Budrul Chukrut | LightRakete | Getty Images
The Chinese central bank said Tuesday it had called for the closure of a company that was “suspected of providing software services for virtual currency transactions.” The statement issued by the Beijing Office of the People’s Bank of China also warned institutions not to offer other services related to virtual currency, including providing business premises or marketing.
The fight against digital currencies is nothing new to the authoritarian state.
In 2013, the country ordered third-party vendors to stop using Bitcoin. The Chinese authorities stopped selling tokens in 2017 and promised to continue targeting crypto exchanges in 2019.
But usually every time Beijing hit the crypto industry, Beijing has slacked off and the rules have eventually been relaxed.
This time, however, it seems to be different.
In May, China banned financial institutions and payment companies from offering crypto-related services. In June there were mass arrests in China of people suspected of shamefully using cryptocurrencies. In the same month, regulators increased pressure on banks and payment companies to stop providing cryptocurrency services, and Weibo, the Twitter of China, banned crypto-related accounts.
Read more about cryptocurrencies from CNBC Pro
By July, half of the world’s bitcoin miners had gone dark after Beijing’s call for crackdown on bitcoin mining and trading.
“China’s government is doing everything possible to ensure that Bitcoin and other cryptocurrencies disappear from the Chinese financial systems and economy,” said Fred Thiel, CEO of Marathon Digital Holdings and a member of the Bitcoin Mining Council.
So why did China essentially declare war on cryptocurrencies in 2021?
“We all wonder,” said Nic Carter, founding partner of Castle Island Ventures.
One theory suggests that it is part of a broader legislative and regulatory push ahead of the Chinese Communist Party’s centenary this year.
“They take action against all kinds of undesirable behavior,” Carter said.
Crypto has long been synonymous with crime on the mainland.
“The greatest Ponzi of all time in cryptocurrency was probably Plus Token, a Chinese project,” he said.
In this scheme, scammers tricked investors into $ 5.7 billion and arrested dozens. “You will remember that.”
Another theory is that China is clearing the runway for its own digital yuan, a central bank digital currency that has been in development since 2014.
“Part of it is to ensure the introduction of the Chinese central bank’s digital currency, and part of it is most likely to ensure that all economic activities can be captured by financial monitoring activities,” explained Thiel. The digital yuan could theoretically give the government more power to track spending in real time.
However, Carter argues that Bitcoin and the digital yuan are so different that they cannot really be viewed as direct competitors.
“That is certainly the most common reason given,” said Carter. “I just don’t know if I believe it. They are so different systems from each other. “
The most likely motivator, according to Carter, is that Beijing is trying to stem capital outflows via stablecoins and cryptocurrencies. “China stalling the flow of yuan to crypto is a big deal,” he said.
The price of bitcoin
When it comes to the price of Bitcoin, curbing all of China’s crypto retail “totally moves the needle,” Carter said.
“I think that actually explains a lot of the market weakness and sell-off,” he said. “The good news is that as the crackdown accelerated, Bitcoin stayed pretty flat, which suggests the market has digested that information.”
Thiel believes that the ban on Bitcoin and crypto will actually help Bitcoin in the long term.
“If China’s goal was to kill Bitcoin by shutting down 50% of its mining capacity and banning trading – plummeting its value to punish Chinese owners (a la Didi post-IPO and Ant Financial),” worked it not.
“Instead, Bitcoin has proven its resilience and trading has just moved overseas and miners elsewhere will fill the gap.”
Alyse Killeen, founder and managing partner of Bitcoin-focused venture firm Stillmark, points out that this whole conversation could be a moot point as a government’s ability to enforce a Bitcoin ban will continue to dwindle over time.
“I would expect this type of news to have less of an impact on Bitcoin’s exchange rate than it has in the past,” she said. “It is also true that this news has to some extent been inoculated by the industry – Bitcoin has been banned many times in many regions, yet adoption today is outperforming the Internet at a similar stage in its life cycle.”