The cryptocurrency industry is going to face crucial times ahead as China declares all cryptocurrency transactions illegal in the country. The People's Bank of China (PBOC) has stated that cryptocurrencies should not be traded in the same way as traditional currencies and that foreign exchanges should not provide services to mainland investors via the internet. Financial institutions, payment businesses, and internet enterprises have also been prohibited from aiding cryptocurrency trade, according to the PBOC.
This news has already set the industry to hit the bears. Bitcoin is down by more than 4% in the last 24 hours. And almost all the major digital currencies have hit the bearish trend. The decision also hit cryptocurrency and blockchain-related shares, although they crawled 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 crypto exchange Coinbase Global fell just over 1%.
Note that this is not the first time that China has taken a down troll on crypto. Earlier this June, China banned and shut down all the cryptocurrency mining factories in the country. Chinese authorities say cryptocurrencies disrupt economic order and facilitate illegal asset transfers and money laundering. Analysts say Beijing is also worried about potential competition for the digital yuan and that the power-hungry business of bitcoin mining could damage the environment. So with all the news coming up, what does this mean for the crypto space? Before we get into that, let us first understand where do cryptocurrencies stand in China.
The Chinese government will "resolutely clamp down on virtual currency speculation, and related financial activities and misbehavior to safeguard people's properties and maintain economic, financial, and social order," the PBOC said in a statement on its official website.
In a joint statement, ten Chinese government agencies, including the central bank, banking, securities, and foreign exchange authorities, said they will work closely to maintain a "high-pressure" clampdown on cryptocurrency trade.
The steps follow China's State Council, or cabinet, vowing in May to crack down on bitcoin mining and trade as part of its efforts to combat financial risk, causing a massive sell-off of cryptocurrencies. The National Development and Reform Commission (NDRC) declared that it would conduct a nationwide investigation into cryptocurrency mining. Such activities don’t have much to do with China's economic growth, spawn risks, consume a huge amount of energy, and hamper carbon neutrality goals.
It's "imperative" to wipe out cryptocurrency mining, a task key to promoting high-quality growth of China's economy, the NDRC said in a notice to local governments.
Virtual currency mining had been a big business in China before a crackdown that started earlier this year, accounting for more than half of the world's crypto supply.
The NDRC said it will work closely with other government agencies to make sure financial support and electricity supply will be cut off for mining. The national planning body also urged local governments to come up with a specific timetable and road map to eradicate such activities.
Apart from this, China is presently testing its Digital Chinese Yuan, a government-backed digital currency that aims to provide the convenience of bitcoin without the privacy and decentralization benefits — or, potentially, the absence of government oversight. Allowing the Digital Chinese Yuan to coexist with any other virtual asset does not make sense in Beijing's eyes. China was concerned about “avoiding competition [from] cryptocurrencies,” according to Kinzius, especially as it prepares to make the Digital Chinese Yuan available to overseas users during the 2022 Beijing Winter Olympics.
Some cryptocurrency enthusiasts are hoping that China's crackdown on established exchanges will drive Chinese crypto traders to so-called decentralized finance (DeFi) platforms, which are blockchain-based organizations that can provide a variety of services and are not controlled by a single party or company. Indeed, Chinese cryptocurrency users have been actively "discussing how to learn DeFi," according to Colin Wu, a China-based writer covering crypto.
Of course, the news hit the industry on a negative note with Bitcoin, Ethereum, and all other major cryptocurrencies hitting a low. 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, this ban and crackdown cannot put down the massive growing industry for a long time. And there are various reasons for that. Dr. Sean Stein Smith from The Central Bank Digital Currency Think Tank says:
“The banning of crypto transactions should be seen as an opportunity for more free-market-based economies to assume a leadership role in the development of open-source crypto applications.”
Indeed, there is a growing perception in the marketplace that regulators are aiming to regulate through fiat rather than continual engagement with private sector participants.
To put it another way, crypto is a hot topic in any jurisdiction that looks at it. With that in mind, let's look at why crypto bans (whether nationwide or not) in some jurisdictions may be beneficial to the future development of crypto.
Innovation, entrepreneurial spirit, or creative destruction — whatever term is in vogue at the time — is an uncontrollable force. New ways of doing business, regardless of the industry, are eventually regarded as successes or failures based on whether or not the market wants them. Trying to control, restrict, or prevent ideas that provide value to consumers and end-users while also improving the experience of individuals engaged is fruitless.
Blockchain-based technology and applications, including but not limited to crypto-assets, deliver multiple benefits and savings to all network members; working to stop this advancement would simply disappoint the consumers.
It's no secret that China's central government has been tightening its grip on nearly every element of the economy in the last six months or so, with a particular focus on ensuring that technology companies follow Beijing's directions. The more open and accessible a platform or model of governance is, the more it will attract innovative and entrepreneurial thinking, both in terms of government structures and systems as well as business systems and enterprises.
When viewed through a more traditional corporate lens, the value of many high-flying technology companies – Apple, Facebook, Google, Amazon, Alibaba, and Baidu – is driven in large part by the networks of users and developers that coalesce around the platform in question.
In this context, the prohibition on crypto transactions should be viewed as an opportunity for more free-market-based economies to take the lead in the development of open-source crypto applications.