China Makes Cryptocurrency Transactions Illegal: An Explainer

On the September 24, 2021, 10 government authorities, including the People’s Bank of China (PBOC), jointly issued a notice to clarify that cryptocurrency is not a legal tender. Further, all cryptocurrency transactions in China are considered illegal, including offshore exchanges to provide services to Chinese citizens. The authorities stated that China-based employees of offshore crypto exchanges or any companies providing services to them will be investigated and prosecuted.

On the same day, the National Development and Reform Commission (NDRC) and 10 other authorities issued another circular (the NDRC circular) to local governments on how to wind down cryptocurrency mining activities in their areas.

China joins a growing list of countries where cryptocurrencies are banned or restricted. Egypt, Indonesia, and Nepal are among where these restrictions exist.

China has one of the world’s biggest cryptocurrency markets, which is why global price of cryptocurrencies is affected by fluctuations in the Chinese market. With the announcement of the banning of cryptocurrencies, the price of bitcoin fell by more than US$2,000.

This ban is part of a national crackdown on the currency form. The Chinese government sees it as a volatile investment and have concerns about it being used to launder money. The People’s Bank of China said of “[cryptocurrency] seriously endangers the safety of people’s assets”.

Background: Introduction of cryptocurrency restrictions in China

Cryptocurrency restrictions in China are not new.

In 2017, China shut down local cryptocurrency exchanges at a time when their speculative market accounted for 90 percent of the world’s trade of bitcoin.

In June 2019, trading cryptocurrency was officially banned in China, when the PBOC stated they would be blocking access to all forms of cryptocurrency exchanges, domestic and foreign, and Initial Coin Offering websites although cryptocurrency transactions continued through foreign online exchanges.

2021, however, saw the government double down on its crackdown on cryptocurrencies:

• In May, China banned institutions and companies from providing cryptocurrency related services, warning investors against speculative crypto-currency trading.
• Three industry bodies (the China Banking Association and the Payment, the Clearing Association of China, and the National Internet Finance Association of China) released a statement categorically informing that offering services such as registration, clearing, settlement, and trading is not permissible.
• Government officials attempted to increase pressure on the industry by warning buyers they will not receive protection for trading in bitcoin and other online currencies.
• In June, the government told payment platforms and banks to stop aiding transactions and issued bans on mining cryptocurrencies.
• Finally, two documents were released in September.

How to read the latest ban

Legal currency and virtual currency exchanges, buying or selling virtual currencies (including overseas sales to Chinese residents), and providing information (including pricing services and technical support) for virtual currency are illegal currently. They carry the threat of investigation and prosecution. Under the latest ban, the government hopes to combine offline and online investigation to best identify and investigate crypto-currency trading activity.

Financial institutions are banned from providing services for cryptocurrencies, including opening accounts, funds transfers, and other activities that facilitate the use of cryptocurrencies. Internet companies and websites are also banned from providing payment services in cryptocurrencies. Advertisements for cryptocurrencies are also prohibited, with the monitoring of key words relating to them.

Global concerns mirrored

China’s ban basically reflects global concerns about cryptocurrency. Governments across US and Asia have raised concerns that digital currencies increase risk, promote crime, harm investors, and affect government control of monetary systems.

The Chinese government also reported that the trading of virtual currency has contributed to the rise in gambling, fraud, money laundering, pyramid schemes, and other illegal activities. Thus, banning cryptocurrency is necessary to maintain social stability and national security.

Some analysts also feel China sees cryptocurrencies as threatening to the digital yuan, an electronic currency at the advanced pilot stage.

Crypto-mining winding down in China

Cryptocurrency technology relies on many computers checking transaction on a shared ledger, known as the “blockchain”. Those who participate in this work, known as crypto-mining, are rewarded with new “coins”. With low electricity costs and cheap computer hardware, China has for a long time been one of the main centres for mining. Mining is so popular that gamers have previously blamed the cryptocurrency industry for the global shortage of powerful graphic cards.

