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Why China is cracking down on crypto?

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Pavan A

CBW -External Analyst

INDIA

Jun, 04 2021

Jun, 04 2021

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After Tesla called off its decision to accept Bitcoin as a payment option for buying its car, in another major blow to the growing crypto market; China is now regulating the use of cryptocurrencies and has directed its banking system to stop dealing with Cryptocurrencies related transactions. 

 

Beijing bans financial institutions from providing crypto-related services and warns investors against trading in cryptocurrencies. This fresh curb has lowered the valve of bitcoin to $34,000 for the first time in three months.? 

 

On Friday 21st May, A State Council committee led by Chinese Vice Premier Liu He announced the curb targeting virtual currency mining and strict regulations to protect the financial system. 

 

Even though bitcoin recovered after this news, it's still down -10.4% at $38,131. But other cryptocurrencies suffered a major blow with Ethereum and Dogecoin losing as much as 22% and 24% due to the new curbs by China. 

 

Reasons for the crackdown 

 

In 2019, China imposed a ban on Cryptocurrency trading to curb money laundering and for?Investor?protection. But people still continued dealing with bitcoin and other cryptocurrencies. Even after it was made illegal, China became a hub for bitcoin mining with 70% of the world’s crypto supply. 

 

Governments and experts in the field have expressed concern over how bitcoin and other cryptocurrencies might be used for illicit purposes like money laundering and criminal activities. 

 

State-backed?financial organization on Tuesday 18th May jointly issued a warning in the public domain against the usage of cryptocurrencies. National Internet Finance Association of China, the Payment, and Clearing Association of China, and the China Banking Association issued a statement that consumers suffering losses from digital currency transactions will no longer be protected.? 

 

They further added cryptocurrency prices are highly volatile in nature when compared with the traditional currency which “seriously violate people's asset safety" and causes changes in the functioning of the country’s economic and financial order. 

 

According to the?statement by Chinese Vice Premier Liu He and the State?Council on Friday, it is necessary to "crackdown on Bitcoin mining and trading behavior, and resolutely prevent the transmission of individual risks to the social field." 

 

Neil Wilson of Markets.com said: "China has for some time been putting pressure on the crypto space, but this marks an intensification - other countries might follow now as central banks make strides towards their own digital currencies. Until now, Western regulators have been pretty relaxed about Bitcoin, but this might change soon." 

 

To get an early piece of the pie in the cryptocurrency space, China is looking forward to launching its own digital currency backed by its central bank. Some experts have speculated that China will be launching their own central digital currency Digital Yuan to counter the US dollar.? 

 

With climate change becoming a growing concern around the world, China has decided to control its carbon emission by the year 2060. And it’s working on its goal of reducing the carbon footprint caused by bitcoin mining by banning its use.? 

 

Mining bitcoin is a complex process, the computers require a lot of energy for solving complex mathematical problems, bitcoin mining consumes 121.36 terawatt-hours (TWh) of power in a year and China accounts for 65% of the global mining every month.?? 

 

What will happen after China cracks down on crypto? 

 

China has already started losing its position as the top mining hotspot and a global cryptocurrency trading centerThe miners who had found safe haven and cheap electricity in the coal-rich province of China for their mining activities will eventually be forced to shift base to some other country where laws are relaxed. 

 

Founder of BTC.TOP, Jiang Zhuoer, says that his company will mainly conduct crypto mining business in North America if there is a complete ban on cryptocurrency mining. “In the long term, nearly all of Chinese crypto mining rigs will be sold overseas, as Chinese regulators crackdown on mining at home,” he wrote in a microblog post via Weibo. 

 

Jiang expects more than half of the country's mining equipment’s could be suspended because of the new curb which is targeting big mining farms. “Eventually, China will lose crypto computing power to foreign markets as well,” Jiang further adds. 


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Pavan A

CBW - External Analyst

INDIA

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