25 March 2023
Why did China Prohibit Cryptocurrencies?
The People's Bank of China (PBOC) prohibited the use of Cryptocurrencies in late September 2021. The People's Bank of China (PBOC) has said that Cryptos pose a rising danger to China's financial system due to their highly speculative character and their role in aiding financial crimes. Yet, preventing money outflow from China is another plausible justification for the Cryptocurrency prohibition. Between 2019 and 2020, more than $50 billion in bitcoin is expected to leave East Asian accounts and be sent to locations outside of the region, as shown by statistics from the Chainalysis Blockchain platform. Chainalysis analysts assume that most of this gross outflow of bitcoin was really capital flight from China, given the country's disproportionate representation on Cryptocurrency exchanges in East Asia.
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What Does Cryptocurrency Ban Include?
Using digital assets in the case of Cryptocurrencies ban can be broken down into three areas:
1. Bitcoin Mining
When China passed a law prohibiting the mining of Bitcoin, it also made it unlawful for Chinese citizens as well as corporations to mine other proof-of-work Cryptos.
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2. Crypto Trading and Transactions
The purchasing, sending, or receiving of virtual currencies such as Bitcoin or Ethereum by Chinese venture capitalists is not authorized under any circumstances. Several jurisdictions also have rules banning the sale and purchase of NFTs and other digital collectibles or non-fungible tokens.
3. Employment in Crypto Industry
The Chinese authorities are working to stifle advancement in the country's Cryptocurrency industry. There is a risk of serious repercussions for just about any entrepreneurs or IT businesses who engage in the trading of Cryptos.
The keeping of virtual currencies such as Bitcoin, Dogecoin, or Ethereum is not specifically prohibited by any laws, despite the fact that it is against the law to use and purchase Cryptocurrencies. Hence, Chinese people who currently possess Cryptocurrency stored in a wallet are not in violation of any regulations that are now in effect.
Capital Controls and Cryptocurrency Exchanges
As part of its stringent capital restrictions, China allows just $50,000 to be purchased in foreign currency each year. For this reason, the capital flight made possible by Cryptocurrencies stands out. In the past, wealthy Chinese individuals and companies evaded capital regulations by secretly buying up overseas property, inventing new ways to bill for international commerce, and even pressuring their staff to move their earnings to offshore accounts. Bitcoin has made it easier for Chinese citizens to purchase international assets outside of the country without drawing attention from the government. Since Bitcoin as well as other blockchain-based Cryptos are decentralized, they are far more readily able to be used to avoid capital restrictions than a traditional currency transaction that leverages the banking institution.
Even with all the regulations in place, the Chinese government continues to be apprehensive about a possible flight of funds. Whereas some observers have claimed that capital flight increased dramatically between 2009 and 2018, the efficacy of these measures is open to considerable debate. Meanwhile, the People's Bank of China (PBOC) shut down all domestic Cryptocurrency exchanges that year. The 2017 prohibition does not outlaw possession or mining of Cryptocurrencies, which the 2021 prohibition eventually does. While capital flight was not cited as a justification for China's Cryptocurrency ban in 2017, other limitations on foreign investments by Chinese corporations were imposed that year by Chinese officials. China's crackdown on Cryptocurrency exchanges in 2017 might be considered as a precursor to the country's crackdown on foreign investment by Chinese enterprises later that same year.
Tether (USDT) is a stablecoin that is theoretically tethered to the worth of the US dollar, and Chainalysis reports that it is a major facilitator of capital flight from East Asia. As a result of the PBOC's crackdown on Cryptocurrency exchanges in China in 2017, Tether's popularity soared. In spite of the PBOC's ban on Cryptocurrency exchanges in 2017, Chinese Cryptocurrency traders may still obtain Tether via covert transaction through over-the-counter brokers or the use of overseas bank accounts. Tether is widely used in China, says Philip Bonello, a former director of research at Grayscale, since its value is steady due to being nominally tied to the US Dollar. This makes it simple for users to convert Tether to any fiat money.
Did the Ban have any After Effects?
Because of China's restriction on Bitcoin mining, the hash rate of the Bitcoin network has dropped dramatically. China's contribution to the Bitcoin network in May 2021 was recorded as 70.9 exhalates per second (Eh/s) on the Cambridge Bitcoin Electricity Consumption Index (CBECI), but it fell to zero by July of that year. From above 150 Eh/s, Bitcoin's overall hash rate plummeted to below 100 Eh/s throughout the same time frame. As a result of the China mining ban, many Chinese Bitcoin miners left for countries that are more welcoming to the Crypto business, such as Kazakhstan, where the country's share of Bitcoin's overall hash rate grew. Bitcoin's overall hash rate kept rising even in the months that followed. The Bitcoin hash rate in January 2022 was close to 200 Eh/s, which was much more than it had been before China banned Bitcoin.
Disclaimer: The author’s thoughts and comments are solely for educational reasons and informative purposes only. They do not represent financial, investment, or other advice.