Why did China crush the cryptocurrency business?

In just one day, the Chinese authorities have essentially destroyed the country’s crypto business. It resulted in a massive drop in the cryptocurrency market and the hash rate collapse. The main question is what motives drive Beijing’s actions?

On Monday, June 21, the People’s Bank of China (PBC, acts as the country’s central bank) issued an order to the country’s largest banks and financial company Alipay to stop servicing everything related to crypto transactions. As a result, Alipay, the Industrial Bank and the Commercial Bank of China announced the termination of all cryptocurrency and crypto service operations. Earlier, a similar statement had been made by the AgBank, one of the largest banks in China: they said that effective June 21 they would stop working with cryptocurrency companies and block accounts associated with cryptocurrencies. Soon, the Construction Bank and the Postal Savings Bank joined suit.

In its statement, the PBC claimed that trading in virtual currencies disrupts established economic and financial order, creates risks of illegal movement of assets across borders, money laundering and other unlawful activities, and also seriously threatens the well-being of citizens. In this regard, banks must strictly follow the requirements to prevent risks associated with the use of bitcoin and other cryptocurrencies, as well as the issuing of tokens and various operations with virtual assets not approved by the People’s Bank. The PBC also stressed the requirement for banks and payment systems to conduct thorough customer identification.

 “Financial institutions must conduct comprehensive investigations and identify accounts of virtual asset exchanges and OTC brokers, as well as promptly eliminate all opportunities for such payments,” the statement says. “In addition, they have to analyze the distinctive characteristics of cryptocurrency-related capital transactions, advance the means of tracking unusual transactions and improve their own internal processes.”

It’s China, so no one objected. Leading Chinese banks and payment systems (including the aforementioned ones) immediately publicly expressed their willingness to “responsibly follow the imposed requirements” and promised not to carry out any cryptocurrency-related transactions themselves, further strengthen their monitoring and decisively stop servicing accounts, connected to virtual currency transactions.

Here it should be noted that back in 2017 in China, crypto exchanges were prohibited from conducting operations with fiat money. Since that time, Chinese exchanges have completely switched to cryptocurrency/cryptocurrency pairings, and the task of depositing / withdrawing fiat currency was delegated to individual brokers. This scheme had worked well until recently – but now the OTC broker accounts are simply no longer serviced. Moreover, crypto exchanges Huobi and Bybit have stopped servicing customers from mainland China.

At the same time, pressure on cryptocurrency miners continued. The mining ban was introduced in four Chinese provinces: Sichuan, Yunnan, Qinghai and Xinjiang. There, the local governments simply cut the mining farms off the power supply en masse. The result was a rapid drop in network computing power – the hash rate. For Bitcoin, it plummeted to 91.2 exahash per second (EH/s) – the lowest level since November 3, 2020. Most large mining pools have lost up to 33% of their computing power.

But why are the Chinese authorities so hostile to cryptocurrencies? There are three quite considerable reasons:

1. Chinese businesses have long been in the habit of using bitcoin to transfer money abroad, since other channels are under the strict supervision of the Communist Party and the intelligence agencies. It is extremely difficult to estimate the amount of funds withdrawn this way, but obviously we are talking about tens of billions of dollars a year.

2. The ungovernable nature of cryptocurrencies goes against the party line of universal control over citizens and business. The Chinese authorities believe that a citizen and a businessman have the right to privacy (keeping secrets from other people), but there cannot and should not be secrets from the state. And the very ideology of cryptocurrencies challenges that approach.

3. Most importantly, cryptocurrencies are direct competitors to the digital yuan, which has been tested in China since last autumn. China’s own digital currency, it is on the blockchain, but all the nodes of the digital yuan network are controlled by the state.

One of the goals of China developing the digital yuan was to gain complete state control over the financial situation of citizens. When the new digital payment system becomes commonplace, the country’s government will be able to track all financial transactions of its citizens and companies in real time. It is clear that the natural response of those seeking to preserve their anonymity would be to go to cryptocurrencies. That’s exactly why Beijing struck a preemptive blow against them.

Globally, the consequence was a fall in the value of bitcoin: the BTC price on Monday, June 21, dropped to $ 31,900. Literally the day before, June 20, bitcoin drew the so-called “cross of death”. The 50-day moving average (MA 50) crossed with the 200-day average (MA 200). In technical analysis, this indicates a further trend reversal. Moreover, a similar situation was observed in 2018 before a large-scale drop in the value of the first cryptocurrency.

Following Bitcoin, almost all altcoins suffered losses due to their traditional dependence on the demand for BTC. According to Skew, the price correlation of the ten largest digital currencies has peaked in the past few years. The total capitalization of the crypto market on Monday, June 21, decreased to $ 1.453 billion.