Moves by the Chinese central bank and government officials to curtail the use of Bitcoin and other digital currencies stretches back almost to their inception. The last week has seen crypto markets battered by news that the Chinese government is firmly clamping down on digital currencies within its borders.
Multiple provinces, many of which host large crypto mining operations, have moved to ban or severely restrict the ability of the industry to operate in compliance with the mood in Beijing, while the country’s central bank recently ordered all financial institutions to stop facilitating transactions in digital currency.
The actions of China’s authorities sent the price of Bitcoin and several other cryptos tumbling earlier this week, with Bitcoin briefly dipping below US$30,000 on Tuesday afternoon for the first time since January. However, for many long-time observers of the Chinese crypto market, Beijing’s moves are nothing new and such an outcome may have been inevitable.
Tightening the screws
The Chinese government’s hostile attitude to crypto goes back to when digital currency first rose to prominence in the early 2010s.
Bitcoin transactions were banned by The People’s Bank of China (PBOC) all the way back in 2013, while initial coin offerings (ICOs) and cryptocurrency exchanges were halted in 2017 amid worries they could be used in illegal financing and money laundering.
Some have even said that the reaction by officials to crypto represents a fundamental concern about whether digital currencies represent a possible challenge to the dominance of the ruling Chinese Communist Party (CCP).
Another reason for the renewed crackdown may be the imminent introduction of the Digital Yuan, China's attempt to introduce a digital currency that is both backed and controlled by its central bank, and a joint venture with SWIFT (the international payment and cross-border payment gateway). Although China’s not going to replace its fiat currency with the Digital Yuan completely, it’s too soon to tell as trials are still going on with central banks, like the People’s Bank of China, leading the operation.
What is the Digital Yuan?
Officially known as a Digital Currency Electronic Payment (DCEP), China wants to replace its fiat currency with the digital one to encourage cashless transactions, ushering in a new era for world economics. Like Bitcoin, it also relies on blockchain technology to facilitate and verify transactions, but unlike Bitcoin, it is centrally controlled by regulatory authorities and backed up by fiat currency reserves.
The rest of the world’s gain?
Novogratz added that while a lot of crypto-related activity and trading is currently focused within Asia and in China specifically, the latest crackdown could result in a shift of the industry elsewhere that could prove a boon for participants in the rest of the world.
Possible beneficiaries could be non-China based miners such as Argo Blockchain PLC, which operates Bitcoin mining facilities in Canada and the US, as well as non-Chinese crypto exchanges such as Coinbase Global Inc.
Countries with less strict rules around digital currency could also see an influx of miners, particularly those offering cheap electricity or favourable regulation. A notable example may be the Central American nation of El Salvador, which made Bitcoin legal tender earlier this month.
Some of China’s biggest players in the sector are also seeking out greener pastures following the latest crackdown, with both mining machine maker Canaan Inc and crypto mining heavyweight BIT Mining setting up bases of operation in neighbouring Kazakhstan.
Or the planet’s loss?
There’s also speculation that the Chinese government may be concerned about optics: crypto mining’s reputation as an environmental disaster doesn’t square with the China’s desire to be seen as a leader in green energy, with XiJinPing pledging that the country will be carbon-neutral by 2060. China still accounts for more than half of Bitcoin mining: concerns related to the climate as bitcoin mining requires tremendous amounts of energy to run Application-Specific Integrated Circuits (ASICs) – computers that solve complex cryptographic mathematical problems part of the verification process in the blockchain.
The move of mining operators to Kazakhstan may be a particular concern, given the country derives over 90% of its electricity from fossil fuels. By contrast, the Chinese province of Sichuan, which until recently served as a crypto mining hub, derives large portions of its electrical power from hydroelectricity.
Any move toward less climate-friendly energy usage is also likely to give institutional investors pause when considering crypto investments.
Future Cryptocurrency Regulations
There’s no indication that China intends to lift or loosen its ban on cryptocurrencies anytime soon but recent developments suggest that the government intends to position the country as a leader in the crypto space. Those developments include statements by Chinese government officials endorsing blockchain technology, the extensive trial and testing of the central bank’s digital currency.