How would China’s crackdown impact the international crypto market?
The death knell of crypto in China
The People’s Bank of China said in September this year that “all virtual currency-related business activities are illegal financial activities”, including services by overseas cryptocurrency exchanges to Chinese residents through the Internet.
The Bank also warned that the trading of cryptocurrency “seriously endangers the safety of people’s assets”. It asked provincial governments to step up local monitoring and early warning systems to improve the accuracy and efficiency of discovering hyped activities in cryptocurrencies.
In November, China’s National Development and Reform Commission continued to criticize crypto trading, targeting Bitcoin mining this time. The Commission said that the activity “produces a lot of carbon emissions” and “prominent risks.”
The price of Bitcoin fell immediately after the remarks, plunging more than 7% to US$60,889.
Crypto’s journey to extinction in China
Beijing’s latest announcements on crypto regulation did not come out of the blue. It is merely the latest in a series of tech crackdowns led by Beijing targeting cryptocurrencies.
In May this year, Chinese financial self-regulatory bodies—the National Internet Finance Association of China, the China Banking Association and the Payment and Clearing Association of China—warned investors against speculative crypto-trading. They also banned financial institutions and payment companies from providing crypto-transactions-related services, following government officials’ vows to increase pressure on the industry.
A month later, the government told banks and payment platforms to stop supporting digital currency transactions. According to the People’s Bank of China, they were told to stop providing products or services, such as trading, clearing and settlement for cryptocurrency transactions. The government also issued bans on currency mining, the trade of using computer processors to make new coins.
Reasons for crypto enforcement
Beijing’s primary objective is to curb illegal and criminal activities, such as gambling, illegal fund-raising, pyramid schemes and money laundering. They reckon these acts would endanger the safety of people’s money and property. However, a more significant concern is that privately-operated, highly volatile cryptocurrencies, such as Bitcoin, could disrupt the state’s financial and monetary systems, thus threatening the regime of top-down centralized currency control. Besides, it could also be a move to push China’s digital currency, the electronic Chinese yuan, which is about to be launched at the 2022 Winter Olympics.
Evidently, China’s objective in recent crypto crackdowns is to retain control of the country’s monetary systems, and it’s not alone. China’s position has inadvertently put pressure on other countries to tighten cryptocurrency regulation. There has been increasing worry in the U.S. that regulatory systems would echo China’s strict control. Meltem Demirors, the Chief Strategy Officer at CoinShares, said, “D.C. has been increasingly aggressive with crypto enforcement, and clearly sees crypto as a threat to the government’s ability to manage markets.”
Gary Gensler, Chairman of the Securities and Exchange Commission, said that they have been “working overtime” to create a set of rules to oversee volatile cryptocurrency markets and regulate thousands of new digital assets and coins.
The way forward
Taking reasonable steps in regulating cryptocurrency is necessary to make investments safer and minimize the possible abuse of crypto, such as for money-laundering and illicit activities. However, it is also important for regulations to be reasonable, or else the spirit of cryptocurrency—freedom of exchange—will be suffocated.
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