Headline: buying CryptoKitties will now be illegal in China, as the government banned the use of cryptocurrencies altogether.
The end of crypto in China?
Well, it does sound like it. Chinese regulators have been building a solid wall against cryptocurrency’s influence over the past years, but it recently made a last push to repel the invasion with its last decision: the ban of crypto use altogether.
The last major ban occurred in 2017, when the country ruled against any cryptocurrency exchange to do business in China, forcing many to drop their activities and relocate. In June this year, fearing the enormous consumption of energy, they decided to impose mining restrictions, forcing 90% of China’s bitcoin mining capacity to be offline. This was big news, as the country handled 75% of the world’s mining capacity, opening the door for US incumbents.
The final blow to the crypto enemy happened last week, when ten agencies, including the central bank, financial, securities and foreign exchange regulators united forces to root out cryptocurrency from the country, making it simply illegal. Therefore, as of last week, Chinese residents can no longer trade crypto on peer-to-peer platforms (on WeChat Pay or AliPay for example) and mining will be completely forbidden.
The government will "resolutely clamp down on virtual currency speculation ... to safeguard people's properties and maintain economic, financial, and social order", said the People’s Bank of China.
Why is the Chinese government so bearish about crypto?
China’s main concern about cryptocurrencies lies in the very center of the blockchain technology: it has no higher authority regulation to dictate a direction and restrictions for it. This is not like the Chinese government likes to operate, as it was once more confirmed by the regulations spree the country entered it in the last couple months. The government has burdened the country with many new regulations of all kinds, ranging from data security issues to screen time for children.
Additionally, the global cryptocurrency crackdown from East to West laid out a decent time for such an announcement, as governments all around the world are seeing that these highly digital currencies could risk undermining their control of financial systems, potentially hurting both individual investors and the economy.
The massive energy for mining is another major argument against crypto. Indeed, China is facing a severe power crisis as several industries have seen their power supply curbed in the last few weeks. The country used to be home to a large part of the world’s miners, with 46% of the global hash rate – a measure of computing power used in mining and processing, – as of April.
Others against the concept argue that the use of cryptocurrencies greatly facilitates illegal activities, whether through opaque payments or money laundering. Additionally, it permits users to get money out of the country without any legal documentation.
We also ought to mention that the Chinese Government has been developing its own digital currency: the digital yuan. Having its own centralized cryptocurrency will help China monitor its citizen’s spending and activities, a strong contrast to traditional crypto’s opaqueness.
Impact on cryptocurrency markets and companies
The end of a large market is not good for any commodity or mean of payment. The news sent bitcoin down 9% before paring the losses. Other coins which generally follow bitcoin also took a hit before rising again. While Bitcoin was down 30% following the May announcement, when China vowed to crack crypto, it is up 12% since the news, showing signs of resilience despite short-term swings.
It might seem surprising that such an announcement impacts prices so little, but we need to keep in mind that this decision was to be waited for, as it is not the first time that the Chinese Government speaks against cryptocurrency. “China’s ban on all cryptocurrency trading activity will have some short-term impact on the currency’s valuation, but long-term implications are likely to be muted,” said Ganesh Viswanath Natraj, an assistant professor of finance at Warwick Business School.
The decline also hit crypto and blockchain-related stocks, although losses were recovered in early US trading. Riot Blockchain, Marathon Digital and Bit Digital slipped between 3% and 5%, while Coinbase only fell 1%.
It seems like overall, these types of stocks should not suffer, nor should the market, as globally, companies and users are adopting crypto services at an alarming rate. Crypto exchanges OKEx and Huobi might be the ones who will suffer the most, as a large part of their clientele is Chinese.
So, who’s hurt? According to Christopher Bendiksen, head of research at digital asset manager CoinShares, the Chinese are the real victims here. "The losers in all of this are plainly the Chinese. They will now lose around $6 billion worth of annual mining revenue, all of which will flow to the remaining global mining regions," citing Kazakhstan, Russia and the United States.
This ban, although extreme, was to be expected. Indeed, for years, crypto-related companies have been moving out of the country as the Chinese government was starting to lack hospitality. It started to give the feeling of shopping for groceries 5 min before the store closes.
The Chinese have pushed a client outside for more control over its system, but was the sacrifice worth it? Only time will tell.