We must not forget that housing is for living in, not for speculation,” said China president Xi Jinping in 2017. There is nothing that the Chinese Communist Party finds more petrifying than rumours and speculation.
The cryptocurrency market is one such topic that China has looked at with suspicious eyes for a long time. Despite effectively banning cryptocurrencies in 2017, Xi Jinping breathed new life into blockchain technology in 2019. Blockchain is the technology that powers cryptocurrencies, but on its own, blockchain has several other applications.
At the heart of the Chinese concern about cryptocurrencies, and its latest ban on them, are rumours and unregulated flows of capital.
Shut it down
On 18 May, China’s three financial bodies — the National Internet Finance Association of China, the China Banking Association and the Payment and Clearing Association of China — issued a joint statement targeting financial transactions related to cryptocurrency trading and controlling growing financial risk from these activities.
“Recently, crypto currency prices have skyrocketed and plummeted, and speculative trading of cryptocurrency has rebounded, seriously infringing on the safety of people’s property and disrupting the normal economic and financial order,” said the joint statement.
Following the decision and a recent Tesla announcement, Bitcoin crashed almost 30 per cent in value and other cryptocurrencies were down by almost 50 per cent. Over 480,000 people in China liquidated their cryptocurrency assets in just 24 hours, which added upto $5.92 billion in value.
On the same day, China’s central bank, People’s Bank of China (PBOC) issued a statement prohibiting financial institutions from processing any cryptocurrency related transactions.
The Financial Stability and Development Committee of the State Council, which is chaired by China’s Vice-Premier Liu He issued a statement which said, “crack down on Bitcoin mining and trading behaviour, and resolutely prevent the transmission of individual risks to the social field”.
In March of 2021, China had banned Weibo accounts of cryptocurrency trading platforms Binance, Huobi and OKEx.
The latest decision banning all cryptocurrency related financial transactions is a reiteration of the decisions in 2013 and 2017. China’s central bank banned financial institutions from handling bitcoin payments in 2013. In 2017, the PBOC made initial coin offerings illegal. But those decisions couldn’t entirely stop the growth of cryptocurrency market in China.
China wants alternatives
The new cryptocurrency transactions ban is more about speculation and rumours than just economics. In recent times, China has cracked down on ballooning peer-to-peer lending (P2P) industry and related scams. In 2019, China had more than 5,000 P2P lenders who processed more than $459 billion in annual transactions. The industry was hit by several scandals and major financial defaults in 2018. China now claims to have closed most of the P2P lending businesses and brought others under the regulation of the central bank.
There has been a growing concern about the high level of energy consumption required for bitcoin mining. China currently accounts for more than 65 per cent of the global Bitcoin mining every month based on the hash rate mined. The Bitcoin mining operations are nomadic, which is moved from one Chinese province to other to maximise on the energy supply.
“Chinese cryptocurrency miners alternate between areas rich in hydropower during the rainy summer, and return to northern areas like Xinjiang and Inner Mongolia that are rich in coal-fired electricity during the dry season,” reported Chinese state media outlet Sixth Tone.
Bitcoin mining consumes 121.36 terawatt-hours (TWh) a year, which is more than the annual energy consumption of Argentina. China has made a bold commitment towards cutting its carbon emission by the year 2060, but hasn’t yet outlawed the mining of Bitcoin.
But the latest ban hasn’t stopped people from looking at alternate options to purchase cryptocurrencies.
“If you look at the banking activity in China, millions or maybe billions of transactions happen on a daily basis. From all that …how many are actually really crypto services versus dining or e-commerce? It’s almost unknowable,” Bobby Lee, founder and CEO of Ballet, a cryptocurrency wallet app told Reuters after the latest ban.
On cryptocurrency exchange Binance’s official Chinese language Telegram channel, people have discussed alternative ways of purchasing cryptocurrencies. Reuters reported on 20 May that people in China could still purchase cryptocurrencies from foreign exchanges using their payment methods.
The Telegram channel has been set to private and it is not accepting any more applications to join the group, as tested by me. Binance is the world’s largest cryptocurrency exchange and the company used to be based in China before moving base to the Cayman Islands.
The hashtag “Bitcoin plunged” was the viewed over 600 million times on Weibo.
The ban on transaction also came just a day before 520, or Chinese Valentine’s Day.
“Today is 520, the girl whom I wanted to date is still there, but the money is missing,” wrote a Weibo user.
“Cryptocurrency crashed across the board” was the third trend on Baidu on 19 May. The trend was viewed 4.54 million times.
Prosperity for the masses?
Similar to P2P lending there are many cryptocurrency scams that China continues to crackdown on. China’s police busted a massive digital currency pyramid scheme in Anqing, east China’s Anhui Province, “involving around 2,000 people and over 200 million yuan (about 31.1 million U.S. dollars)”, reported Xinhua.
“We believe that Bitcoin and stablecoins are encrypted assets. Encrypted asset is an investment option, it is not currency itself,” said Zhou Xiaochuan, former governor of the People’s Bank of China, who is the mastermind behind making China’s Digital Yuan a reality. But he also added: “And it is necessary to ensure that speculation in such assets will not cause serious financial risks”.
Digital Yuan is China’s own centralised digital currency that has gone through trials across various provinces. Some experts have speculated that China wants to replace the US dollar’s role as international reserve currency with the Digital Yuan. China’s digital Yuan will not replace US dollar’s status as the international reserve currency,” said Zhou Xiaochuan.
“While the country is further strictly supervising, consumers still have to increase their risk awareness, do not participate in hyped up cryptocurrency trading activities, and do not believe in the ‘myth of wealth creation’ of cryptocurrency,” said a commentary in Xinhua while sounding alarm bells about cryptocurrency related speculation.
The Chinese Communist Party’s social contract with the people is based on ensuring economic prosperity for the masses, which is behind the popularity of the party. But the recent cryptocurrency related ban brings forward the challenge the Communist Party faces between tapping the wonders of capitalism while making sure the jamboree doesn’t bust-up.
The author is a columnist and a freelance journalist. He was previously a China media journalist at the BBC World Service. Views are personal.
(Edited by Neera Majumdar)
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