China’s most powerful regulators have intensified the country’s crackdown on cryptocurrencies with a complete ban on all crypto transactions and crypto mining. The move undercut bitcoin and other major coins, as well as put pressure on crypto and blockchain-related stocks.
What’s new: Ten Chinese agencies, including central banks and banking, securities and foreign exchange regulators, have vowed to work together to root out “illegal” cryptocurrency activity. While China has been making stricter rules on virtual currencies, now making all activities related to them illegal and sending a signal of intent, they plan to be even stricter on enforcing the rules.
China’s central People’s Bank of China (PBOC) said it was illegal to facilitate cryptocurrency trading and planned to severely punish anyone who did so, including those working for foreign platforms from within China. Those were also involved. The National Development and Reform Council (NDRC) said it will launch a nationwide crackdown on cryptocurrency mining as it seeks to completely phase out the sector.
What came before: China does not recognize cryptocurrencies as legal tender and the banking system does not accept cryptocurrencies or provide relevant services. In 2013, the government defined bitcoin as a virtual commodity and said that individuals are allowed to freely participate in its online business. However, later that year, financial regulators including PBOC banned banks and payment companies from providing bitcoin-related services. In September 2017, China banned initial coin offerings (ICOs) to protect investors and prevent financial risks.
ICO regulations also banned cryptocurrency trading platforms from converting fiat to cryptocurrencies and vice versa. The sanctions led to the closure of most such trading platforms, with many moving offshore. ICO regulations bar financial firms and payment companies from providing services for ICOs and cryptocurrencies, including account opening, registration, trading, clearing and liquidation services.
PBOC said that as of July 2018, 88 virtual currency trading platforms and 85 ICO platforms had withdrawn from the market.
Why it keeps the rules tighter: The huge jump in the price of bitcoin and other coins over the past year has revived cryptocurrency trading in China, with investors finding ways around the current regulations. This is because the country is trying to develop its own official digital currency, becoming the first major economy to do so. Earlier this year, Chinese regulators tightened restrictions banning financial institutions and payment companies from providing services related to cryptocurrency. An industry directive said speculative bitcoin trading had resumed and was “violating the security of people’s assets and disrupting the normal economic and financial order”. Read more
Many Chinese investors were now trading on platforms owned by Chinese exchanges that had moved overseas, including Huobi and OKEx. Meanwhile, China’s over-the-counter market for cryptocurrencies has been busy again, while social media’s once dormant trading chartrooms have resumed. China-focused exchanges, including Binance and MXC, also allow Chinese individuals to open accounts online, a process that takes only a few minutes. They also facilitate peer-to-peer deals in OTC markets that help convert the Chinese yuan into cryptocurrency.
Such transactions are carried out through banks, or online payment channels such as Alipay or WeChat Pay, although the latter require major websites and accounts to perform due diligence on customers and detect illegal crypto-related transactions. A targeted surveillance system has been promised to be set up. Retail investors also buy “computing power” from cryptocurrency miners, who design various investment schemes that promise quick and hefty returns.
What is the effect of the action: While the cryptocurrency fell on Friday, September 24, the decline was less pronounced than the slide seen in May, when China’s State Council, or cabinet, vowed to crack down on bitcoin mining. The test will be whether China is able to find and punish those who break the platform and the rules. Some analysts said that based on what has happened before, determined investors will still find a way to trade.
“Although retail traders in China will no longer be able to access online exchange platforms, which are now illegal, crypto funds may be able to shift management of their funds,” said Ganesh Vishwanath Natraj, assistant professor of finance at Warwick Business School.
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