China's recent cryptocurrency regulations have caused a lot of confusion. The Chinese government announced that they plan to ban all digital assets such as bitcoin trading, initial coin offerings (ICOs), and cryptocurrency mining by September 2021.
The notice passed by the government restricts all forms of cryptocurrency activities. This includes selling tokens, trading crypto, and performing transactions involving virtual derivatives. The Chinese central bank said, "Speculation and trading of Bitcoin and other forms of cryptocurrencies have become widespread, disrupting financial and economic order”.
This has given rise to illegal fundraising, money laundering, pyramid schemes, fraud, and other forms of criminal and illicit activities with over one thousand people being arrested for using proceeds made from crime to buy cryptocurrencies."
Why Are They Cracking Down?
China has had a rocky relationship with cryptocurrencies in recent months. In September 2017, China banned initial coin offerings (ICOs) and fiat-to-crypto trading platforms as part of an effort to protect investors from fraud and undue risk.
These new regulations were designed to curtail capital flight by preventing companies from making investments in Yuan and then using them for crypto transactions outside of China's borders.
The authorities also wanted to prevent crypto speculation after digital token prices soared earlier. However, the People's Bank of China (PBoC), which oversees Chinese monetary policy, announced that it would halt all centralized cryptocurrency exchanges within its borders.
This also includes peer-to-peer markets where users can buy tokens directly from one another with no intermediary controlling the transaction or verifying user identities—for example, LocalBitcoins and Paxful are popular choices in China at present.
It's hard to remember the last time when fear, uncertainty, and doubt were so heavily concentrated in one place. After banning ICOs, China has now banned crypto trading of any kind.
In addition, the Country's government is taking a stance that they are not recognizing cryptocurrencies as a legal tender and strictly regulating all virtual currency exchanges.
This seems to be a move of fear rather than caution. The news sent FUD through the roof across all social media channels for weeks afterward!
And you know how they say, "News is like Gasoline"? This report sparked a fiery rash of posts from folks who misunderstood what people need to use their two feet. The regulation resulted in an overall drop in the value of Bitcoin by about 6% within 24 hours.
However, many traders believe the fall in price may be because of more than just one country's regulatory changes. In contrast, some believe it also has to do with rumors about Goldman Sachs dropping plans for a bitcoin trading desk because there isn't enough clarity on the regulation yet.
Cryptocurrency Regulations In China
Cryptocurrencies: Are Not Considered As a Legal Tender
The PBoC banned Bitcoin in 2013 and prohibited Chinese Financial Institutions from handling cryptocurrencies. In 2017, they implemented a blanket ban on all ICOs and domestic cryptocurrency exchanges with little explanation for why this was necessary, other than "virtual currencies" being regulated like actual cash instead of being considered public financing with no approval.
Despite China's reputation for strict currency control, it recently revealed that the government has granted cryptocurrencies a new classification and considers them property instead of digital assets. This means they can now be passed on through inheritance according to the Civil Code 2020 amendment of Chinese law in May-June 2019.
Cryptocurrency Exchange Regulations
Despite the near-comprehensive prohibition on crypto trading and related services in China (including a blanket ban), workarounds are possible using foreign platforms and websites. Unfortunately, however, most foreign exchange platforms aren't regulated by Chinese law.
Despite this significant setback for cryptocurrency mining activities, some restaurants accept bitcoin as payment, and crypto mining is still considered legal as long as the operation meets environmental standards set out by central authorities.
The recent shift in policy towards cryptocurrencies provides an opportunity for people across mainland China who want to access their data stored within digital currency wallets abroad.
Future Cryptocurrency Regulations
According to recent developments, China plans to maintain its leadership in the cryptocurrency space. These include statements by Chinese government officials endorsing blockchain technology, an extensive trial to create their digital currency (the "Digital Yuan"), in a joint venture with SWIFT to grant them access to international payments gateways transactions worldwide.
The Chinese government has been introducing a digital currency for years now, spurred by Facebook's move into space after announcing they were creating their cryptocurrency. As a result, the law was passed that conferred a legal status for PBoC's Yuan - called "the Great Wall" or "PBoC Digital Yuan," which will cause its demise with bespoke controls covering exchanges and fungibility within the Country.
China's Cryptocurrency Crackdown Isn't New.
China has been targeting Bitcoin since 2013 and forbidding financial institutions from handling it. As a result, over a hundred Chinese banks have stopped providing services for cryptocurrencies.
