Since the start of the summer, a series of measures from Chinese authorities to curb cryptocurrency trading and mining have dominated the crypto news cycle.
From urging financial service providers to throttle cryptocurrency-related transactions to ordering a crypto trading software provider shut down, the initiatives coming out of Beijing and their repercussions are widely believed to have contributed considerably to the recent market downturn.
What motivates this new round of hostile actions, and how will they affect the cryptocurrency space of the nation that had once accounted for some two-thirds of the global digital asset supply? Furthermore, it seems that whatever happens in China is having a great effect on other parts of the world, which doesn’t seem to be negative.
Propping up the digital yuan
It is not hard to notice how the intensifying clampdown on trading and mining of decentralized cryptocurrencies comes hand-in-hand with the ramping up of China’s central bank digital currency (CBDC) project. As part of the Digital Currency Electronic Payment system testing, stacks of the government-issued electronic money have already landed in the wallet apps of some 200,000 Chinese citizens selected via a lottery. It looks as if larger-scale trials and wide implementation can be expected within months.
When it comes to the distribution of political or economic power, Chinese leadership is not in the habit of promoting pluralism and competition. Up to a certain point, the nation’s sprawling cryptocurrency sector could eschew scrutiny, as it didn’t come into direct conflict with the government’s strategic plans, but this does not seem to be the case anymore.
Yu Xiong, professor of business analytics and director of the Center for Innovation and Commercialization at the University of Surrey, told Cointelegraph that China will not allow any currency to affect the renminbi, and for that reason, it can’t allow Bitcoin (BTC) to grow too big. Xiong added:
“China, like most of the other governments, would like Bitcoin value to grow at a manageable pace. If Bitcoin is allowed to be used as currency, China, [as many other countries], would face financial disaster. China now has its own CBDC, which can be controlled by the central bank, so there is no need for the government to encourage a decentralized cryptocurrency.â€
With major Chinese banks such as the Agricultural Bank of China falling in line and squishing consumer and business operations related to crypto, the concerted effort looks more like a chokehold than a lack of encouragement. On the receiving end of the government’s anti-Bitcoin push, crypto businesses and everyday users are dealing with the dire consequences of the stiffening policies.
Bearing the brunt
The authorities’ all-around crusade against China’s cryptocurrency sector encompasses all major groups of stakeholders: As financial service providers are waking up to their bank accounts suspended, miners in several key provinces are receiving eviction notices. The exit of the company that operated the nation’s oldest Bitcoin exchange vividly illustrates the depth of the crisis.
Yifan He, CEO of Hong Kong-based blockchain firm Red Date Technology, opined to Cointelegraph that “the entire crypto industry in China is officially gone.†He thinks that while trading has always been in the area and mining was largely supported by some local governments, the current prohibitive turn in governmental policy will deal both types of activity a blow, from which they are unlikely to recover anytime soon:
“Once banks and payment service companies ban crypto trading completely, it will be very hard for regular people to use RMB to buy crypto. There is already a significant drop in crypto trading activities in China because all mining is gone. Regular users can no longer inject new money into trading, and almost all major exchanges have banned leverage and margin services for Chinese citizens.â€
In He’s opinion, a fraction of crypto trading can still persist, yet it will have to migrate underground. This will essentially put an end to China’s BTC mining dominance, as miners will either have to shut down completely or relocate and be regulated in other jurisdictions.
The global fallout
What’s being witnessed right now appears to be nothing short of the dismantling of the entire cryptocurrency industry in the country that, until recently, was a major mining and trading powerhouse.
Most everyday Chinese traders will likely find the new rules prohibitive and cease trading activity. Mining businesses will face a choice between vanishing and opening up shop in a different jurisdiction. Those who appreciated the ease of transacting in digital assets will soon have a centralized alternative in the government-backed CBDC.
Squashing the crypto sector on such a vast scale is inevitably echoing on the global scale as well. With much of the Chinese mining capacity gone, the hash power map of the world will have to undergo a dramatic rearrangement, with new centers of mining power emerging elsewhere to fill the void. With that, not just the firms but also the regular users will be affected in the long run, as some parts of the world will start witnessing an inflow of crypto-related business, to which regulators will start responding.
It is also possible that the loss of Chinese trading activity will become a factor weighing on the global crypto market for quite some time. Building and sustaining a new bull run comparable to that of the early 2021 — a process that requires a continuous inflow of new market participants — might become more challenging, given that China is no longer able to supply the user base growth it had contributed previously. The rest of the world is going to have to try really hard to compensate for China’s departure.
