China Tightens the Noose around Crypto

Crypto

Cryptocurrency traders and miners have been backed into a corner with the latest edition of China’s crypto regulations.

A week after crypto mining operations in China’s Sichuan province came to a halt, the country has now declared all crypto transactions illegal. On September 24, ten Chinese government agencies, including the central bank, made a statement saying that they would work closely to ensure a “high-pressure clampdown” on crypto trading.

The Chinese government has vowed to eliminate illegal cryptocurrency activity in the country. Let’s take a closer look at what these new regulations are, the possible reasons behind them and how Bitcoin is faring after being hit with another ban.

Nothing except “fiat” currencies on the market

The People’s Bank of China (PBOC) said that cryptocurrencies must not circulate on the market like traditional fiat currencies (currencies issued by governments). They announced that foreign crypto exchange regulators are barred from providing their services in mainland China. Financial institutions, payment companies and internet firms have also been instructed to not facilitate crypto transactions.

The National Development and Reform Commission (NDRC) in China has said that it will be launching a nationwide cleanup of crypto mining. NDRC states that crypto provides little to the country’s economic growth and rather hampers China’s carbon neutrality goals. NDRC declared that it will ensure that electricity and financial services for miners are restricted, urging local governments to come up with a timeline to achieve these goals.

Reasons behind increased regulation

The environmental risk posed by crypto mining is one of the primary reasons for the strengthened regulation surrounding cryptocurrencies in China. In 2021, the Bitcoin mining industry accounts for approximately 5.41% of China’s carbon emissions due to electricity generation. It is believed that China has intensified the crackdown upon sensing the continuation of illegal crypto mining activities.

Besides environmental concerns, this step follows a power crisis in China which has lowered the energy supply for various industries. Given Bitcoin’s high electricity consumption of  91 terawatts-hours of electricity annually (or 0.5% of all electricity worldwide), making crypto transactions illegal could also be considered a step towards reducing the country’s energy requirements. 

Market response

Bitcoin has been having tough luck recently, with the Securities and Exchange Commission (SEC) in the U.S. calling for tighter regulation in Chairman Gary Gensler’s recent statement.  Following this, China’s latest crypto-regulatory step has also dealt a heavy blow to the price of Bitcoin, with it dropping as much as 5.5% soon after the announcement.

China’s recent step comes in the wake of real estate giant Evergrande’s liquidity crisis in China, which has garnered the attention of global markets. This liquidity crisis had crypto investors rushing to liquidate their assets for fear of disruption in the global financial balance. Such a rush to liquidate crypto had also adversely affected crypto prices.

The effect of China’s announcement does not limit to Bitcoin. Other cryptocurrencies like Ether and Ripple (XRP) have also seen a drop of 8% and 7% respectively.

Header image courtesy of Freepik

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