China Doubles Down On Its Crypto Crackdown Again

CHINA IS INTENSIFYING its elimination of cryptocurrencies, banning all trading and mining and promising a crackdown on any illegal activity, according to a joint announcement by the central bank and nine other regulatory agencies.

While the campaign against crypto dates back to at least 2017, the latest announcement reaffirms May’s ban on financial institutions, payment companies and internet firms from facilitating cryptocurrency trading.

The People’s Bank of China also now says that overseas cryptocurrency exchanges providing services in mainland China will be illegal. This closes a loophole being used to evade May’s domestic trading restrictions. Any Chinese citizen aiding or abetting a foreign exchange is now explicitly at risk of investigation.

The central bank added that it had improved its systems for monitoring crypto-related transactions and speculative investing.

As for reasons, the preamble to the announcement says:

Recently, virtual currency trading hype activities have risen, disrupting economic and financial order, breeding illegal and criminal activities such as gambling, illegal fund-raising, fraud, pyramid schemes, and money laundering, and seriously endangering the safety of people’s property.

The announcement sent the prices of cryptocurrencies, notably Bitcoin tumbling, along with the share prices of crypto and blockchain-related companies.

Before the clampdown, Chinese miners accounted for more than half of the world’s crypto supply. The National Development and Reform Commission (NDRC) says ‘such activities contribute little to China’s economic growth, spawn risks, consume a huge amount of energy and hamper carbon neutrality goals’. It has told local governments that it is ‘imperative’ to wipe out crypto mining.

Crypto miners use powerful, energy-hungry computers designed to verify bitcoin transactions in a process that produces new bitcoins. That is a bad look internationally for a country touting its net zero carbon ambitions, and especially amid domestic power shortages for industry.

Following May’s crackdown, most Chinese mining relocated to Central Asia and North America, with cheap energy and policy support. However, the latest announcement suggests that not all of it has moved. The hunt is clearly on for any that remained.

None of the latest measures applies to the state digital currency, the digital yuan or e-yuan, now being trialled in several regions.

Beijing Doubles Down On Crypto

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. 

China Cracks Down On Crypto Again

CHINA’S POLICYMAKERS MAY love the digital yuan, but their attitude towards private cryptocurrencies is much different.

New restrictions expand the crackdown on cryptocurrencies initiated in 2017 that included a ban on Initial Coin Offerings (ICOs). Chinese regulators have now banned financial institutions and payment companies from providing any services related to cryptocurrencies.

Banks and online payment firms were already prescribed from offering customers crypto-related services such as new accounts, registration, trading, clearing, settlement and insurance. To this list is added services not previously covered, such as exchanging bitcoins and other cryptocurrencies into yuan or foreign currencies and including anything crypto-related in wealth management products.

Authorities are concerned about the rise in financial risks as bitcoin’s soaring price has sent speculative crypto trading soaring again. The official word is that ‘virtual currencies are not supported by any real value’.

The latest crackdown effectively ends crypto-related transactions. This Bystander expects the next step to be outright bans on crypto assets.

National Launch Of Digital Yuan May Be Only Two Years Away

THE PEOPLE’S BANK OF CHINA has been experimenting with a sovereign digital currency since April. Last week, it conducted a showy trial in Shenzhen to coincide with President Xi Jinping’s visit for the former fishing village’s 40th anniversary of its transformation into the first special economic zone.

The central bank gave away 10 million yuan ($1.5 million) of its digital yuan, formally called Digital Currency Electronic Payment (DCEP), to 50,000 randomly chosen residents to spend in Shenzhen shops. The test, the largest to date of the digital yuan, reportedly went without a hitch.

Central bank digital currencies (CBDCs) are gaining attention globally. China’s progress in implementing one is pushing the US Federal Reserve and the European Central Bank to speed up work on their digital dollar and digital euro, respectively.

Cash is already fading in China as a medium of exchange, with mobile and cashless payment commonplace, notably via Alipay and WeChat. Four out of five payment transactions already happen via mobile devices.

Beijing has other reasons for favouring the development of a CBDC.

First, it will improve authorities’ ability to manage the money supply. Second, it will help track financial transactions. That will help with everything from combatting corruption and money laundering to monitoring the distribution of international aid. It also potentially expands the toolbox for domestic social control once the use of digital yuan is widespread, as it is likely that only digital wallets authorised by the central bank and issued by one of the big four state-owned banks will be allowed.

Third, it opens the possibility of an international payments system independent of the dollar, and thus immune to US financial sanctions. In that regard, a digital yuan would provide some of the transactional advantages of an internationalised yuan without all the disadvantages of losing capital controls. Internationalisation of the currency remains a long-term goal for Beijing but is not a short-term priority.

For most countries, the main challenges to issuing a CBDC are not technological, but political and regulatory. A second-order regulatory effect will be that CBDCs will advance the digitalisation of all financial assets. Thus there will be a need for more all-embracing regulatory scrutiny of all cryptocurrencies and other digital financial instruments.

China may have an advantage on both points, thanks to the Party’s monopoly on power and the country’s monopolistic internet platforms.

Widespread adoption will also require collaboration between governments and private-sector technology platforms. The PBOC is already exploring with online local shopping platform Meituan and ride-hailing app Didi Chuxing applications for their services.

The next step will be large-scale tests in cities like Hong Kong, Shanghai and Beijing, with the 2022 Winter Olympics in Beijing providing an ideal international showcase for a national launch.