Over the years, they have renewed their crackdown of crypto markets with more measures to shut down mining rigs and reiterated a ban on Chinese banks providing services related to cryptocurrencies in April 2018.
The People's Bank of China announced that operations involving virtual currency trading societies would be diligently monitored by authorities and stricter regulations against those who infringed upon these rules.
In China, it's not just illegal for banks to trade between cryptocurrencies and fiat currencies. They're also banned from storing cryptocurrency-related funds or issuing "crypto-related financial products."
The Initial Ban In 2013
The government further restricts payment companies from providing bitcoin-related services in response to an increasing number of cases where people lose their investments because cryptocurrency prices are soaring, only for them to fall dramatically later down the line.
However, in late 2013, China opened up to trading in bitcoin with some restrictions on how much you could buy or sell at one time. Still, everything changed when a group from different agencies joined later that same year, creating an even more restrictive environment where, if anyone wants financial freedom through virtual assets, they'll need to look elsewhere!
Cryptocurrency offers anonymity features that fiat currency does not. However, China often sees these currencies associated with illegal activity like money laundering or drug trafficking because they cannot be simply traced back directly to a bank account, unlike traditional financial products where you can see the amount and the funding source.
The ICO Ban in 2017
China announced all ICOs were banned in September 2017, deeming them illegal. The Chinese regulatory body, the People's Bank of China (PBoC), announced this news with an official directive to stop any form of public financing using cryptocurrencies like bitcoin or ethereum and ordering trading platforms not to convert legal tender into crypto assets (and vice versa).
The regulatory body claims that digital assets were too insecure about being considered an investment. However, the China-led crypto trading platform ban prompted a mass exodus from the Country.
By July 2018, approximately 88 virtual currency trading platforms and 85 ICOs had withdrawn to countries where they could operate freely, such as Singapore and Hong Kong, which are more liberal regarding regulating these coins/tokens.
Additionally, the PBOC's actions against exchanges had a significantly negative effect on cryptocurrency prices because investors began selling off all their digital currencies in response, fearfully believing another major exchange closure might be imminent due to how strictly enforced KYC laws were.
Tightening The Ban In 2019
The People's Bank of China also issued a statement announcing blocking access to all domestic and foreign cryptocurrency exchanges and ICO websites in June 2019. The goal behind this move is for the banks to aim at clamping down on trading activity with an outright ban of foreign exchange platforms.
This comes after PBoC's warning earlier this year that cryptocurrencies are not 'Spells Of Wealth' but financial risks that risk investor capital because of their high volatility.
New Restrictions or FUD
On May 18th, 2021, three major bodies in China (the National Internet Finance Association for Cyberspace Economic and Trade Promotion, the Central Bank, and its counterparts at banking organizations) jointly released for a second time an advisory - stating that they do not recognize cryptocurrency as legal tender and won't permit banks to service them.
The subsequent report covers some services that were not previously mentioned in earlier bans. This time, it states that institutions must not accept virtual currencies or use them as a means of payment and settlement.
For example, to use them as fines imposed by law; if they do, they do so at their own risk since there are no other options available.
These include penalties up to 5% per month maximum rate on funds deposited without prior approval from the bank (or financial institution) where you had opened an account. This restriction has made it difficult for institutions to interact with cryptocurrencies.
The rules also state that no institution may provide "saving" or deposit services involving virtual currencies — not even as an investment target of trust products/funds.
The Crypto Space Will Continue To Strive
In contrast to the previous bans, the recent 2021 bill does not impose additional restrictions. However, it expanded on the scope of prior restrictions. It states that "virtual currencies are not supported by real value."
It's hard to believe that the country that houses the world's largest community of bitcoin miners would take such drastic measures against cryptocurrency, but it is what it is!
Developments like these might seem unpredictable and erratic. However, China's perspective toward cryptocurrency has been inconsistent since 2013. The good news is, the wider crypto space has evolved and survived regardless of the regulatory developments and will keep moving at full speed!
*This communication is intended as strictly informational, and nothing herein constitutes an offer or a recommendation to buy, sell, or retain any specific product, security or investment, or to utilise or refrain from utilising any particular service. The use of the products and services referred to herein may be subject to certain limitations in specific jurisdictions. This communication does not constitute and shall under no circumstances be deemed to constitute investment advice. This communication is not intended to constitute a public offering of securities within the meaning of any applicable legislation.