Government Intervention on Crypto
Chiara Ma
Introduction
Cryptocurrencies have emerged as an innovation that has challenged traditional financial systems and gained increasing popularity around the world. However, governments have been grappling with how to regulate this new form of currency, with some embracing it while others seeking to restrict or ban its use. This article delves into governmental intervention in the world of crypto, with a focus on China's strong stance on crypto and the measures imposed by the Chinese government to regulate the use of cryptocurrencies within the country. For individuals keen on understanding the future of crypto and how certain governments have responded to it, this article will provide valuable knowledge.
Chain 1 - Policies and measures implemented by the Chinese government
“Virtual currencies have recently attracted increasing attention of the relevant departments, have a certain market popularity and have raised certain legal risks, prompting relevant departments to take action.” - PBOC
Around 2013, the People's Bank of China officially acknowledged the growing popularity of virtual currencies and recognised the potential legal risks associated with them. Consequently, the Chinese government implemented a series of measures aimed at restricting and eventually prohibiting their use within the country. Major actions include:
2013 - the PBOC prohibited all banks from engaging in transactions involving Bitcoin and warned those who were involved in crypto of its potential risks.
2017 - all platforms issuing initial coin offerings (ICOs) were banned. ICOs were deemed an illegal fundraising mechanism.
2018 - all cryptocurrency exchanges operating in China were banned.
May 2021 - China's State Council announced a restriction to crypto mining and trading.
September 2021 - the People's Bank of China (PBOC) declared all crypto-related transactions illegal, including trading, mining, and issuance. The PBOC also instructed financial institutions and payment companies to stop facilitating crypto-related transactions.
These policies aim to ban the following three areas of dealing with digital assets: Bitcoin mining; crypto trading and transactions; and employment in the crypto sector. The policies had a significant impact on the crypto industry in the country and raised concerns about the potential impact on the global crypto market.
Chain 2 - The reason behind China’s strict stance
Chinese officials have publicly noted that their strict stance on cryptocurrency is driven by a combination of concerns:
The Chinese government is wary of cryptocurrencies' association with scams and money laundering, and wishes to safeguard consumers against potential financial harm. China does not recognise cryptocurrencies as valid currencies and criticised the unclear legal status of digital currencies such as Bitcoin, which are not issued by sovereign nations. This lack of legal backing makes it difficult for the People's Bank of China to regulate cryptocurrencies and protect its citizens from potential financial risks.
Another possible factor behind China's strict stance on cryptocurrencies is concerns about capital flight. The majority of cryptocurrencies are nationless, and many countries are worried that these digital assets will facilitate the outflow of money from their local economies. The Chinese government fears that the use of cryptocurrencies will make it more difficult to contain the flow of capital, which could have a negative impact on the country's economy. In addition, the Chinese government is concerned that the rising value of Bitcoin could lead to increased competition for the Chinese yuan, thereby devaluing the national currency. This is why the Chinese government has implemented various measures to restrict the use of cryptocurrencies within the country.
(For further insight on illegal activities involved with crypto, check out our article The Illegal Side of Crypto).
Chain 3 - Aftermath of China’s intervention
The Chinese government's intervention in the crypto market has had significant impacts both domestically and globally. One of the major challenges it brought to the global market was a decrease in the value of cryptocurrencies - particularly Bitcoin, the world’s most valuable cryptocurrency - as China was one of the largest markets for crypto mining and trading. The crackdown on mining and trading led to a decrease in demand and an increase in supply, causing the value of Bitcoin to drop significantly. According to some estimates, China's crypto crackdown led to a 50% drop in Bitcoin's value from its peak in 2021. Other cryptocurrencies, such as Ethereum and Dogecoin, also experienced drops in value.
Furthermore, the Chinese government's stance on cryptocurrency has sparked a debate about the future of digital currencies worldwide. Some experts believe that China's ban on cryptocurrency could encourage other countries to follow suit, leading to a fragmentation of the crypto market, which could have a negative impact on the market as a whole. However, others argue that the Chinese government's intervention also created opportunities for other countries, particularly those that were more welcoming to the crypto market. As a result, many cryptocurrency exchanges and mining companies have moved their operations to other countries, such as the United States, Canada, and Kazakhstan. Subsequently, these countries saw an increase in crypto trading and mining activities as Chinese miners and traders relocated. On the other hand, experts warn that this could also lead to a fragmentation of the market, with different countries adopting their own regulations and standards for cryptocurrencies.
Individuals in China and around the world reacted to this in different ways. Some in China expressed disappointment and frustration at the government's actions, particularly those who had invested heavily in cryptocurrencies. However, others supported the crackdown, citing concerns about money laundering, fraud, and environmental damage caused by crypto mining. Outside of China, there were mixed but similar reactions. Some applauded the crackdown, seeing it as a necessary step to regulate the crypto market and prevent illegal activities. Others criticised China for being too authoritarian and stifling innovation. Altogether, responses varied, with some supporting and some criticising the Chinese government.
Conclusion
In conclusion, China has been one of the most stringent governments when it comes to cryptocurrency regulation. Concerns about money laundering, scams, and capital flight led to strict measures, including the banning of all cryptocurrency exchanges operating in China, prohibiting all banks from engaging in transactions involving Bitcoin, and the prohibition of ICOs. Looking ahead, the impact of China's intervention on the future development of the crypto market is unclear. While some suggest that China's actions created opportunities for other countries - particularly those that were more welcoming to the crypto market - others believe that such an action may lead to a fragmentation of the crypto market. Altogether, it is clear that the Chinese government's stance on crypto has had significant ripple effects both domestically and globally, and its impact will continue to be felt in the years to come.
