What's Behind China's Most Recent Transaction Ban on Cryptocurrency?

Kavya  |  Oct 13, 2021

Since the introduction of Bitcoin, everyone has been concerned that this cryptocurrency will be outlawed by governments all over the world in the future due to its ungoverned, decentralized, and autonomous aspects.

One reason Bitcoin is portrayed as a threat to established financial institutions is the ability to undermine central banks' control over the money supply. Because of Bitcoin's pseudo-anonymous nature, there are further concerns that it facilitates.

However, whether or not governments regulate or restrict Bitcoin use is dependent on the situation.

Chinese Crypto Censorship

Chinese miners were ordered to cease operations earlier, prompting the country's central banks to issue an edict directing payment platforms and institutions to halt cryptocurrency activities. Financial institutions were also instructed to discontinue providing services to cryptocurrency exchanges and over-the-counter (OTC) platforms for cryptocurrencies.

FTX's head of unlisted and institutional sales, Jonathan Cheesman, told Bloomberg, “It’s a lot of proof of China’s more durable stance on crypto that’s stretching from monetary regulation to the energy demands of Bitcoin mining,”  Mining was part one and speculation is part 2.”

Out of all the nations that have adopted a hostile attitude to cryptocurrencies, China has established a number of the harshest measures against Bitcoin in 2021. China has taken over Bitcoin mining and cryptocurrency-related companies, fueled by its promises of carbon neutrality (and, as analysts have recognized, the forthcoming launch of its Bitcoin challenger, the digital yuan).

China has long prohibited cryptocurrency trade since its inception; however, in May 2021, the government forced crypto miners to close their operations and relocate out of the country. Recently, the People's Bank of China (PBoC) issued a regulation requiring payment platforms and establishments to cease cryptocurrency activity.

Before the mining ban, Chinese miners dominated the global Bitcoin mining industry, accounting for a major percentage of the total. However, the Chinese government’s anti-crypto and political censorship nature kept miners at bay. As a result of the strict stance of the Chinese government, Bitcoin and altcoins saw massive price depreciation. Bitcoin price dropped below $30,000 from an all-time high of $64,865. 

However, the restriction had only a limited effect. Despite China's best efforts to suffocate the crypto industry, citizens of the state used virtual non-public networks (VPNs) to connect to crypto exchanges in other nations.

Meanwhile, Bitcoin's mining hash rate has gradually recovered from the initial decrease caused by China's mining ban. Although Bitcoin's value has yet to return to its pre-ban highs of a Gregorian calendar month and will in 2021, it has been steadily climbing since late July.

What Has Changed in China's Most Recent Cryptocurrency Regulation Ban?

In China, Bitcoin has been in legal limbo for some time. The trade has found a way to be the correct side of the line that divides sensitive issues like capital outflow and internet gambling. Take, for example, Huobi and OKEx exchanges have had illegal ICOs and exchanges since 2017.

Despite the government's efforts to prevent Bitcoin commerce and investment, China has consistently remained the global center for cryptocurrency mining. According to some estimations, it contributed to more than one-fifth of the hash rate on the Bitcoin network before the restriction.

That is until China pledged to achieve "carbon neutrality" in the 2020 United Nations General Assembly. To keep this promise, the country expects to increase energy consumption by about 1.9% by 2021, and Bitcoin's pollution image isn't helping.

These are not the only reasons China is concerned about the decentralized and uncontrollable nature of cryptos like Bitcoin. "China is building its cryptocurrency," said Ruud Feltkamp, CEO of Cryptohopper, a cryptocurrency commercialization machine. "[China] has every incentive to own as much competition as possible."

In China, cryptocurrency commercialism has returned, with investors devising ways to circumvent present regulations. To do this, the government is attempting to make its official digital currency the major massive economy. Further, utilizing its government-owned business enterprises to infiltrate every industry.

