2021 may be remembered, because the overall volume of cryptocurrencies has become so large that regulators cannot ignore it at all. At present, we are in uncharted territory. Because the technology is disruptive, its path is neither predictable nor impossible. Global regulators are adopting different approaches from authoritarian to inclusive, and entrepreneurs are also adopting different approaches to actively participate.
Despite the challenges, China has played a fascinating and indispensable role in the development of crypto assets. In 2007, Tencent’s Q coin (QQ) preceded Satoshi Nakamoto’s white paper; in 2013, BTCChina became the first major exchange; later, Huobi, Okex, F2Pool and Poolin dominated the global trading volume and mining capacity.
The recent crackdowns on mining and cryptocurrency trading have further damaged cryptocurrency activities in the Chinese economy. In less than two months, China’s policy actions have brought shock waves to the cryptocurrency market, forcing many Bitcoin miners to move overseas. So, what does the government’s latest crackdown measures mean for China’s cryptocurrency, and how is it different from previous measures?
As early as 2013, five departments including the People’s Bank of China (the People’s Bank of China) issued a clear document prohibiting all financial and payment institutions from conducting any bitcoin-related business and closing the RMB channel.
On September 4, 2017 (known as the 9.4 Incident), the People’s Bank of China and seven national ministries issued a regulation banning ICOs and cryptocurrency exchanges because they were accused of illegal financing activities.
On May 21, 2021, Chinese regulators tightened restrictions and unambiguously cracked down on Bitcoin mining and trading activities.
China has taken a firmer stance on cryptocurrencies for two reasons: financial conservatism and stability goals.
The “Report on the Implementation of China’s Monetary Policy for the First Quarter of 2021″ issued by the People’s Bank of China in May 2021 set the tone for China’s next phase of monetary policy, clarifying that “a sound monetary policy must be flexible, targeted and appropriate. , Put the service of the real economy in a more prominent position, cherish the normal monetary policy space, and handle the relationship between economic recovery and risk prevention.”
At the peak of speculation, Chinese retail investors poured funds into “hot assets”, some of which were low-quality altcoins (such as LoserCoin, QiongB, etc.). Despite the government’s warnings, the hype is still spiraling and makes officials worry about it. After all, the goal of the People’s Bank of China is to promote stable and controlled growth in order to better serve the real economy and create a “virtuous cycle and healthy development of the economy and finance.”
The relevant department of the People’s Bank of China also pointed out that cryptocurrency trading activities disrupted “normal economic and financial order, breeds the risk of illegal cross-border transfer of assets, money laundering and other illegal and criminal activities, and seriously infringes the people’s property safety.”
Compared with the previous ban issued in 2017, the new rules are more stringent and greatly expand the scope of prohibited services. In 2017, the policy focus is on ICO, and this year’s policy is going deeper, focusing on controlling excessive energy consumption (in particular, mining) and over-the-counter transactions. Recently, any advertising related to cryptocurrency has been increasingly banned.
Cryptocurrencies, especially Bitcoin, are a challenge for Beijing because the People’s Bank of China cannot track the flow of funds. The People’s Bank of China has always been extremely concerned about the risk of instability in capital outflows. China is “going all out” to develop its own cryptocurrency, but of course, its Crypto currency/DCEP version will be controlled by its central bank. It is expected to provide the Chinese government with a large number of new tools to monitor its economy and people. This is consistent with China’s growing role in the global economy and in initiatives such as the “One Belt, One Road” initiative. According to the design, DCEP will deny one of Bitcoin’s main “deficiencies”: the anonymity of users.
China’s Fourteenth Five-Year Plan (2021-2025) spans 2021 (the 100th anniversary of the founding of the Communist Party of China), and it claims to be the great development and prosperity of the Crypto economy. This will also be a five-year period for the acceleration of blockchain innovation, the construction of an ecosystem, the widespread implementation of (applications), and the implementation of regulatory practices. Under the strategy of Chairman Xi Jinping’s “Vision 2035”, the blockchain has played a key role in the country’s Crypto economy in the three key directions of technological innovation, industry application and regulatory system.
According to current trends, China is separating the concept of cryptocurrency from the blockchain and advocating a token-free blockchain. It aims to turn DCEP/Crypto renminbi into a truly global currency. Under stricter restrictions by the Chinese government, trading volumes on major Chinese exchanges such as Huobi and Okex are declining. There is no doubt that China’s cryptocurrency environment has undergone profound changes in a short period of time.
Given China’s dominant market share in mining and trading, the strategic decision to exit surprised many people. It can be said that this is a financial dialogue decision, not a short-term business decision. These actions have changed the global and local cryptocurrency landscape. Most importantly, it caused a substantial adjustment in the hashrate, which is a windfall for the ongoing mining business. Estimates of hash rate recovery vary greatly, but at least it should be months rather than weeks, during which theoretically “forced” sales (to cover costs) will decrease.
Total hash rate graph
The negative side is that China is a large consumer of crypto assets, which will leave a blank. However, on the positive side, it is also a source of speculative volatility/leverage and raises concerns about the concentration of mining. As recently as 2015, China’s four mining pools controlled more than 50% of the world’s computing power. More decentralized mining and lower volatility around the world should facilitate institutional adoption.
For those who are still bullish, Bitcoin is anti-fragile. Taleb defines this: Anti-fragility transcends resilience or robustness, and some things benefit from shocks; when exposed to volatility, randomness, disorder, and stress, they thrive, like taking risks and taking risks. And uncertainty… the resilient people resist the shock and stay the same; the anti-fragile people get better.
One can describe China’s recent policy changes as a “state attack” on Bitcoin. Its survival proves its durability, and we will see whether it exhibits anti-fragility through reinforcement on the other side. The ongoing short-term bear market flow chart may give way to more bullish mid- to long-term fundamentals.