On Friday, Chinese regulators announced a nationwide ban on cryptocurrency transactions and cryptocurrency mining. The culmination of a years-long crackdown, the move was meant to close loopholes in previous attempts to regulate cryptocurrency, root out rivals to government-issued money, and reduce the energy consumption of the heavily polluting sector. It also comes amid Xi Jinping’s long-running anti-corruption campaign and more recent efforts to reign in powerful tech-sector businesses and monopolistic platforms.
Stock prices for Bitcoin and other popular cryptocurrencies nose-dived before recovering slightly. Analysts remained largely optimistic about the future vitality of cryptocurrency in the broader global economy, but in China, the ban paves the way for greater state control over financial transactions and for the rollout of China’s own state-backed digital currency.
The news was announced by the People’s Bank of China (PBOC), in coordination with the Cyberspace Administration of China, the People’s Supreme Court, and eight other government bodies. Elaine Yu and Joe Wallace from the Wall Street Journal reported on PBOC’s notice:
Naming bitcoin, ether and tether as examples, the central bank said cryptocurrencies are issued by non-monetary authorities, use encryption technologies and exist in digital form, and shouldn’t be circulated and used in the market as currencies.
It also said it is illegal for overseas exchanges to provide services for residents in China through the internet.
[…] The statement called for a comprehensive monitoring system, giving local governments “full play” to monitor their regions and flag early warnings. It vowed to crack down on “illegal financial activities” related to cryptocurrencies, and investigate employees of foreign cryptocurrency exchanges inside China as well as others in the industry who continued to advertise or provide crypto-related services.
[…] Chinese regulators have worried that cryptocurrencies’ decentralized, anonymous transactions facilitate money laundering and illegal capital flight out of the country. There are signs that its resolve to crack down on cryptocurrencies has grown stronger in recent months. [Source]
#China central bank declares #virtualcurrency-related business activities as illegal. No legal tender/crypto exchange; exchange between virtual currency; token issuance; derivatives; providing info; others. Crimes punished. BUT no ban on #crypto POSSESSION.https://t.co/hEQKetxbjO
— Eunice Yoon (@onlyyoontv) September 24, 2021
The ban follows a series of tough measures by the Chinese government to crack down on cryptocurrencies, dating back 2013, when the government prohibited Chinese banks from using Bitcoin. Matthew Fox of Business Insider assembled a broad timeline of recent regulations:
December 2013: China bans banks from handling bitcoin transactions […]
September 2017: China orders local cryptocurrency exchanges to cease operations.
The country banned initial coin offerings and ordered all domestic cryptocurrency exchanges to end operations within the country. The move came amid a strong bull market for bitcoin which eventually topped out near $20,000 in late 2017.
May 2021: China bans various financial institutions and payment firms from offering crypto services.
The country reiterated its prior bans from 2013 and 2017, citing the dangers of speculative trading in the crypto coins, and cemented the ban for various payment platforms and business activities related to cryptocurrencies.
June 2021: China ramps up crypto mining crackdown.
The country set its eyes on banning cryptocurrency mining with various regulations towards the sector. Following the new rules, bitcoin mining immediately moved overseas to more crypto friendly countries, including the US. China cited environmental concerns and excessive energy consumption as reasons for its new restrictions. [Source]
One motivation for the Chinese government’s harsh stance on cryptocurrencies relates to their enormous energy demands and negative environmental impact. Bitcoin’s annual global electricity demand is greater than that of the entire country of Finland. According to researchers at Cambridge University, China’s share of global hashrate, the computing power needed to run Bitcoin mining operations, declined from a lion’s-share of 75 percent in 2019 to a still-impressive 43 percent in April 2021. Maintaining this level of energy consumption is unsustainable, relying on cheap, coal-powered electricity grids in provinces like Sichuan and Xinjiang, which is in direct conflict with President Xi Jinping’s long-term commitments to address climate change.
Another explanation for China’s crypto ban is that the government is clearing space for its own state-backed digital currency. In April 2020, the People’s Bank of China created and tested China’s new cyber yuan (e-CNY, or DCNY) in several pilot programs across different cities. The new digital currency could have far-reaching financial stability and geopolitical consequences, such as eliminating illicit financial flows and undermining the efficacy of future U.S. sanctions. It also allows the government to reinforce its surveillance state by enhancing the ability to track all individual transactions of the currency in real time. Barclay Bram from Wired described how China’s state-backed digital currency fits into the CCP’s data-driven future:
“In general, this does strengthen authoritarianism. Putting the levers of financial power in the government’s hands does increase CCP power,” says [Center for a New American Security Adjunct Senior Fellow Yaya] Fanusie. However, as he notes, the picture is more nuanced and complex. “This is part of a bigger process. It’s less about what the Digital Yuan will do, but more about what happens when China becomes more data driven, and when the government has significantly more centralised data in general.” Seen in this light, the DCNY is part of a much bigger plan the government has long been pursuing to get a more detailed picture of its population through big data. As an article from MIT Technology Review argued, who needs democracy when you have data? The CCP is trying to leverage the massive amounts of data generated by an increasingly digitised society to try to create more responsive government systems. [Source]
The announcement of China’s cryptocurrency ban rattled the markets. Jonathan Ponciano at Forbes tallied the initial shock:
The value of the world’s cryptocurrencies tanked to a low of about $1.8 trillion by 7:15 a.m. EDT on Friday, falling roughly 9% and losing $188 billion in market value within just three hours of China’s announcement, according to crypto-data website CoinMarketCap.
The stark plunge wiped out virtually all of the gains since a global stock selloff on Monday triggered the crypto market’s worst decline in weeks, with top cryptocurrencies bitcoin, ether and Solana’s sol falling between 6% and 10% apiece Friday morning. [Source]
However, as stocks recovered somewhat, analysts emerged divided in their interpretations of the longer-term impact. Some viewed China’s new ban as an inevitability, and retained their faith in the future of the cryptocurrency market, which enjoys great popularity in the U.S., Kazakhstan, El Savlador and many other countries. FTX, the second most popular crypto trading platform, went so far as to move its headquarters from Hong Kong to the Bahamas upon hearing the news. But despite China’s ban on cryptocurrencies, their underlying blockchain technology is still feasible and popular in China, leaving plenty of opportunities in nascent markets. Vildana Hajric and Katherine Greifeld from Bloomberg reported on the mixed views over how the ban fits into the future of cryptocurrency in China and world:
Chen Arad, chief operating officer at crypto risk surveillance firm Solidus Labs:
“Though China’s move is particularly dramatic, it reflects on similar concerns regulators globally are sharing surrounding crypto market integrity and its role in illicit activity. Manipulation and fraud is not unique to crypto but, as a new asset class, digital assets present new challenges and have more to prove to regulators and the public.”
[…] Steven McClurg, chief investment officer at crypto fund-manager Valkyrie Investments:
“China has banned crypto at least a dozen times this year. The volatility we are seeing today may be a knee-jerk reaction by some, but most market participants have already priced a China ban in from the beginning of the summer.”
[…] Alex Tapscott, managing director of the digital asset group at Ninepoint Partners:
“Veteran traders are conditioned to shrug off bad news from China and buy the dip, but could this time be different? There are a few reasons to think so,” including China’s tech crackdown, as well as its pursuit of its digital yuan, among other factors. [Source]