Cryptocurrency has defied all expectations reaching record highs this year. But lately, cryptocurrency prices seem to be on a downfall, which some blame on China’s clampdown on digital currency.
China has banned financial firms from providing cryptocurrency transactions. It has also issued a warning to investors against speculative trading in cryptocurrency. This was the latest attempt of Chinese authorities to limit digital currency transactions.
Under the latest directives, Chinese banks and only payment firms cannot offer any services related to cryptocurrency to their customers. The firms are not allowed to offer registration, investment, settlement, and clearing services regarding cryptocurrency to their clients.
This decision was taken by the major financial regulatory bodies in China, which included the National Internet Finance Association of China, the China Bank Association, and the Payment and Clearing Association of China.
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Chinese regulators have increased restrictions on cryptocurrencies in light of the record increase in the value of digital currencies. The three major regulators stated that the speculative investment in cryptocurrencies has rebounded due to which the prices had skyrocketed and then plummeted. “The speculative activity in digital currency posed a threat to the property of the people and disrupted the normal financial and economic order,” said Scott Jason Cooper.
China had previously banned initial coin offerings (ICOs) and crypto exchanges, but at the moment it has still not banned the holding of digital currency.
Financial institutions are not allowed to provide, trust, save or pledge services in digital currencies. They are also not allowed to issue cryptocurrency-related financial products.
China banned crypto exchanges in 2017 which at the time had commanded 90 percent of Bitcoin transactions. Two years later, a statement was issued by the People’s Bank of China that access to all foreign and domestic cryptocurrency exchanges will be banned.
China’s stance on the global digital currency platform is the result of the speculative and risky nature of the currencies. The value of the currency fluctuates drastically and the contracts in digital currencies are not protected by local or international laws.
The latest restrictions on cryptocurrencies are an extension of the limits on digital currency transactions. The restrictions have been placed to fill the loopholes in the previous directives in the country against the digital currency. The loopholes had allowed certain types of financial and payment firms to continue to offer cryptocurrencies.
China’s Stance Towards Cryptocurrencies
China’s stance towards cryptocurrencies is contrary to other developed firms. Cryptocurrency transactions are allowed without significant restrictions in the EU, US, Australia, and other developed economies.
Cryptocurrency holds great potential due to being a low-cost medium of exchange. Moreover, the digital currency value cannot be manipulated by a central authority. However, digital currency transactions are not protected by any legislation. That is the reason Chinese regulators have aggressively clamped down on cryptocurrency to protect the interest of consumers. Chinese regulators have made it clear that digital coins will not be accepted in the country.
The Chines government had considered digital currency to be a virtual commodity in 2013. The same year, regulators prohibited banks and financial firms from offering any services related to cryptocurrencies.
In 2017, initial coin offerings (ICOs) were banned to protect the interest of the residents. Moreover, cryptocurrency exchanges were also prohibited from converting legal tenders into digital currency and vice versa.
The restrictions placed on cryptocurrencies does not outright ban holding of the digital currency. But they discourage the use of digital currency as a mode of payment. These restrictions had forced many crypto exchanges to end operations in China and shift to other countries.
A report from PBOC shows that about 85 ICO and 88 cryptocurrency trading exchanges had shifted operations from the country in 2018.
The latest restrictions by Chinese regulators make it difficult for individuals to purchase digital currency in China. The limitations also affected the operations of Chinese digital currency miners who were forced to shut down operations.
Experts say that the restrictions will encourage buying and selling of cryptocurrencies in the black market. This will create even more difficulties for the regulators to monitor digital currency transactions.
Negative Impact on Cryptocurrency Values
Restriction on cryptocurrency transactions had a negative impact on the cryptocurrency values. The values of all cryptocurrencies including Ethereum, Bitcoin, Litecoin, Binance coin, Dogecoin, and others had gone down.
The latest Bitcoin value is the lowest since January 2018. The market capitalization value has decreased by about 38 percent or $1 trillion after the clampdown of Chinese regulators on cryptocurrencies.
China had provided about 65 percent of the Bitcoin hash rate, according to a report by the University of Cambridge in April 2020. The three regions with the biggest cryptocurrency mining operations had been Xinjiang, Inner Mongolia, and Sichuan. After the directives of the central regulators, cryptocurrency mining was closed in all three regions that were the major hub of cryptocurrencies. In other regions such as the Yunnan province, authorities had ordered electrical firms to stop making deals with miners.
A report by CNBC had stated that most of the miners in China are winding down operations in the country and moving to Kazakhstan, the USA, and other regions. Many have sold mining equipment to foreign cryptocurrency traders.
After China’s restrictions on cryptocurrency transactions, Coinbase – a major cryptocurrency platform – had reported that the value of Bitcoin dipped down from $55,000 to $32,000.
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Chinese regulators have stated that it is clamping down on digital currency due to concerns regarding the wide fluctuation in digital currency. Moreover, that had made the move due to the potential use of digital currency in illegal transactions and money laundering.
Some experts also say that the Chinese government may be concerned about the environmental footprint of digital mining. Cryptocurrency mining requires a lot of power consumption and most of the miners in China relied on public power utilities. China has pledged to become carbon neutral by 2060. Moreover, some have also noted that the country is developing its virtual currency due to which it may be clamping down on cryptocurrencies.
