China’s Crackdown on Cryptocurrency

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On Friday, 18 June 2021, Chinese authorities ordered cryptocurrency miners in Sichuan province to shut down their operations, marking the dissolution of one of the biggest bitcoin mining centers in China. According to China’s state broadcaster CCTV, “bitcoin is no longer an investment tool to avoid risks; rather, it’s a speculative instrument” which has often been used to enable black market trade, money-laundering, arms smuggling, gambling and drug dealings. To the government, this unregulated market threatens the financial stability of the country, prompting authorities to clamp down hard on the bitcoin industry.

Credit: Reuters

When did the crackdown begin?

The ongoing crackdown on cryptocurrency is a part of a broader clampdown on bitcoin in the past decade. In 2013, Chinese authorities ordered third-party payment providers to stop any “custody, trading and other services” related to virtual currency. According to Yicai, a media platform affiliated with China Business Network TV station, platforms were also told to terminate any working relationships with currency exchanges in the same year.

In 2017, the People’s Bank of China (PBOC), China’s central bank, announced a ban on digital token fundraisers, or initial coin offerings. Several major Chinese bitcoin exchanges, including BTC China, were forced to cease trading following reports that Chinese regulators were planning to shut down exchanges. PBOC also launched a probe into local bitcoin exchanges to ensure that enterprises dealing in bitcoin were operating under the correct licenses, have implemented anti-money laundering systems, and are not partaking in market manipulation. In the latest round of clampdown before this year’s in 2019, Chinese authorities announced that they would continue to target crypto exchanges.

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How are current measures different from previous ones?

According to Martin Chorzempa, research fellow at the Peterson Institute for International Economics, the Chinese crackdown on bitcoin is “much more massive” than most financial regulatory actions taken by Chinese authorities in the past, including on shadow banking. In fact, the recent round of crackdown has been identified to be more serious than those on cryptocurrency itself in the past decade, including the ban on digital token fundraisers in 2017, which was previously deemed to be the strictest measure to curb the use of bitcoin.

For one, the new regulations do not just stop banks and other financial institutions from doing business with crypto exchanges and related companies; they illegalize the dealing of cryptocurrencies by any institution, be it for payments, remittance, or other purposes. PBOC has also spoken to Alipay and other major financial institutions, urging them not to provide crypto-related services, including account openings or clearing and settlement. In other words, the newest round of regulations covers crypto-related services that were not included in the original ban announced in 2017.

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Until the recent crackdown, Beijing did not support or allow financial institutions to trade cryptocurrencies, but turned a blind eye to mining. This time, authorities have tightened restrictions on mining as well, shutting down the vast majority of bitcoin mines in Sichuan province, one of China’s largest cryptocurrency mining bases.

Huobi Mall and BTZC.TOP, two of the largest crypto miners in the world, announced their exits from China the day after the crackdown was announced. According to Business Insider India, the most recent crackdown has a measurable impact this time, which is more expansive than that in any other prior years. Darin Feinstein, the founder of Blockcap, one of the largest bitcoin mining companies, told CNBC that “[the government has] banned banks from using bitcoin, but this is actually different”. Feinstein also said that he has “never seen an exodus like this before”. 

Shortly after the exit of Huobi and BTC.COP, the global hash rate for Bitcoin mining, a measure of the amount of computing power being dedicated towards crypto transactions, fell dramatically. According to CNBC, over $400 billion of the total digital assets market value has been wiped from the digital currency market, and the value of Bitcoin crashed between 18 to 22 June, falling below $30,000 for the first time since January this year.

Credit: Business Insider India

Why is the government targeting cryptocurrency?

Even though the recent round of crackdown is nothing new, it highlights the fact that Beijing is growing increasingly fazed by the ways in which cryptocurrency might undermine official institutions and lead to undesirable outcomes that are difficult to regulate. For example, the anonymity of using cryptocurrency can aid the facilitation of dark trades online, and can potentially open doors to money-laundering, arms smuggling, gambling and drug dealings. Hence, the strict measures implemented by authorities this year will help the government strengthen its monetary hold, while projecting its new official digital currency.

Apart from being an unregulated market, the newest round of regulations are also said to be compounded by the enormous environmental toll of crypto mining, which undermines President Xi Jinping’s ambitious promise to make China carbon neutral by 2060, according to a Times article. A study published in the scientific journal Nature Communications showed that bitcoin mining in China was projected to generate more than 130 million metric tons of carbon emissions by 2024, prior to the crackdown. In fact, if global bitcoin mining were a country, it would be the 29th biggest consumer of power in the world on a list of nations by energy use, pacing just above Argentina, which has a population of roughly 45 million.

Credit: Bloomberg

As for the future of cryptocurrency in China, experts have said that even though the price of bitcoin will likely recover from its current slump, it is unlikely that bitcoin miners in China will be able to operate as they did before. Through its latest round of crackdown, Beijing has sent a clear message that the government will continue stamping out financial activities that bypass official institutions and threaten the country’s financial stability. Analysts also expect many big commercial mining operations to flee China en masse for alternative hosts such as Mongolia, Kazakhstan and Afghanistan. Having witnessed the government’s latest crackdown, it is likely that for many Chinese miners, the prospect of going toe to toe with the Chinese government provides enough deterrence for them to remain in the country.