Many Chinese investors were now transacting on platforms owned by Chinese exchanges that had moved their business overseas, such as Huobi and OKEx. China's cryptocurrency securities market has reopened, as have previously inactive commercialism chat rooms on social media.

Impact of China’s Most Recent Stance on Cryptocurrency Ban

While cryptocurrencies fell, the drop was not as severe as it had been in the past, when China's State Council, or cabinet, threatened to tighten regulations on Bitcoin mining.

The important question is whether China would develop and punish platforms and individuals who violate UN regulations.

Dedicated investors, according to some studies, would nonetheless notice a trading method supported by prior experience.

"While regular traders in China might not be able to use online exchange platforms that square measure currently unlawful," said Ganesh Viswanath Natraj, prof of Finance at Earl of Warwick graduate school, "crypto funds are also able to shift management of their cash overseas."

What Makes China Important?

Nearly 80% of the global cryptocurrency trading is powered by China's electricity- Bitcoin data centers. Access to low-cost power and hardware has enabled Chinese firms to process the vast majority of crypto transactions and generate time-consuming hexadecimal numbers required to mint new currency. 

China relies on lignite, a particularly dirty form of coal, to power some of its mining, and Bloomberg forecasts that it will not be able to satisfy the demands of its Bitcoin sector through renewable energy until 2060.          

According to Cambridge University’s Bitcoin Electricity Consumption Index, cryptocurrency mining will consume 0.6% of the world’s total electricity production in 2021, which is higher than Norway’s yearly consumption. 

Chinese regulations may have been prompted in part by the fact that crypto's massive power demands have increased illicit coal extraction, posing a major threat to Beijing's ambitious climate ambitions.

As the central government plays whack-a-mole with the dark industry, some provinces have forced mines to close. A few weeks back, authorities in the Chinese province of Sichuan ordered the closure of 26 mines and instructed power providers not to give electricity to the energy-guzzling factories.

The strike on one of the mining jurisdictions caused Bitcoin’s price to plummet to $32,309. 

Why Did the PBoC Thought of Starting e-CNY?

The establishment of the e-CNY by the People’s Bank of China serves two different but connected purposes. The first, long-term objective is to develop a digital currency that can compete with existing cryptocurrencies, such as Bitcoin, stablecoins, and other central banks of digital currencies (CBDC) while guaranteeing that the yuan remains China’s dominant currency. 

Secondly, the more immediate objective is to alter China's present payment system by offering a cash-like digital payment mechanism that is easily accessible, low cost, anonymous (to some extent) and promotes competition among payment service providers.

Will Chinese Yuan Get Stronger?

Increased foreign investment in Chinese markets may drive the yuan to become the world's third-largest reserve currency, after only the US dollar and the Euro, Morgan Stanley analysts said in research released Friday.

The projection comes as the Chinese government has been working for years to encourage the use of the yuan, also known as the renminbi, in foreign transactions.

According to Morgan Stanley, China will receive $3 trillion in investment portfolio inflows over the next decade, which will exceed foreign direct investment. More global assets will be kept in yuan, which has failed to acquire worldwide momentum. The Chinese government has typically maintained a tight hold on the yuan, preventing huge sums of wealth from leaving the nation. 

The Chinese yuan was trading at 6.85 yuan to the US dollar. Morgan Stanley predicted that the yuan will likely rise to 6.6 yuan per US dollar by the end of 2021. At the end of 2019, about 70 central banks across the globe held RMB in their reserves. 

Conclusion

Though China has always supported technological innovations, but this time, the Chinese authorities have led a massive crackdown on cryptocurrencies, condemning them as a threat to citizens’ assets citing concerns around national security and financial crimes. 

Moreover, experts believe the deeper reason the Chinese government carried out the sudden crackdown on Bitcoin and other cryptocurrencies, considering it as a threat to China’s state monetary sovereignty and authoritarian model. The strategic launch of its CBDC, digital yuan, is the sole plan to continue dominating the market economy and reduce the influence of the Dollar-dominated global financial system. 

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