-By Ishwari Chavan
Bitcoin and Ethereum, two of the most common cryptocurrencies have seen a plunge in their prices. After hitting a peak in mid-April to $65,000, Bitcoin has more than halved in the previous week to below $30,000 for the first time since January.
Modest recovery has been seen since then. Similarly, Ethereum has dropped after its peak last month.
China’s tough stance against cryptocurrency trading and mining is believed to be a major factor for the downward spiral in Bitcoin.
Why China is cracking down on cryptocurrency?
The second-largest economy plays an important role in the Bitcoin ecosystem. In recent years, it emerged as a hub for cryptocurrency. According to reports, China accounted for 65% of the total global mining capacity.
Mining operations have particularly been prominent in Inner Mongolia and Sichuan provinces due to access to cheap electricity in abundance.
According to the Cambridge Bitcoin Electricity Consumption Index, China accounted for around two-thirds of the total computational power last year. Xinjiang and Sichuan provinces accounted for nearly half of this.
How is China’s stance evolving on crypto?
When it comes to Beijing’s stance on cryptocurrency, different positions of the government can be observed over the years. Although Bitcoin was not legal or regulated, authorities until recently, had not intensified their fight against it.
In some cases, the local governments even encouraged the mining operations. As mining activities consume a large amount of electricity, they were key sources of income during energy-rich seasons in several Chinese provinces.
However, Beijing imposed restrictions on Bitcoin back in 2013. These restrictions were aimed at reducing the use of cryptocurrency in the country.
The Central Bank banned financial institutions and other payment processors from servicing cryptocurrency-related transactions and traders. While prices plunged, they quickly saw recovery.
In 2019, China took a further tough stance. The ban on cryptocurrencies was extended from domestic entities to foreign exchanges and initial coin offering (ICO). Even then, the prices recovered quickly after witnessing a slump.
How different is China’s crackdown on cryptocurrency in 2021 so far?
This year, China launched Digital Renminbi (digital RMB), a digital currency issued by the People’s Bank of China (PBOC). With this launch of the first digital currency issued by a major economy, China accelerated its crackdown on cryptocurrencies by shutting down mining operations.
The state-owned Global Times noted, “The ban also means that more than 90% of China’s Bitcoin mining capacity is estimated to be shut down, at least for the short term.”
On May 18, the People’s Bank of China further intensified the fight. The National Internet Finance Association of China, the China Banking Association, and the Payment and Clearing Association banned financial institutions and other payment companies from servicing any cryptocurrency-related exchanges and traders.
The ban also came from the local governments that once encouraged Bitcoin mining operations.
Why does China want to ban cryptocurrency?
Cryptocurrency is a decentralized currency. The Communist Party of China’s (CCP) hesitation of unregulated currency flowing in the country and the need for high centralized control has invited the crackdown.
Like many central governments, Beijing believes cryptocurrency disrupts the economic order. It has been linked to facilitating illegal activities including illegal asset transfers and money laundering.
In addition, the high energy consumption by mining operations has been a cause of concern for China which has committed to being carbon-neutral by 2060.
How has it affected the Chinese involved in cryptocurrency?
Miners in China have already started to relocate their activities outside the country including Kazakhstan, Russia, and the United States.
The prices of cryptocurrency mining machines have slumped after their peak in April-May. These machines are now being delivered overseas.
Huang Dezhi, who operates a mining farm in Sichuan, said to Reuters, “If the government doesn’t reverse the policy, we will have no other choice. You cannot defy central government decisions.”
Others hope the ban will eventually be relaxed.