The Digital Yuan vs. Bitcoin. What’s Driving China’s Witch Hunt Against Cryptocurrency?
Blockchain companies continue to leave China amid tightening regulations. So what is the reason for this, and why is the country likely to only increase pressure on the digital asset industry in the future? Let’s try to figure it out.
From about mid-May, the Bitcoin rate fell by almost 50%, to $34 thousand. Cryptocurrency quotations began to decline sharply after the tightening of regulation of the digital asset market in China. Until that time, the country was one of the leaders in the industry, including in terms of the number of Bitcoin miners. However, we can say that now everything has changed; in the last two months, miners and companies associated with the crypto sphere have begun to leave China.
A couple of days ago, blockchain company IBC Group announced its plans to close data centers for cryptocurrency mining located in China. The company intends to transport equipment and employees from China to the USA, Canada, the United Arab Emirates, Kazakhstan, Iceland, and various South American countries.
The very beginning
On May 19, three Chinese financial regulators, which oversee online financial transactions, the payments market, and clearing, banned local financial institutions from providing services related to cryptocurrencies. The statement explained that virtual currencies are not supported by real value, their prices are easy to manipulate, and trading contracts are not protected by Chinese law. After that, the Bitcoin rate fell by a third per day, to $30 thousand.
A few days later, Vice Premier of the State Council of PRC Liú Hè called for stricter mining and crypto trading regulations in the country. In addition, the government news agency Xinhua published an article “Urgently eliminate the hype and chaos around virtual currency.” It discusses four risks associated with trading and using cryptocurrencies: market, transactional, technology, and compliance.
Against the backdrop of negative rhetoric regarding cryptocurrencies, miners began to stop work in China at the end of May. BTC.TOP and HashCow were the first to stop mining bitcoins. Also, the cryptocurrency exchange Huobi announced the suspension of mining.
Last month, four Chinese provinces imposed a mining ban in two weeks. For example, the authorities of Sichuan, a major mining center for cryptocurrency, have approved measures to discourage mining in the region. First of all, this affected 26 companies that worked officially.
The People’s Bank of China also met with representatives of five Chinese banks and the Alipay payment system. The regulator instructed financial institutions not to participate in transactions with digital assets. Following this, the Agricultural Bank of China (ABC), the third-largest banking institution in the PRC, issued a warning to ban digital asset transactions. The bank promised to block all such transactions and terminate contracts with clients who performed them.
What is the possible reason
It is logical to assume that the Chinese authorities have set a goal to promote their own digital yuan; therefore, they are fighting and will continue to fight against unofficial cryptocurrencies at the state level. Thus, the Chinese are “clearing” space.
China wants to make the yuan the world’s primary reserve currency; this can only be done through new technology — the digital yuan. Any unofficial currencies alienate the country from the world leadership in this new area.
Likely, the tightening of cryptocurrency positions from several national provinces will also intensify since Bitcoin is not controlled, which means it poses a threat.
About digital yuan
A thousand years ago, when money was in the form of coins, China was the first to invent paper money. It is not surprising that now the Chinese government is doing its best to stand out.
The Chinese version of the digital currency is controlled by its central bank, which will issue new electronic money — effectively going against the essence of cryptocurrency. This is expected to give the Chinese government extensive new tools to monitor its economy and people; this is what is happening now.
At the end of June, passengers on the Beijing subway were able to purchase tickets using the digital yuan. And two weeks earlier, the Industrial and Commercial Bank of China (ICBC) was the first in the country to allow its clients to convert digital yuan into cash and cash into digital yuan.
Last year, the IPO of Ant Financial, Alibaba’s fintech business, was disrupted, most likely due to fears by the Chinese authorities that the Alipay payment system will compete with the digital yuan. We can say that now a similar trend is observed in the case of cryptocurrencies.
We may try to conclude that it’s not about miners but about supporting the widely implemented digital yuan. But, fundamentally, nothing new has been adopted recently — the existing restrictions have already been specified in regulatory acts since 2017, but now they have begun to be observed.
In September 2017, the People’s Bank of China banned initial token offerings (ICOs) in the country. This is most likely why the Chinese authorities are not revising their policy about digital assets but are implementing the practices and laws adopted earlier.
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