China has had a vice-like grip on cryptocurrencies since 2013 when it first barred its banks from handling transactions related to Bitcoin. Now, a fresh crackdown has been initiated by China on activities related to cryptocurrencies which include an explicit ban on crypto trading, according to a press release by the People’s Bank of China. The country has also intensified its clampdown on crypto mining after banning mining projects in June this year, according to a CoinDesk report.
Many crypto analysts believe that the latest move is the most comprehensive of all the rules in the history of crypto regulation in China. The crypto ecosystem is under pressure across the world as governments become wary of privately operated, volatile digital currencies.
Here, we answer frequently asked questions about China’s crypto ban, the measures announced, and their impact.
What did the Chinese government say about crypto trading?
What is banned as per the new regulations? These are the trading activities banned as per the new law:
- Virtual currency-related transactions such as the conversion of fiat currency into virtual currency
- Buying and selling virtual currency
- Provision of intermediary information and pricing services for virtual currency transactions
- Token issuance financing
- Virtual currency derivatives and futures transactions
- Unauthorised public issuance of securities
Do the rules apply to foreign crypto exchanges? It is now illegal for foreign virtual currency exchanges to engage in financial activity with domestic residents of China through the Internet. Parties like the domestic staff of these exchanges along with people availing their services will be a subject of an investigation if they engage with them. Huobi and Binance, two of the biggest exchanges in the world, have announced plans to stop providing their services to the Chinese market following this development. China had already directed crypto exchanges to cease operations in 2017 but they continued to serve the market from offshore bases.
How will the government implement these rules? PBOC laid down a set of measures it will rely upon to strengthen surveillance of the virtual currency space and dissuade people from engaging with virtual currencies.
- Constant monitoring and early warning systems: It has directed local governments to be proactive in monitoring, and develop early warning mechanisms to improve the accuracy and efficiency of identifying virtual currency trading speculation activities.
- Information sharing and rapid response mechanism: Provincial governments have to establish a mechanism for sharing information and cross-verification of virtual currency trading speculation as well as early warning signs.
Why is the government banning virtual currencies? “Trading speculation has risen, disrupting the economic and financial order, breeding illegal and criminal activities such as gambling, illegal fund-raising, fraud, pyramid schemes, money laundering, etc., and seriously endangering the safety of people’s property,” China’s central bank said in its statement.
Why does China refuse to recognise crypto as legal tender? The central bank said: “Virtual currency does not have the same legal status as legal tender. Bitcoin, Ethereum and other virtual currencies have the main characteristics of issuance by non-monetary authorities, the use of crypto technology and distributed accounts or similar technologies, and the existence in digital form. They are not legal compensation and should not and cannot be used in the market as money,” the statement continued.
Which departments or ministries have established a monitoring mechanism?
- People’s Bank of China,
- Central Cyberspace Administration,
- Supreme People’s Court,
- Supreme People’s Procuratorate,
- Ministry of Industry and Information Technology,
- Ministry of Public Security,
- State Administration of Market Supervision,
- China Banking and Insurance Regulatory Commission,
- China Securities Regulatory Commission,
- State Administration of Foreign Exchange.
What is the status of crypto mining in China?
The National Development and Reform Commission (NDRC), China’s apex state-planning body, reiterated China’s intention to phase out mining completely from its land.
What is crypto mining? The term crypto mining means gaining cryptocurrencies by solving cryptographic equations through the use of computers. This process involves validating data blocks and adding transaction records to a public record (ledger) known as a blockchain. China had emerged as the hub of mining because it offers electricity at low cost and cheap computer hardware.
Why is it being discouraged by China? It has not been banned completely but it consumes a lot of electricity which has forced China to wash its hands off the scheme so as to meet its carbon-neutrality goals.
What did the NDRC order? It ordered local authorities to clamp down on illegal mining activities. Mining is to be deemed an “outdated” industry and no new projects will be sanctioned, whereas existing ones will be given time to exit, as per a CoinDesk report. The NDRC has transfered full control of the mining crackdown to central authorities from provincial and city governments, the report added. The notice prevents crypto mining activities under the guise of a data centre.
