin investors are speculating that it will eventually achieve near-universal acceptance as a non-sovereign money, with high returns (and high volatility) along the way.

— D.T.

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