Last Monday, June 21st, the People’s Bank of China (PBOC, China’s central bank) announced that it had recently summoned several major banks and payments companies to call on them to take tougher action over the trading of cryptocurrencies.
As per the statement published by the PBOC that day, banks were told to not provide products or services such as trading, clearing and settlement for cryptocurrency transactions. This follows an order from the previous Friday to stop Bitcoin mining in the Sichuan province.
These movements do not come as a surprise, since the Chinese Government has been intensifying its crackdown on crypto currencies these last few weeks, a crackdown that started in September 2017, when the Government took a series of regulatory measures related to crypto currencies, mainly due to the concern over financial risks associated with such assets.
For example, the practice of raising funds through initial coin offerings (ICOs) is completely banned in China. On September 4, 2017, seven Chinese central government regulators -the People’s Bank of China (PBOC), the Cyberspace Administration of China (CAC), the Ministry of Industry and Information Technology (MIIT), the State Administration for Industry and Commerce (SAIC), the China Banking Regulatory Commission (CBRC), the China Securities Regulatory Commission (CSRC), and the China Insurance Regulatory Commission (CIRC)- jointly issued the Announcement on Preventing Financial Risks from Initial Coin Offerings (ICO Rules) for purposes of investor protection and financial risk prevention.
Under the ICO Rules, ICOs that raise cryptocurrencies, such as Bitcoin and Ethereum, through the irregular sale and circulation of tokens are essentially engaging in public financing without official authorization, which is illegal.
Last month, in May 2021, Chinese-mainland authorities took a tougher stand on cryptocurrencies by imposing a new ban covering services that had not been mentioned previously.
Financial institutions and payment companies have now been barred from providing services concerning cryptocurrency transactions, and investors have been warned against engaging in speculative crypto trading. In other words, institutions must not accept virtual currencies, use them as a means of payment and settlement, nor offer their clients services involving cryptocurrencies, such as registration, trading, clearing and settlement.
At the same time, China, on one hand, is promoting the Digital Yuan, and, on the other hand, the Chinese Government is adopting a tough approach on cryptocurrencies and virtual-currency trading platforms, as I have just explained.
Is that consistent? Indeed, it is.
This is so because, unlike what some people think, the Digital Yuan is a Central Bank Digital Currency (CBDC), and CBDCs are not crypto currencies.
The rationale behind CBDCs and cryptos is actually the opposite: whilst CBDCs are Central Bank Money adopting a digital form (therefore, legal tender issued by a central bank, representing a claim against that central bank) and thus centralized, crypto currencies are a key pillar of the movement known as DeFi (Decentralized Finance) and are established by private entities and supported by numerous distributed nodes that are incentivized through block rewards to maintain the network. In other words, the rationale behind CBDCs is centralization, while the one behind cryptos is the opposite.
But, why this crackdown on crypto currencies?
Cryptos pose certain risks and challenges, such as their volatility (financial risks), as well as regulatory and energy consumption-related risks, which need to be solved, especially those concerning energy consumption.
I myself am not against crypto currencies, but I am aware that these risks need to be taken into consideration.
When it comes to the environmental footprint, the main issue comes from bitcoin mining. Investopedia defines “bitcoin mining” as the “process by which new bitcoins are entered into circulation, but it is also a critical component of the maintenance and development of the blockchain ledger. It’s performed using very sophisticated computers that solve extremely complex computational math problems”.
An analysis published in February by the Cambridge Centre for Alternative Finance said bitcoin mining uses more electricity annually than the whole of Argentina, consuming around 121.36 terawatt-hours annually, which is, undoubtedly, a very high amount and an environmental conundrum.
The mainland’s latest crackdown on bitcoin mining and trading has forced many cryptocurrency miners to halt all or part of their operations in the country. China accounts for up to 65 percent of the world’s bitcoin mining, especially in the Inner Mongolia autonomous region, which accounts for 8 percent globally — more than the total amount in the United States.
Therefore, if bitcoin mining is a problem worldwide due to its high energy consumption, it is even a bigger problem in China due to the fact that almost two-thirds of the world’s mining activities takes place there.
Although the ban on bitcoin mining has drawn criticism, I think it is perfectly in line with China’s current goals. Under the 14th Five-Year Plan (2021-25) for National Economic and Social Development and the Long-Range Objectives Through the Year 2035, China aims to reach its carbon emissions peak before 2030 and become carbon neutral before 2060.
When it comes to the financial risks, it is undeniable that, despite crypto currencies offering many opportunities, their high level of volatility makes them a risky asset class that should be approached carefully.
To sum up, is China’s ban compatible with its policies? To me, it is. It is fair and respectable for every country to adopt a different approach toward cryptocurrencies. While some countries, like Singapore, can be more “crypto-friendly”, other nations may take a tougher stand, like China, and it is understandable.
China’s latest ban on cryptocurrencies seems perfectly in line with its policies, especially when it comes to bitcoin mining and the goal of becoming carbon neutral as listed in the 14th Five-Year Plan.
Besides, there is no contradiction in China promoting the digital yuan on one hand and encouraging Chinese companies to seize the opportunity offered by blockchain technology on the other, while it takes a tougher line against cryptocurrencies and virtual-currency trading platforms, since central bank digital currencies (like the digital yuan) and cryptocurrencies are not the same.
The author works as a FinTech Advisor and Researcher. He holds an MBA and a doctorate in Hong Kong real estate law and economics. He has worked as a business analyst for a Hong Kong publicly listed company and has given seminars on Central Bank Digital Currencies and Blockchain in many international conferences and universities.