There isn’t as much sentiment moving the cryptocurrency market as Elon Musk tweeted. However, the Chinese government’s strict and assertive policy towards the crypto market is likely to almost match the influence of the Tesla Boss’ tweet.
Reporting from Bloomberg, Thursday (27/5/2021), the Chinese government has banned crypto trading on domestic exchanges, as well as pressure digital currency miners who are considered to consume a lot of energy.
Chinese regulators have sought to reduce the financial risks associated with the rise of Bitcoin and the like over the years. However, a spate of official warnings recently has scared crypto traders again, although some of the warnings seem to repeat previous policies.
This signals that China is watching the crypto market closely and can take further steps as President Xi Jinping seeks to reduce economic risks and meet the country’s ambitious goals to tackle climate change.
What has China done?
In 2017, China asked local exchanges to stop trading cryptocurrencies and banned initial coin offerings, or ICOs, which are the equivalent of an initial public offering for a new virtual currency.
The Chinese government also prohibits financial institutions and payment service providers from engaging in crypto trading, such as opening bank accounts for those involved in it.
Furthermore, China is also concerned about energy-consuming computing processes, where crypto transactions have long been concentrated.
Why is it a new concern?
On May 21, 2021, the Chinese Cabinet called for a crackdown on Bitcoin mining and trading activities. The statement was made during a meeting of local government agencies to discuss financial stability.
It marks the first time a top Chinese official has highlighted crypto mining at the national level since removing it from a list of dirty industries proposed to be eliminated in 2019.
There has previously been crackdown on regional areas in cheap energy places like Mongolia, but law enforcement has always been a big question mark.
However, starting April 2021, the government in the coal-rich country has banned mining, then set up a whistle-blowing system, and said it would increase sanctions for violators. Meanwhile, many financial industry associations have issued notices not to get involved in the crypto market.
Why is China cracking down firmly?
There is no explicit explanation, but clearing risks from financial markets has been the Chinese government’s mantra for years, as evidenced recently in the crackdown on fintech giants including Ant Group Co. Jack Ma’s and the central bank’s efforts to develop a digital yuan.
Digital currencies are also seen as providing a way to move money out of China, potentially increasing outflows.
Regarding crypto mining activities, the Chinese government is increasingly wary of the huge industrial energy consumption. President Xi Jinping has previously pledged to achieve carbon neutrality by 2060.
Didn’t crypto grow big in China?
China dominates the crypto mining world in several ways. For example, companies like Bitmain, MicroBT, and Canaan Inc. listed in the US is the largest crypto mining machine manufacturer.
Other companies such as F2Pool and Poolin also run online services where users combine their computing power and split up prizes for better opportunities to dig up new coins.
China is also home to most of the crypto miners on the planet. Miners reside in warehouses and data centers that utilize coal or cheap hydropower in regions such as Xinjiang, Mongolia, Sichuan and Yunnan.
As of April 2020, China provided 65 percent of the world’s computing power for Bitcoin mining, compared to 7 percent allocated by the United States. This is according to estimates by the University of Cambridge.
Bitcoin and the like can still be traded, but only directly between two parties in an over-the-counter market run by the likes of Binance and Huobi.
How is the impact?
It’s hard to judge. China’s latest crackdown is primarily on physical mining facilities, where no specific player can take the lead. It is possible that tens of thousands of operations are scattered across the country, which makes regulatory oversight difficult.
However, the move has reshaped the industry and raised costs. The computing power of the Bitcoin network has taken a dip following the recent Chinese State Council meeting. This represents a temporary disruption of crypto miner operations.
Meanwhile, some Chinese miners appear to be moving their base of operations, selling Bitcoin or their machines.
However, the exodus of Chinese crypto players has actually been going on since 2017. At that time, Bitmain established mining operations in the US and Canada, and many local exchange and wallet service providers had set up shops in Hong Kong and Singapore. As a result, the latest warnings from Chinese regulators could speed up the exodus process.
On May 26, Beijing-based BitDeer, a mining startup founded by influential crypto entrepreneur Jihan Wu, said it had blocked all internet addresses from China to ensure the company no longer served Chinese citizens.
Additionally, Huobi stopped registering new Chinese users to trade risky crypto-related products on its platform. The company also suspended machine sales and hosting businesses in the country. Smaller crypto futures apps like XMEX have announced a complete shutdown.
What about cryptocurrency prices?
China’s stringent policies led to heavy losses in the price of Bitcoin in early 2018, but cryptocurrency has had many ups and downs since then.
Bitcoin has gradually recovered and reached an all-time high of US $64,870 in April 2021. The latest Chinese news has hit the confidence of Bitcoin support groups, after previously Elon Musk made a change of direction and criticized the token for its energy consumption. The price of Bitcoin immediately fell by 10 percent after the Chinese State Council meeting.