On 24th September 2021, China declared all cryptocurrencies illegal, effectively banning Bitcoin, Ethereum, Litecoin, and other cryptocurrencies. The Chinese Central Bank, while banning in its announcement, stated it was concerned about the rise in money laundering and gambling emanating from cryptocurrency.
The move by China sparked a drastic fall in the markets as most Bitcoin investors raced to sell their holdings. Ethereum and other smaller coins tumbled; Bitcoin, in particular, fell by almost 10% before regaining its balance in later days.
While the ban isn’t surprising as the Chinese government has always been suspicious of blockchain technology, we consider how the ban is affecting cryptocurrency and its impact.
What was China’s position on cryptocurrency
before the ban?
As earlier stated, China has long been skeptical of cryptocurrency. The government in 2013 banned financial institutions, including banks, from conducting Bitcoin transactions. The situation has not improved but rather become stiffer over the years.
In 2017, China outlawed initial coin offerings, which is crypto’s initial public offering. The process involved crypto startup companies selling their tokens or coins to the public to raise funds. But the People’s Bank of China (China’s Central Bank) declared it an illegal means of fundraising and proceeded to put a stop to it.
China has, in recent times, targeted Bitcoin mining operations within the country. In 2019, the country’s state planner declared its interest in stopping Bitcoin mining. In 2021, the government outrightly banned Bitcoin mining across several provinces, including Sichuan, China’s epicenter of Bitcoin mining. While the country has its digital currency, e-CNY, it remains to be seen how this ban will affect it.
What role does China play in crypto mining?
The University of Cambridge, in research released in April 2021, stated that 47% of cryptocurrency mining happened in China, followed by the US with 16.8%.
But with the ban on crypto-related activities, this is likely to change. Already, crypto-mining migration has begun to take place and the pace is likely to increase. According to a report by CoinDesk, just days after the ban was placed, the authorities in Inner Mongolia, one of the provinces in China, confiscated more than 10 000 computers that were designed for Bitcoin mining.
Will the Chinese ban on Crypto affect the price of Bitcoin?
After the ban on cryptocurrency by the Chinese government, “China FUD” became a trending topic on Twitter. However, unlike previous bans, which produced fear, doubts, and uncertainties, users weren’t as panicked this time around. This is because in the previous cases, the ban only followed a short-lived downturn before things went back to normal. True to their prediction, the next Monday, the Bitcoin price went back up. Users could even buy Bitcoin with a credit or debit card on any exchanges such as Coinbase, Binance, Paybis, etc.
What is the Impact of the Crypto ban
on Blockchain Exchanges?
The crypto ban extended to crypto exchanges, affecting even citizens outside the country. Already, many crypto exchanges are in a dilemma as they are unable to figure out how to deal with their Chinese clients.
While many crypto exchanges reacted to the ban, Coinbase, one of the most credible US-based crypto exchanges, remained silent. But according to reports by Bloomberg, they weren’t unaffected as investors shunned the exchange’s debut bond sale after the ban was announced, resulting in a fall in its bond.
Impact of the ban on the US
Although the US government is yet to take an official position more than a month after the ban, many lawmakers and prominent citizens have weighed in on the matter.
“It could impact market volatility,” says John Wu, president of Ava Labs, a blockchain support company.
This could not be far from the truth as following the ban. Bitcoin fell by 4% within a day while Ether fell by 6%, CoinMarketCap reports.
This cryptocurrency market volatility is the reason many experts warn that investors should only invest what they can lose. Many financial critics say cryptocurrency is speculative and risky and the Chinese ban will further create doubt and affect its price.
However, many of these crypto experts are more worried about cryptocurrency in the US than they are in China.
According to Demirors, “the bigger risk is the U.S regulatory apparatus emulates China.” He goes further to say, “D.C. has been increasingly aggressive with crypto enforcement and sees crypto as a threat to the government’s ability to manage markets.”
The U.S regulators are now beginning to pay more attention to the cryptocurrency industry. Already the Security and Exchange Commission is calling for the crypto market to be regulated, with Gary Gensler and his team working overtime to create the rules. The U.S Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powel have also shared their concerns about the free reign given to cryptocurrency companies.