CHINA HAS AGAIN put the boot into cryptocurrencies.
Vice Premier Liu He issued a statement saying that tighter regulation of crypto is needed to protect the financial system and hinted at prosecutions of illegal financial activities. This doubles down on the warnings earlier in the week issued by three financial self-regulatory bodies — the National Internet Finance Association of China, the China Banking Association and the Payment & Clearing Association of China — about the investment and legal risks involved in trading in virtual currencies.
News of the statement sent bitcoin and other cryptocurrencies into a further swoon. It also fuelled speculation that Beijing plans a further crackdown on crypto.
Trading in virtual currencies already violates several laws and regulations, including exchanging legal currencies for cryptocurrencies and exchanges between different virtual currencies. The prohibition on exchanging crypto for physical money means that the only channel for virtual currency exchanges is the exchanges’ over-the-counter (OTC) trading.
The snag there is that OTC transactions can be used for money laundering, which runs slap bang into the anti-corruption campaign. OTC traders can require buyers to provide documentary evidence that they are not money laundering, but convincing authorities is another matter.
As well as closing off opportunities for individuals to convert cryptocurrencies, authorities can crackdown on financial institutions for providing crypto-related services. Banks have already been warned of the risk of violating laws and regulations when they are involved in any virtual currency-related businesses.
However, this is more by way of a warning not to take advantage of loopholes in the rules on virtual currency-related business than closing the loopholes.
That, though, will likely come with more and more specific violations being codified. Meanwhile, the ban on financial institutions being indirect involved in crypto-related business provides a catch-all compliance obligation that regulators can impose as strictly as they feel they need to.
That, in turn, can be dialled up or down to reflect how firmly authorities feel they have crypto under their thumb. Private crypto will not be allowed to compete with the People’s Bank of China’s digital yuan, which is a key component of authorities’ broader plan to maintain control of a rapidly digitising economy.