What are the measures stipulated? The NDRC instructed local authorities to draw up a list of current and developing mining projects and their characteristics. The regulatory body also wants a check on power grids for abnormal electricity use related to illicit mining and to strengthen on-site inspections of large data centres. It urged local governments to cease tax support of mining projects.
How does the notice target the electricity supply of miners? No electricity supplier will provide electricity to miners, CoinDesk reported. The notice increases the cost of electricity supplied to miners.
China’s past actions to stem the crypto industry
December 2013: The PBOC termed bitcoin as a “virtual good” that has no legal status and shouldn’t be used as a currency. This was effectively the first ban towards crypto applied to major financial institutions within the country, according to a BBC report.
September 2017: The country ordered local cryptocurrency exchanges shut and banned Initial Coin Offerings (ICO). It did permit over-the-counter transactions while restricting the conversion of fiat into virtual currencies, Business Insider reported.
May 2021: China then banned financial institutions and payment companies from providing services related to cryptocurrency transactions, and warned investors against speculative crypto trading in May this year, Reuters said in its report. Banks and online payments channels will not be able to offer clients any service involving cryptocurrencies, such as registration, trading, clearing, and settlement, Reuters added.
June 2021: China, citing environmental concerns and excessive energy consumption, clamped down on mining operations in the country. It led to bitcoin mining operations moving overseas to more crypto-friendly countries, including the US and Kazakhstan.
The blanket ban imposed by China is its most categorical response to the sunrise industry. Here are a few articles to help make sense of China’s actions:
Explainer: What’s new in China’s crackdown on crypto? by Reuters (Read here)
- “Ten Chinese agencies, including the central bank and banking, securities and foreign exchange regulators, have vowed to work together to root out “illegal” cryptocurrency activity.”
- “While China has been putting in place increasingly stricter rules on virtual currencies, it has now made all activities related to them illegal and sent a signal of intent they plan to get even tougher on enforcing the rules.”
- “The huge run-up in price in bitcoin and other coins over the past year has revived cryptocurrency trading in China, with investors finding ways round the existing regulations. That’s come as the country is trying to develop its own official digital currency, becoming the first major economy to do so.”
China’s Latest Crypto Ban Is Its Most Severe, Insiders Say by Muyao Shen (Read here)
- “But this most recent ban makes clear that crypto trading activity involves “legal risks” and “any legal person, unincorporated organization or natural person” who is investing in virtual currency and related derivatives violates “public order and good customs.”
- “This is certainly much bigger and more expansive than the destruction of the mining industry,” Bishop said. “It could easily be construed as making anything related to crypto possibly illegal under the menu of statutes the notice cites.”
- “Do not be too pessimistic about it,” he told CoinDesk via WeChat audio messages. “…I think the biggest possibility in the future is that once major countries in Europe, North America as well as Japan, South Korea have come out with clearer regulatory policies on crypto, China will slowly introduce laws and regulations on crypto, too.”
Why China Finally Decided to Ban Bitcoin by Aaron Mak (Read here)
- “The Chinese government’s move to rein in cryptocurrency also has to do with its desire to exert more control over economic activity in the country. Bitcoin and its brethren were designed as a tool for facilitating transactions without institutional authorities like banks or governments, so allowing them to flourish in any country takes some power away from state actors.”
- “U.S. regulators are training their sights on Bitcoin as well. Securities and Exchange Commission Chair Gary Gensler spoke at length about cryptocurrencies in an event hosted by the Washington Post on Tuesday, and he didn’t seem too optimistic about their future.”
- “Of particular concern for the cryptocurrency is that Gensler left the door open to regulating stablecoins, or cryptocurrency that’s pegged to fiat currency, as securities.”
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If you have a question that you’d like us to consider about China and cryptocurrency, leave a comment.