Explainer: What’s new in China’s crackdown on crypto?

KATHMANDU: China’s most powerful regulators on Friday intensified a crackdown on cryptocurrencies with a blanket ban on all crypto transactions and mining, hitting bitcoin and other major coins and pressuring crypto and blockchain-related stocks.

Ten agencies, including the central bank, financial, securities and foreign exchange regulators, vowed to work together to root out “illegal” cryptocurrency activity, the first time the Beijing-based regulators have joined forces to explicitly ban all cryptocurrency-related activity.

China in May banned financial institutions and payment companies from providing services related to cryptocurrency transactions, and issued similar bans in 2013 and 2017.

The repeated prohibitions highlight the challenge of closing loopholes and identifying bitcoin-related transactions, though banks and payment firms say they support the effort.

Friday’s statement is the most detailed and expansive yet from the country’s main regulators, underscoring Beijing’s commitment to suffocating the Chinese crypto market.

“In the history of crypto market regulation in China, this is the most direct, most comprehensive regulatory framework involving the largest number of ministries,” said Winston Ma, NYU Law School adjunct professor.

The move comes amid a global cryptocurrency crackdown as governments from Asia to the United States fret that privately operated highly volatile digital currencies could undermine their control of the financial and monetary systems, increase systemic risk, promote financial crime and hurt investors.

They also worry that “mining,” the energy-intensive computing process through which bitcoin and other tokens are created, is hurting global environmental goals.

Chinese government agencies have repeatedly raised concerns that cryptocurrency speculation could disrupt the country’s economic and financial order, one of Beijing’s top priorities.

Analysts say China also sees cryptocurrencies as a threat to its sovereign digital-yuan, which is at an advanced pilot stage.

“Beijing is so hostile to economic freedom they cannot even tolerate their people participating in what is arguably the most exciting innovation in finance in decades,” top U.S. Republican Senator Pat Toomey tweeted.

While U.S. regulators are closely scrutinizing digital asset risks, they have said they also offer opportunities, including to promote financial inclusion.

‘SOCIAL ORDER’

The People’s Bank of China (PBOC) said cryptocurrencies must not circulate and that overseas exchanges are barred from providing services to China-based investors. It also barred financial institutions, payment companies and internet firms from facilitating cryptocurrency trading nationally.

The government will “resolutely clamp down on virtual currency speculation … to safeguard people’s properties and maintain economic, financial and social order”, the PBOC said.

China’s National Development and Reform Commission said it will work to cut off financial support and electricity supply for mining, which it said spawns risks and hampers carbon neutrality goals.

Bitcoin , the world’s largest cryptocurrency, dropped more than 9% before paring those losses. It was down 6.6% at $41,937 around 12:00ET. Smaller coins, which typically mimic bitcoin, also tumbled.

China’s cabinet vowed in May to crack down on bitcoin mining and trading as it sought to mitigate financial risks, without going into details, sending bitcoin tumbling 30% in a day. Friday’s news dashed hopes among crypto-enthusiasts that the cabinet would fail to follow through on its threat.

“This is the manifestation of the crypto mining and trading crackdown announcement … back in May,” said NYU’s Ma.

BOUNCE BACK?

The move also hit cryptocurrency and blockchain-related shares, although they clawed back some of those declines in morning U.S. trading.

U.S.-listed miners Riot Blockchain, Marathon Digital and Bit Digital slipped between 2.5% and 5%, while San Francisco crypto exchange Coinbase Global fell just over 1%.

Despite the initial shock, analysts said they did not expect the crackdown to dent global crypto-asset prices long term as companies continue to adopt crypto products and services.

The exposure of major crypto exchanges and payment companies was not immediately clear, however. Binance, the world’s biggest, has been blocked in China since 2017, a spokesperson said. A spokesperson for Coinbase declined to comment. Global payment company PayPal does not offer crypto services in China, a spokesperson said.

Crypto exchanges OKEx and Huobi, which originated in China but are now based overseas, are likely to be the worst affected since they still have some China users, analysts said. Tokens associated with the two exchanges plunged over 20%. The exchanges did not immediately respond to requests for comment.

However, the Chinese government has struggled in the past to stop internet users from evading its controls.

“China’s actions haven’t held back crypto’s rise too much in the past so I wouldn’t be surprised to see it bounce back once more,” wrote Craig Erlam, an analyst at currency broker OANDA.

