September 2020 marked a watershed moment for the crypto-tech industry as El Salvador became the first country to use the world’s leading cryptocurrency, Bitcoin, as a legal tender. However, the joy was short-lived. Later that month, top-down actions taken across the Pacific sent ripples throughout the crypto setup.
On September 24, Chinese authorities issued two notices on the entire industry chain of cryptocurrency. A document published on the National Development and Reform Commission (NDRC) website declared the aim to eliminate the upstream and downstream of cryptocurrency mining activities. Guided by the concept of ecological civilisation listed in Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era, the document noted that cryptocurrency’s contribution to China’s national economy is low despite the high energy consumption. It proposed central coordination, provincial responsibility, and city and county implementation to crackdown any mining activity. It strictly forbids local governments, financial institutions, and non-bank payment institutions to provide fiscal, taxation, and financial support.
It directed all financial institutions and non-bank payment institutions to recover the already issued loans. Apart from accelerating the orderly exit of existing mining projects, the notification calls for intensifying investigations in all aspects of the preliminary work of cryptocurrency mining projects, primarily through monitoring and analysis of abnormal electricity consumption. It has touched upon the loophole of mining centres operating as data centres, asking to distinguish between mining and blockchain, big data, cloud computing, and other industries, and strengthening data centre enterprises’ credit supervision.
Another notice was focused on the trading of cryptocurrencies. It reiterated Beijing’s stance that cryptocurrency is not a legal tender. Thus, cryptocurrency-related business activities constitute a crime, including services by overseas cryptocurrency exchanges to Chinese residents through the internet. It has asked provincial governments to revamp local monitoring and early warning mechanisms and combine online monitoring and offline investigation with improving the accuracy and efficiency of identifying and discovering hyped activities in cryptocurrencies.
Besides strengthening territorial implementation, it announced departmental coordination to establish a working mechanism to deal with the risks of hyped-up crypto-trading. It stipulates that financial institutions and non-bank payment institutions shall not provide account opening, fund transfer, clearing, and settlement services for cryptocurrency-related business activities. Internet companies cannot offer services such as online business premises, commercial display, marketing promotion, and paid diversion for cryptocurrency-related business activities.
Cryptocurrencies tumbled after China laid down its latest regulations on cryptocurrencies. According to data from CoinMarketCap, Bitcoin dropped 9 per cent within three hours of the announcement. As the notification targets overseas exchanges catering to Chinese residents, some exchanges, such as Huobi, immediately announced that they would no longer provide services to users in mainland China. Some cryptocurrency enthusiasts speculate that “Chinese crypto traders might shift to decentralised finance or decentralised finance (DeFi) platforms—blockchain-based organisations that can provide several services and are not nominally controlled by any single party or company.”
The decision does not come out of the blue. In May this year, three Chinese financial self-regulatory bodies—the National Internet Finance Association of China, the China Banking Association, and the Payment and Clearing Association of China—warned investors against speculative crypto-trading and banned financial institutions and payment companies from providing crypto transactions-related services. This spurred crypto miners to move out of China.
Counterview: Why Cryptocurrency is a Kardashian, Not Meryl Streep
Though China has been creating fear, uncertainty, and doubt (FUD) over the last decade, cryptocurrencies and crypto-exchanges have fared well so far. However, this time the situation is not the same. These are the most comprehensive guidelines on cryptocurrency signed by stalwart agencies, including People’s Bank of China, Cyberspace Administration of China, 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, Securities Regulatory Commission, and foreign exchange bureaus.
The primary objective ostensibly is to curb illegal and criminal activities such as gambling, illegal fund-raising, fraud, pyramid schemes, money laundering, and endangering the safety of people’s property. Moreover, the ban on power exhausting mining activities supports China’s carbon neutrality goals. Nonetheless, the state-backed digital currency—digital Chinese Yuan—is another significant factor influencing the recent moves.
Governments worldwide have a common concern that privately operated, highly volatile digital currencies threaten their financial and monetary systems. Hence, they are working to roll out their central bank digital currencies. China’s early steps might serve as a lesson for them.
This article was first published on ORF.
The author is Research Assistant with the Centre for Security, Strategy and Technology (CSST). The views expressed in this article are those of the author and do not represent the stand of this publication.