On September 24th, China’s Central bank announced that all transactions of cryptocurrencies are now illegal, banning digital tokens such as Bitcoin and Ethereum.
Though trading cryptocurrencies have been officially banned in China since 2019, the practice has continued online through foreign exchanges and is one of the worlds largest cryptocurrency markets.
However, there has been a significant crackdown this year, as China sees crypto as a “volatile speculative investment” that “seriously endanger the safety of peoples assets,” as well as having the potential to facilitate money laundering.
The statement from the bank makes it clear that those who are involved with such illegal financial activities, as crypto transactions now are, are committing a crime and will be prosecuted. It is also noted that any foreign websites providing these services to Chinese citizens online are also illegal.
Ganesh Viswanath Natraj, Assistant Professor of Finance at Warwick Business School, researches cryptocurrencies.
He said: “China’s ban on all cryptocurrency trading activity will have some short-term impact on currency valuation, but long-term implications are likely to be muted. For example, while retail traders in China may no longer be able to access online exchange platforms that are now illegal, crypto funds may be able to move management of their funds offshore. This ban will result in the migration of crypto investment opportunities to other hubs in Asia, such as Singapore’s launch of the DBS digital currency exchange earlier this month.
“The motives for the crypto ban are also not clear cut. Strategically, the People’s Bank of China’s pilot project of issuing a digital currency will face threats of competition from the private cryptocurrency market. By forcing a ban, it is ensuring significant adoption of the central bank’s digital currency.
“Another potential motive lies in traceability. A ban on private cryptocurrencies and issuance of a public digital currency will make it easier for the government to trace payments and clamp down on illicit activity.”
Adi Ben-Ari, CEO and Founder of Applied Blockchain said: “The cryptocurrency space has generated more innovation in the last 18 months than the financial services establishment has in two decades.The background to all this innovation is an open system that thrives through a lack of central control. China is increasing central control introducing innovation centrally on its own terms. Each approach has its merits.
“The balance is to let the innovation thrive while placing selective appropriate controls and measures to manage risk. Part of the challenge is the pace at which innovation and products in this space are emerging and funds are moving.”
Unsurprisingly, the news has caused the price of Bitcoin to drop, falling below $34,000 for the first time in three months after the ban was announced.
Other digital currencies such as Ether and Dogecoin have also falling, losing as much as 22% and 24% respectively.
Jonas Luethy, Sales Trader at the UK based digital asset broker GlobalBlock said: “Following last Friday’s news that China would once again ban crypto, BTC fell by nearly $5,000, sending a shockwave through the market. Most coins have now recovered to their previous levels, with some analysts suggesting that bitcoin is forming a bullish pattern and could break out above 45k. Ethereum is back above $3,000, and most altcoins are back in the green.
“Many have criticised the dip last week as FUD (fear, uncertainty, and doubt) since China has already banned cryptocurrency many times before. This kind of news usually causes a short-term pullback in the market but doesn’t really impact the fundamentals in the mid to long run. Offshore Chinese exchanges such as Huobi are no longer accepting new customers from mainland China and are closing all Chinese accounts from December 31st. Decentralised exchanges Uniswap and Sushiswap have seen a surge in usage, which is likely a result of China’s ban on centralised exchanges.
“Since DEX’s only require a crypto wallet and no KYC, it is much easier to use and can be set up in a matter of minutes. Decentralised derivatives exchange DYdX has seen a massive influx of new users, with DYdX having a higher trading volume than Coinbase for the first time ever. China-based cryptocurrency reporter Colin Wu mentioned that an increasing number of Chinese citizens are taking an interest in DeFi and he expects more and more Metamask and DYdX users to come out of China.”
Freddie Williams, Sales Trader at GlobalBlock, added: “We’ve seen little in the way of knee-jerk reaction from clients surrounding this news from China. This news follows the recent ‘Evergrande crisis’ earlier this week that sent the market tumbling. The market bounced back before this recent PBoC news broke and we could see a similar same pattern play out following this recent update.
The Fear & Greed Index tells us we’re in a state of fear, which might see temporary sell-off, but this is all due to China FUD (Fear Uncertainty and Doubt). The current adoption rate at the moment is significant and this is only positive for crypto.
We’ve also seen this before from China where news of bans have been reported over the years, but it has not prevented adoption of from continuing their upward trend.”