Virtual currency mining had been big business in China before May, accounting for more than half the world’s crypto supply, but miners have been moving overseas.

“The losers in all of this are plainly the Chinese,” said Christopher Bendiksen, head of research at digital asset manager CoinShares. “They will now lose around $6 billion worth of annual mining revenue, all of which will flow to the remaining global mining regions,” he added, citing Kazakhstan, Russia and the United States.

 

Explainer: What’s new in China’s crackdown on crypto?

China’s most powerful regulators have intensified the country’s crackdown on cryptocurrencies with a blanket ban on all crypto transactions and crypto mining.

The move sent bitcoin and other major coins lower, as well as pressurising crypto and blockchain-related stocks.

WHAT’S NEW?

Ten Chinese agencies, including the central bank and banking, securities and foreign exchange regulators, have vowed to work together to root out “illegal” cryptocurrency activity.

While China has been putting in place increasingly stricter rules on virtual currencies, it has now made all activities related to them illegal and sent a signal of intent they plan to get even tougher on enforcing the rules.

China’s central People’s Bank of China (PBOC) said it was illegal to facilitate cryptocurrency trading and that it planned to severely punish anyone doing so, including those working for overseas platforms from within China.

The National Development and Reform Council (NDRC) said it would launch a nationwide crackdown on cryptocurrency mining as it tries to phase the sector out entirely.

WHAT’S COME BEFORE?

China does not recognise cryptocurrencies as legal tender and the banking system does not accept cryptocurrencies or provide relevant services.

In 2013, the government defined bitcoin as a virtual commodity and said individuals were allowed to freely participate in its online trade.

However, later that year, financial regulators, including the PBOC, banned banks and payment companies from providing bitcoin-related services.

In September 2017, China banned initial coin offerings (ICOs) in a bid to protect investors and curb financial risks.

The ICO rules also banned cryptocurrency trading platforms from converting legal tender into cryptocurrencies and vice versa.

The restrictions prompted most such trading platforms to shut down with many moving offshore.

The ICO rules also barred financial firms and payment companies from providing services for ICOs and cryptocurrencies, including account openings, registration, trading, clearing and liquidation services.

By July 2018, 88 virtual currency trading platforms and 85 ICO platforms had withdrawn from the market, the PBOC said.

WHY DOES IT KEEP TIGHTENING THE RULES?

The huge run-up in price in bitcoin and other coins over the past year has revived cryptocurrency trading in China, with investors finding ways round the existing regulations. That’s come as the country is trying to develop its own official digital currency, becoming the first major economy to do so.

Earlier this year, Chinese regulators tightened restrictions that banned financial institutions and payment companies from providing services related to cryptocurrency. An industry directive said that speculative bitcoin trading had rebounded and was infringing “the safety of people’s property and disrupting the normal economic and financial order”.

Many Chinese investors were now trading on platforms owned by Chinese exchanges that had relocated overseas, including Huobi and OKEx. Meanwhile, China’s over-the-counter market for cryptocurrencies has become busy again, while once-dormant trading chartrooms on social media have revived.

China-focused exchanges, which also include Binance and MXC, allow Chinese individuals to open accounts online, a process that takes just a few minutes. They also facilitate peer-to-peer deals in OTC markets that help convert Chinese yuan into cryptocurrencies.

Such transactions are made through banks, or online payment channels such as Alipay or WeChat Pay, though these have since promised to conduct due diligence on clients and set up monitoring systems targeting key websites and accounts to detect illegal crypto-related transactions.

Retail investors also buy “computing power” from cryptocurrency miners, who design various investment schemes that promise quick and fat returns.

WHAT’S THE IMPACT OF THE CRACKDOWN?

While cryptocurrencies fell on Friday, the fall was less pronounced than the slide seen in May when China’s State Council, or cabinet, vowed to crack down on bitcoin mining.

The test will be whether China is able to find and punish platforms and people breaking the rules.

Some analysts said that based on what’s gone before, determined investors would still likely find a way to trade.

“While retail traders in China may no longer be able to access online exchange platforms that are now illegal, crypto funds may be able to move management of their funds offshore,” said Ganesh Viswanath Natraj, Assistant Professor of Finance at Warwick Business School. Reuters

Fiscal Nepal |
Monday September 27, 2021, 12:26:45 PM |


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