China Cracks Down on Bitcoin
Article thumbnail of Shanghai’s financial district, 2009, courtesy of Wikipedia Commons
On 21st May, 2021, China’s State Council's Financial Stability and Development Committee announced its decision to crack down on Bitcoin mining and trading activities to avoid financial risks.
Previously in 2017, China had already banned initial coin offerings (ICO), which allowed startups to raise capital by generating their own virtual currency. The CCP’s crackdown on cryptocurrency is not new and Bitcoin was expected to be the Chinese administration’s next target. Under the new measures, financial institutions are no longer allowed to accept virtual currencies, or use them as mediums of exchange, payment and settlement. Exchange services between cryptocurrencies and the yuan or foreign currencies are also banned. The recent series of China’s policies against virtual currencies result from the government’s fear that virtual currencies would destabilise the financial markets and create loopholes for money laundering, threatening investors’ interests.
Implications to the Chinese Financial Market
China’s central bank, the People’s Bank of China (PBOC), is heavily under the influence of the Chinese Communist Party (CCP) and has extended control over the Chinese financial market and exchange rate of the Chinese yuan. Instead of adopting a free floating exchange rate like the USD and the Euro, the PBOC maintains strict control over the value of the yuan as well as China’s monetary policy. The onshore yuan, which trades only within mainland China, is allowed to trade within a narrow band of 2% above or below the day’s midpoint rate, which is determined by the PBOC based on the currency’s previous day closing level and quotations taken from interbank dealers. The offshore yuan, mostly traded in Hong Kong but also in London and Singapore, is determined by market supply and demand, but the PBOC would use its vast foreign reserves to ensure that the offshore and onshore yuan values are similar to each other.
Amidst the COVID-19 pandemic in April 2020, the Chinese government has already begun internal trials of its newly launched central-bank digital currency. China is not the first country that developed the initiative to introduce digital currencies endorsed by the central bank, but is the first to execute such plans. The concept of ‘govcoins’ seeks to shift power from individuals to the state, circumventing conventional retail banks and centralises power in the state through central banks. With its ambitions to ban unregulated cryptocurrency and replace it with the use of the PBOC’s digital yuan, the Chinese administration would continue to exercise extensive state control over its financial markets whilst retail banks and private networks become more irrelevant.
Implications to Chinese Businesses
Businesses that have already engaged in cryptocurrency mining would inevitably be hit hard by the Financial Stability Committee’s new measures. Currently, despite criticisms that the figure has been overstated, virtual currency mining in China alone accounts for up to 70% of the world's crypto supply. As a result, cryptocurrencies and Bitcoin in particular could experience a further decline in value globally. It would not be surprising that once the PBOC’s digital yuan is officially implemented across China, Chinese citizens could be banned from holding any cryptocurrencies.
The CCP’s grip on the financial market extends to other businesses and entrepreneurs. The tech industry, which experienced rapid development in recent years, has also faced regulations and demands for restructuring from the Chinese government. In October, 2020 Alibaba’s founder, Jack Ma, openly criticised Chinese officials for a lack of imagination and ‘pawnshop mentality’. Consequently, Ma became the CCP’s target and his plans for Alibaba’s fintech branch, Ant Group, to become a publicly listed company were halted under orders of the Chinese government. In April 2021, Alibaba received state orders to restructure and pay a fine of $2.8 billion for breaching anti-monopoly rules. Other billionaires, less well-known than Ma, have also been purged by the CCP for suspected political reasons. In April 2021, billionaire Sun Dawu, who owns an agricultural empire just outside Beijing, was arrested by local authorities under eight criminal charges, including illegal mining and ‘seeking quarrels and provoking trouble’. It was suspected that Sun was targeted by the government due to his support for Chinese political dissidents. At the moment his businesses are under government control.
Aside from cryptocurrency trading, large enterprises in China are also under strict surveillance by the CCP, hence critics worry the state of economic and financial freedom in China would further deteriorate within the next few years. If entrepreneurs, of large businesses and cryptocurrencies alike, hope to remain in the Chinese market in the long run, it seems that they must comply with the Chinese government’s financial regulations and be cautious about their political opinion towards the CCP.