An overview of China's crackdown on cryptocurrencies
Cryptocurrencies in China have been under constant threat, but they have never been considered illegal. This scenario could change. In late September, Chinese regulators stated that mining cryptocurrency and crypto trading or crypto use as legal tender is forbidden. The statement came from the Chinese central bank, the People's Bank of China, citing the need to regulate and maintain national security. China has tried to curb the use of digital coins for more than eight years. The Chinese government is transparent in saying that cryptocurrencies are not legitimate coins, and their existence is a risk to the Chinese financial sector. Before this announcement, the crackdown on cryptocurrencies by the Chinese government had been piecemeal. This statement was the first that laid down the gauntlet. The question for investors is whether the Chinese ban on cryptocurrencies will slow the broader adoption of cryptocurrencies.
What Has Changed from Prior Crackdowns?
Nine other Chinese government agencies joined the People's Bank of China, saying that all cryptocurrencies are illegal. Businesses that are involved in cryptocurrency information technology are no longer allowed to function. Miners and investment companies are banned. There can be no cryptocurrency transactions, period. The Chinese government has made it so there are no grey areas for a business to side skirt. One of the most significant issues is that the Chinese are the largest miners of bitcoin. The ban will provide opportunities to miners who are not under the control of the Chinese government.
How Will This Impact Chinese Cryptocurrency Businesses?
While many cryptocurrency businesses have side skirted the rules, they are now likely to take their mining businesses offshore. The Chinese exchanges have been moving offshore, which allows them to hire programmers and handlers in areas outside of the control of the Chinese government. Other Asian nations could benefit from the Chinese ban on crypto trading. Singapore is an Asian trading hub and is likely to be a prime location for Chinese traders and miners to land.
Is China Going Against the Trend?
The widespread ban by the Chinese makes it one of a few countries that are going against the trend. Singapore is a perfect example, as it has accepted more than 300 new applications to mine cryptocurrency since July 2021. In the United States, several companies have opened their door to crypto trading. In 2020 PayPal, one of the largest payment processing companies in the United States announced that it would provide access to cryptocurrencies. It would offer payment processing for all of its vendors globally. Venmo, which offers money transfers, also allows customers to exchange cryptocurrency.
The biggest splash likely occurred in April of 2021. Coinbase, a crypto trading exchange, provided an Initial Public Offering of its equity. The company solely provides access to cryptocurrency transactions. The valuation after the first full day of trading was $86 billion. The company lists its shares on the Nasdaq Exchange. Coinbase is regulated by the Officer of the Controller of the Currency and the Securities and Exchange Commission. When it comes to cryptocurrency, the advancement of regulation and commerce in the United States flies in the face of the changes made in China. China appears to be willing to buck the trend on its own.
The next step will be the custody space. This happens when a financial institution provides the safekeeping and reporting of cash and securities such as cryptocurrency. Companies like Coinbase are also attempting to lend and borrow cryptocurrency. The company will borrow cryptocurrency from its customers who are willing to hold on to positions and pay them an interest rate that will incent them to keep their crypto trading at Coinbase. Coinbase can then lend this cryptocurrency to another investor who wants to trade it. This process also helps reduce the need to have more cryptocurrency available for those who want to sell digital coins.
The Bottom Line
The statement by the People's Bank of China that
they will ban all crypto trading and related operations in China has not sent
ripple effects across the globe so far.
China likely feels that if it let cryptocurrency continue to populate its
region, it will lose monetary policy control. The loss of power in a communist
nation might be beyond what the Chinese government is willing to accept. The
question is whether the crackdown will generate a ripple impact. Initially,
miners will need to find a new location to operate. Beyond that, it appears
that most nations are moving full steam ahead with their adoption of crypto trading. The Office of the Controller of the Currency and the Securities
and Exchange Commission oversees different cryptocurrency operations. Besides
reducing transactions in China, this move is unlikely to have a worldwide
impact.
