China’s crypto crackdown shouldn’t have come as a surprise
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On Tuesday, Chinese regulators announced a raft of new rules barring financial institutions and payment companies from providing services related to cryptocurrencies.
The restrictions—unveiled in the form of a joint statement from the National Internet Finance Association of China, the China Banking Association, and the Payment and Clearing Association of China—reiterate and expand prohibitions on cryptocurrencies Beijing issued in 2017.
News of the added rules sent global crypto markets swooning. Bitcoin plunged to near $30,000 in early trading Wednesday, down from around $40,000 at the beginning of the day. Ether, Ethereum, and meme-stock-turned-cryptocurrency Dogecoin all sank more than 20%. The selloff was so frantic it briefly crashed the systems of the world’s two largest crypto trading platforms, Binance and Coinbase. (The cryptocurrencies recovered some of their losses on Thursday.)
The crypto craze showed signs of peaking before Tuesday—battered in part by crypto fanboy Elon Musk’s declaration last week that Tesla Inc. won’t accept payment in Bitcoin after all because of environmental concerns.
Beijing’s crackdown accelerated the rout. And yet it shouldn’t have come as a surprise.
China doesn’t completely ban cryptocurrencies; it allows its citizens to hold and trade them. But financial regulators in the world’s second-largest economy have clearly and consistently signaled their hostility towards private digital currencies since 2013, when they forbade banks and payment companies from providing Bitcoin-related services to clients and customers.
China tightened those restrictions in 2017 by outlawing Initial Coin Offerings, prohibiting cryptocurrency trading platforms from exchanging legal tender for cryptocurrencies, and barring financial firms and payment companies from providing services to cryptocurrencies including opening accounts, trading or clearing.
Little wonder that, as Reuters reports, by July 2018, 88 virtual currency trading platforms and 85 ICO platforms had withdrawn from the Chinese market.
Tuesday’s directives tighten existing restrictions. The three state-backed financial associations warned member institutions that they must not accept virtual currencies for payment or settlement, provide exchange services between cryptocurrencies and the yuan other foreign currencies, or issue crypto-related financial products.
The associations warned that cryptocurrencies are “not supported by intrinsic value” and must not be classified as money. Per the association’s statement: “They should not and shall not be circulated on the market as a currency.”
One reason Chinese regulators take a dim view of cryptocurrencies is that they’re volatile and high risk. The financial associations’ warning states that concern plainly: “The prices of cryptocurrencies have fluctuated wildly recently,” it said. “Speculation has returned, which seriously damages people’s asset safety and disrupts normal economic and financial order.”
That’s a view that’s increasingly shared by financial regulators in the U.S., where it’s easy for retail investors to purchase cryptocurrencies, and crypto exchanges are listed on public markets.
But China, unlike the U.S., has a closed capital account. Beijing fears cryptocurrencies enable its citizens to evade rules prohibiting individuals from transferring more than the equivalent of $50,000 out of the country in any given year.
Moreover, Chinese officials see cryptocurrencies as a direct threat to their plan to introduce a digital version of the yuan controlled by the nation’s central bank. As the Wall Street Journal‘s James Areddy explains here, Beijing hopes the digital yuan will provide a powerful new tool for collecting information about currency transactions at home—and someday challenge the supremacy of the U.S. dollar as the preferred currency for global exchange.
The crypto rally may still have plenty of room to run, but Beijing is definitely not onboard.
More Eastworld news below.
This edition of Eastworld was curated and produced by Nicholas Gordon. Reach him at firstname.lastname@example.org
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