There are concerns that token mining is harmful for the environment and affect international environmental goals.

While the crypto-minding activities have high energy consumption and carbon emissions, its contribution to the national economy is low, and the driving effect on industrial development and scientific and technological progress is limited. In addition, the risks derived from the production and transaction of virtual currency are becoming more prominent.

Believing that the blind and disorderly development of virtual currency has a negative impact on the promotion of high-quality economic and social development, energy conservation, and emission reduction, which might endanger the goals of carbon neutrality, in addition to the earlier crackdown, the recent NDRC circular stressed that investment in new cryptocurrency mining projects must be prohibited; local governments should speed up efforts to phase out existing projects, and set a reasonable timetable and path to eliminate such projects.

Meanwhile, the crackdown on cryptocurrency mining has already shown its effect. China reported using 75 percent of the world’s bitcoin energy usage in September 2019. By April 2021, this fell to 46 percent.

How are crypto-currency companies reacting?

According to CoinDesk data, the price of bitcoin fell to US$42,000 (an eight percent drop) but swiftly recovered the weekend after the announcement. Experts believe the impact has been limited as the ban was anticipated due to previous crackdowns.

Data from cryptocurrency exchange Bitstamp showed that there was a volume increase in bitcoin at the time of the announcement but soon the volume decreased and the prices recovered.

CEO at investment advisory Viridi Funds, Wes Fulford, said that some forms of cryptocurrency, bitcoin in particular, showed resilience in comparison to others, such as ether. Altcoins, such as dogecoin, solana, and ripple, also fell.

Some US listed mining companies fell after the announcement. Riot Blockchain (RIOT.O), Bit Digital (BTBT.O), and Marathon Digital (MARA.O) fell between 2.5 percent and five percent, while San Francisco based crypto exchange Coinbase Global (COIN.O) fell over one percent.

From September 24, 2021 to October 4, 2021, shares in US mining company Riot Blockchain dropped from US$27.93 to US$25.25. Over the same period, Marathon Digital shares fell from US$36.18 to US$33.63.

It is not immediately clear what the effects on major crypto companies will be in the future.

The world’s biggest crypto company, Binance, has already been blocked in China since 2017. Crypto exchange companies which originated in China, such as OKEz and Huobi, are likely to be worst affected due to still having some users in China. Huobi Global, a Chinese based crypto-currency exchange, stated it would gradually close Mainland China accounts by December 31, 2021. Experts feel that major ethereum miners, bitcoin miners, and exchanges based in China will move offshore to avoid regulations.

In response, several cryptocurrency companies have announced they will stop providing services to people in China, blocking Chinese IP addresses. The announcement also affects any Chinese citizens working for cryptocurrency companies abroad as their roles are now illegal and liable to prosecution.

Bitmain, bitcoin mining machine maker, has ceased sales to miners in China. Ethereum mining pool operator based in China, SparkPool, also ceased services to all users from the 30th September.

Even though there was an initial shock, some analysts feel the crackdown in China will not affect global prices of cryptocurrencies in the long term. This is due to companies continuing to adopt cryptocurrency services and products. Chainalysis published a report that revealed that cryptocurrency transactions have grown in Asia by 706 percent over the past year despite the consecutive bans in China. Furthermore, CEO of the deVere Group, Nigel Green, believes by the end of 2021, bitcoin could hit US$100,000.

Conclusion

With the announcement to ban all cryptocurrency transactions, there will be concentrated efforts by the Chinese government to crack down on mining and all operations related to cryptocurrency, with the intention to prosecute anyone involved.

Due to previous bans already in effect in China, many investors and companies anticipated the latest ban of all cryptocurrencies and linked services and operations. While initial drops were observed in share prices and values of virtual currencies, these have since rebounded. Due to the adoption of virtual currencies by companies internationally, there are predictions currencies such as bitcoin will continue to grow steadily.

Companies that were originally based in China may choose to move offshore to continue operations as they close accounts with Chinese users, which are now liable to prosecution for continued business.

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