Why is it a Bad Idea For China to Ban Operations of Other Crypto Assets
Government and monetary bodies in China continue to oppose the existing cryptocurrencies in the market, dismissing them as any form of legal tender. The crypto restrictions came into the spotlight in 2013 when China’s Central Bank blocked financial institutions from conducting any Bitcoin transactions.
Trading platforms, exchanges, and ICOs followed suit as China prohibited any conversion and fundraising activities in 2017. According to the Chinese regulators, ICOs and crypto transactions are closely related to frequent fraudulent activities. As a result, the country recently initiated a crackdown on Bitcoin mining operations in different provinces such as Inner Mongolia, Yunnan, Xinjiang, and many more.
Furthermore, major financial institutions are also barred from offering any crypto-related services such as settlement and account opening activities. At the same time, China’s stand on digital currencies remains firm as it prepares to launch its native CBDC known as the digital yuan. But where does the ban leave the existing crypto market, and why is it a bad idea?
Impact of Restricting Crypto Operations within China
In 2017, crypto exchanges within China were forced to relocate to other regions such as Hong Kong and South Korea after being issued with a deadline to cease operating. Currently, Bitcoin mining and other crypto-related transactions are coming to a halt, leading to several outcomes. Here’s an outlook:
- Following the restrictions on any crypto-related transactions in June 2021, the digital currency market experienced a sharp decline in the overall market value. As a result, Chinese residents have become skeptical of what the future holds for cryptocurrencies. Bitcoin, for instance, fell below the $30,000 mark for the first time since January 2021. Similarly, the reviewed crypto ban will make it difficult for Chinese residents to purchase any cryptocurrency at the moment. Hence, exchanges focused on China will also look for more mechanisms to cater to traders around the set regulations.
- It creates fear, uncertainty, and doubt (FUD) to Chinese investors and crypto enthusiasts worldwide. Usually, the volatile nature of cryptocurrencies emerges from several factors which could lead to positive or negative price action. Prohibiting the operations of other crypto assets paves the way for panic, especially when misleading information surfaces all over the media, thus creating doubt amongst investors.
- The ban may limit financial freedom. Cryptocurrencies aim at giving users a new and advanced way of trading without any restrictions. Transactions running through the blockchain network eliminate the need for intermediaries, making digital currencies a convenient tool for local and cross-border transactions. Unlike traditional financial systems, which consume a considerable amount of time, crypto transactions take a shorter execution time ranging from seconds to minutes. Suppressing cryptocurrency operations denies Chinese residents of this financial freedom, increasing the number of unbanked people who lack access to financial services without digital currencies.
- China remains the primary epicenter of Bitcoin mining, accounting for 65% of the global hash power. A hash power represents a mining device’s ability to solve complex algorithms when verifying transactions on a blockchain network. Banning mining operations in China could have a positive and negative effect on the future of Bitcoin. As an advantage, it eliminates the possibility of 51% attacks prone to happen when mining farms reside within one area. On the flip side, it is a disadvantage for miners who earned a living by confirming transactions. The supply of bitcoins in the market will also be affected as miners look for convenient locations to operate their rigs.
- A significant amount of renewable energy, including hydroelectric or coal energies, is generated in China. Electricity consumption projects to increase when Bitcoin mining comes to a halt since enthusiasts may opt for expensive energy solutions which harm the ecosystem. Huobi exchange and BTC. TOP are examples of platforms that have shut down their operations in response to the regulations designed by regulators
Unleashing the Digital Yen
The recent block on any crypto assets within China’s economy comes when the country hopes to launch its CBDC dubbed as the digital yuan (e-CNY). Developed as a central bank digital currency, e-CNY will make its first appearance during the Beijing Winter Olympics in 2022.
The CBDC has undergone numerous tests since 2014 across a variety of areas in China, intending to replace the existing cash in circulation. It will, therefore, feature exclusively during the Olympic competitions allowing athletes and visitors to use e-cny as a regular digital currency.
Launching the digital yuan on such an event gives it an immense advantage to gain international recognition. E-cny runs on the Binance Smart Chain and has conducted several tests in conjunction with Alipay and WeChat Pay entities.
The Downsides of a CBDC
Compared to cryptocurrencies that employ anonymity, CBDCs such as the digital yuan will require users to undergo KYC/AML procedures when trying to transact. Thus, revealing users’ true identities makes them susceptible to impersonation cases.
In addition, local commercial banks and other financial institutions may compete to provide customer deposit services which may surge if banks need to generate more money. In exchange, the amount of bank credit lowers, leading to a higher interest rate.
Since 2013, China has been actively trying to discourage the presence of crypto assets within its boundaries. The recent ban may continue to trigger negative price actions on prominent cryptocurrencies such as Bitcoin, Ethereum, and many more.
On the other hand, Chinese residents will bid farewell to any crypto-related trade or mining as it moves to launch e-cny. Nonetheless, global investors may outgrow the impacts China has left in the crypto market with time as enthusiasts look forward to more positive sentiments that will restore cryptocurrencies to their bullish values.