The “Last Chinese” Ban On Cryptocurrencies

    25 Oct 2021

    China once again banned almost everything cryptocurrency-related in the country. It is the state’s second attack on the crypto community this year, and it looks even more serious than the spring one. We tried to figure out what it was all about.

    There is a famous saying in former Soviet countries – “the last Chinese warning”. It originated in the 1960s, when communist China, defending its rights in the international arena, often issued “final warnings” to various countries, including the USSR and the United States. However, nothing would usually come from those warnings, except for the next “last warning”, so the people used the phrase sarcastically.

    Something similar is going on between China and cryptocurrencies. Since 2009, the country has introduced various bans and restrictions on blockchain technologies at least a few dozen times. The latest iteration was on May 21 of this year, when the Chinese authorities began their crusade against cryptocurrency mining, nominally as part of their financial risk management policy. Immediately thereafter, three major mining companies announced they were scaling down their operations in China, with a lot of smaller ones quietly following suit. The exodus of crypto-miners from China is still ongoing.

    On September 24, the People’s Bank of China (PBC, the country’s central bank) issued a statement declaring war against all cryptocurrency trading. All activities related to the exchange of cryptocurrencies for fiat money or other digital currencies were immediately banned.

    From that point on, any transactions with cryptocurrency assets, including stablecoins, were classified as illicit financial activity. All crypto exchange services were made illegal. The over-the-counter cryptocurrency trade, which had grown in popularity after the 2017 ban on exchange trading, was also outlawed.

    The regulator’s statement specifically addressed cryptocurrency derivatives. Crypto derivatives trading services were forbidden as well. Foreign companies providing ways to deal in cryptocurrencies had to cease their operations in the country, and Chinese citizens those companies employed were threatened with legal persecution.

    Although cryptocurrencies in China have been hit numerous times, the latest PBC statement provided the most detailed policy framework on the issue to date; it also, for the first time, called stablecoins an illegal financial mechanism (put a pin in that).

    Just about the only thing still allowed in China (for now, at least) is actually owning cryptocurrencies. However, the People’s Bank of China bluntly stated that “cryptocurrencies disrupt the economic order in the country and give rise to criminal activity.”

    The natural consequence was foreign crypto companies leaving the market and closing down of those few Chinese businesses that still worked in this area.

    On September 25, cryptocurrency exchange Huobi suspended registrations for users from China, although registrations from Hong Kong and Taiwan are still available. Those Chinese cryptocurrency owners who have already been registered, use exclusively foreign financial services in their work, and make no transactions that pass through Chinese territory, can apparently still use the exchange.

    On September 26, following Huobi, the largest cryptocurrency exchange Binance banned users from China from registering and trading on the platform. A Binance spokesman told Bloomberg that the exchange does not trade cryptocurrencies in China and blocks local IP addresses.

    “Binance takes its compliance obligations very seriously and strictly adheres to local regulatory requirements wherever we operate,” said the spokesman.

    In addition, BitMart, Biki exchange, and Feixiaohao platform closed down and deleted user accounts for mainland China; Alibaba stopped selling mining hardware altogether. Anyone who placed such a product on the marketplace after October 15 would be fined. Access to the CoinMarketCap and CoinGecko sites from China is now only possible through a VPN.

    So what is it all about? The news from China seems to fit a pattern of initiatives to oversee the financial sector and business in general. International private investors might be worried, but, in the words of economist Branko Milanovic, China’s “political capitalism” puts national and state interests ahead of private investors’ concerns.

    In this case, several points coincided. The attack on crypto mining is, among many other things, a part of China’s overall reduction in electricity production. Coal generation (still prevalent in the country) produces a constant suffocating smog hanging over the cities. And in a few months, when China hosts the Olympics, the authorities want the country’s guests to see the blue sky as they look up. So it’s not just crypto mining farms – the authorities shut down entire power plants.

    The second point is the government’s desire to control all finance. Cryptocurrencies are being removed from the market to eliminate an independent competitor to the digital yuan, which is now being actively introduced into circulation.

    Third, Chinese businessmen would actively use cryptocurrencies (primarily bitcoin and stablecoins) to withdraw money from the country. China is pursuing a strict currency control policy, so you cannot simply take your profits out of the country – a restriction that crypto allowed people to bypass.

    Here, let’s get back to the stablecoin ban. Just the other day, it became known that China will launch a stablecoin pegged to the digital yuan and limited only to international trade. The new asset will be called the “offshore yuan stablecoin”, and its cost will be tied to the Chinese CBDC.

    According to the official Beijing, unlike such popular stablecoins as USDT and USDC, the new asset will be “completely decentralized.” It may sound like a joke, but in the mind of the Chinese authorities, their country is a democracy the West couldn’t even dream of.

    To me, the most sensible reaction to the latest Chinese ban on cryptocurrencies was expressed by US Senator Pat Toomey, who claimed that the United States could greatly benefit from this step. Toomey made a point that economic freedom leads to a higher standard of living for all country citizens. “This is a great opportunity for the United States and a reminder of our huge structural advantage over China,” – the senator added.

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