Is Cryptocurrency Banned in China?
Cryptocurrency is a digital form of money that is not controlled by any central authority or government. It uses cryptography to secure transactions and create new units of value. Some of the most popular cryptocurrencies include Bitcoin, Ethereum, and Dogecoin.
However, not everyone is a fan of cryptocurrency. In September 2021, China announced a sweeping ban on all cryptocurrency transactions and mining activities, effectively shutting down one of the world’s largest crypto markets. This article will explore the reasons behind China’s ban, the impact on the global crypto industry, and the future prospects for cryptocurrency.
Why Did China Ban Cryptocurrency?
According to the People’s Bank of China (PBOC), the central bank of China, the ban on cryptocurrency is aimed at curbing financial crime and preventing economic instability. The PBOC said that cryptocurrency-related business activities are illegal financial activities that seriously endanger the safety of people’s assets.
However, some analysts believe that there are other motives behind China’s ban. One possible reason is to combat capital flight from China. Capital flight is the movement of money out of a country to avoid currency depreciation, inflation, or political risk. China has strict capital controls that limit the amount of foreign currency that residents can buy or sell each year. However, cryptocurrency offers a way to bypass these restrictions and transfer money abroad more easily.
According to the Chainalysis Blockchain data platform, more than $50 billion worth of cryptocurrency left East Asian accounts to areas outside the region between 2019 and 2020. As China has an outsized presence in East Asian cryptocurrency exchanges, Chainalysis staff believe that much of this net outflow of cryptocurrency was actually capital flight from China.
Another possible reason for China’s ban is to promote its own digital currency, the digital yuan or e-CNY. The digital yuan is a state-backed digital currency that is issued and controlled by the PBOC. Unlike cryptocurrency, which is decentralized and anonymous, the digital yuan is centralized and traceable. The PBOC hopes that the digital yuan will enhance its monetary sovereignty, improve financial inclusion, and facilitate cross-border payments.
China’s ban on cryptocurrency is also part of a broader trend of greater state intervention in the economy and a crackdown on the tech sector. In recent months, China has tightened regulations on various industries such as e-commerce, ride-hailing, gaming, education, and entertainment. The government has also launched a campaign for “common prosperity”, which aims to reduce income inequality and redistribute wealth among its citizens.
How Did the Ban Affect the Global Crypto Industry?
China’s ban on cryptocurrency had an immediate and significant impact on the global crypto industry. The price of Bitcoin, the largest and most influential cryptocurrency, fell by more than $2,000 in the wake of the Chinese announcement. Other cryptocurrencies also suffered losses as investors panicked and sold their holdings.
The ban also affected cryptocurrency mining, which is the process of using powerful computers to create new coins and verify transactions on a shared ledger called the blockchain. Mining consumes a lot of electricity and generates a lot of heat, so miners often look for places with cheap and abundant energy sources. China, with its relatively low electricity costs and cheaper computer hardware, has long been one of the world’s main centers for mining.
However, the Chinese crackdown has already hit the mining industry hard. In May 2021, China ordered banks and payment platforms to stop facilitating cryptocurrency transactions and issued bans on mining in several regions. In June 2021, it told major mining hubs such as Inner Mongolia, Xinjiang, Yunnan, and Sichuan to shut down their operations. As a result, many miners had to relocate their equipment or sell them at a loss.
According to Cambridge University’s Bitcoin Electricity Consumption Index (CBECI), China’s share of global Bitcoin mining power dropped from 75% in September 2019 to 46% in April 2021. Some of the displaced miners moved to other countries such as Kazakhstan, Russia, Canada, or the United States. However, some analysts estimate that up to 90% of China’s mining capacity has been offline since June 2021.
What Are Some Alternatives to Cryptocurrency?
Despite China’s ban on cryptocurrency, there are still some alternatives for people who want to use digital money or invest in crypto assets. Here are some examples:
- Stablecoins: Stablecoins are cryptocurrencies that are pegged to a stable asset such as the US dollar, the euro, or gold. They aim to reduce the volatility and risk of cryptocurrency while retaining its benefits of fast and cheap transactions. Some of the most popular stablecoins include Tether, USD Coin, and Dai.
- Decentralized exchanges (DEXs): DEXs are platforms that allow users to trade cryptocurrencies without intermediaries or central authorities. They use smart contracts and peer-to-peer networks to facilitate transactions and ensure security. Some of the most popular DEXs include Uniswap, SushiSwap, and PancakeSwap.
- Non-fungible tokens (NFTs): NFTs are unique and indivisible digital tokens that represent ownership of a digital or physical asset. They can be used to create, buy, and sell digital art, music, games, collectibles, and more. Some of the most popular NFT platforms include OpenSea, Rarible, and NBA Top Shot.
- Decentralized applications (DApps): DApps are applications that run on a blockchain network instead of a centralized server. They can offer various services such as lending, borrowing, gaming, social media, and more. Some of the most popular DApps include Compound, Aave, Axie Infinity, and CryptoKitties.
What Is the Future of Cryptocurrency?
The future of cryptocurrency is uncertain and depends on many factors such as regulation, innovation, adoption, and competition. In China, people can't access to cryptocurrency exchanges because there is no more crypto exchanges in China and they might have to use a VPN (科学上网) to access foreign crypto exchanges, due to the internet blocking in China. However, some experts believe that cryptocurrency is here to stay and will continue to grow and evolve in the coming years.
According to a report by PwC, a global consulting firm, the global crypto market capitalization could reach $5.6 trillion by 2030. The report also predicts that cryptocurrency will become more mainstream and integrated with existing financial systems, as well as more diverse and inclusive.
However, the report also warns that cryptocurrency faces many challenges and risks such as cyberattacks, fraud, scams, hacking, theft, regulatory uncertainty, environmental concerns, and social issues. The report suggests that cryptocurrency stakeholders need to collaborate and cooperate with each other and with regulators to address these challenges and create a more sustainable and responsible crypto ecosystem.