On the 24th of September, the People's Bank of China (PBOC) announced that all cryptocurrency-related transactions - fiat-to-crypto or crypto-to-crypto trading - were illegal in the country and must be banned, amid concerns around national security and safety of people's assets.
This is not the first time China issues warnings, restrictions or bans. The history of China’s Bitcoin bans started in 2013 when the PBOC forbade banks from handling Bitcoin transactions. At the time, individuals were still allowed to engage in Bitcoin trading while the PBOC hinted at plans to further regulate cryptocurrency exchanges. In September 2017, local exchanges were ordered to cease operations. In June 2019, the PBOC issued a warning against Bitcoin mining under the cover of fighting pollution and the fact that mining does not adhere to relevant laws and regulations.
This time, the news announced last September seems more severe for various reasons:
- The tone of the new policy is tougher than in 2017 as crypto activities are now stated as illegal.
- The new policy was co-signed by the Supreme People’s Court, the Supreme People's Procuratorate and the Public Security Ministry, suggesting law enforcement agencies are now directly involved.
- On the same day, a separate policy was released designed to intensify the crackdown on crypto mining specifically. It aims at clearing out all crypto mining operations that still remain in the country. In March 2021, authorities in China’s Inner Mongolia already stopped local bitcoin mining activities.
Consequence on mining and BTC price
We can expect the China’s cryptocurrency sector to be over for now. Miners have moved to other countries – from Kazakhstan to Canada and the US – or are clearing out their computers at competitive rates. Bitcoin's hash rate dropped from its all-time high of around 198 exa-hashes per second (EH/s) on 15th of April 21 to 147 EH/s on the 3rd of October 21. We can note that the Bitcoin's hash rate has started its downward trend since mid May, probably because the miners have moved their equipment during the rainy season in the country.
Bitcoin Network Hash Rate
As an immediate effect of the recent announcement of the Chinese ban, Bitcoin prices fell but then quickly recovered. The same trend was observed in 2017 and 2019.
Bitcoin prices - 7 Sept 21 to 7 Oct 21
A shift towards Decentralised Exchanges?
Data shows that crypto holders have shifted to Decentralised Finance protocols following China crackdown and the fears of stricter US regulation. Chinese crypto traders are pushed onto decentralised finance (DeFi) offering a censorship-resistant version of traditional finance. These blockchain-based organisations can provide several services and are not nominally controlled by any single party or company. Traditional finance products, on the other hand, have barriers to entry, with various intermediaries blocking access to certain types of people and intervening with transactions.
Activity on decentralised exchanges like Uniswap and the decentralised derivatives exchange dYdX has been on the rise recently as Chinese investors’ have moved their crypto activities to those exchanges.
A shift towards a greener energy?
In September 2019, 75% of all global mining was produced in China using fossil fuels as primary energy resource. Since then other hubs have emerged, where miners use greener energy sources, such as wind power in Texas, hydroelectric power in Quebec, geothermal power in Iceland. Digital assets, known to be energy consumers, are now becoming a greener and more sustainable asset class. Are cryptos going green? explores this topic further.
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