Crypto crash: How China came to crack down on bitcoin – and where it might go from here

·2-min read
A man talks on a mobile phone in a shop displaying a bitcoin sign during the opening ceremony of the first bitcoin retail shop in Hong Kong (AFP via Getty Images)
A man talks on a mobile phone in a shop displaying a bitcoin sign during the opening ceremony of the first bitcoin retail shop in Hong Kong (AFP via Getty Images)

China’s relationship with cryptocurrencies has been a turbulent one with several crack downs since 2013 affecting the values of the digital coins, including Bitcoin, with ripples felt across the world almost once every bull cycle.

On Tuesday, Chinese regulators banned the country’s financial institutions and payment companies from providing services related to cryptocurrency transactions while also warning investors against speculative crypto trading.

The new restrictions add on to previous bans that have limited the use of Bitcoin and other cryptocurrencies in the country - the first of which can be traced back to 2013.

Interest in Bitcoin skyrocketed in China in 2013 following nationwide media attention to a fundraising event along with the founding of the crypto exchange Huobi, and mining hardware manufacturer Bitmain.

But in December that year China banned its banks and domestic exchanges from transactions involving the cryptocurrency.

Through most of 2016, bitcoin prices rose again in China amidst a weakening Yuan but the country’s regulators swooped in again and banned initial coin offerings (ICOs) in September 2017 to protect investors and curb financial risks.

The commitee that advised this 2017 ban expressed concern that some ICOs, which are fundraising platforms that help in creating and selling new crypto tokens, could be financial scams and pyramid schemes.

In the subsequent months, leading to January 2018, the moves reportedly led to a 65 per cent crash in BTC price, and 90 per cent of blockchain-focused venture capital firms in China left the market.

According to the People’s Bank of China (PBoC), close to 90 virtual currency trading platforms and 85 ICO platforms had left the market by July 2018.

Then starting from 2019, the Chinese government also began stressing on the importance of blockchain technology, even initiating plans to set up its own Central Bank Digital Currency (CBDC)

The PBoC set up The Digital Currency Research Institute to conduct research in digital currency and study tools like blockchain and the Distributed Ledger Technology (DLT) to help implement CBDC.

Now the latest ban comes after a week of decline in values of several cryptocurrencies, including Bitcoin, following a global BTC bull run.

“Recently, cryptocurrency prices have skyrocketed and plummeted, and speculative trading of cryptocurrency has rebounded, seriously infringing on the safety of people’s property and disrupting the normal economic and financial order,” the regulators noted in a joint statement on Tuesday.

The current directive could make it more difficult for people to buy cryptocurrencies in China and may throw more hurdles for miners to exchange cryptocurrencies for Yuan, but some investors say this is part of a “once in a bull cycle ban,” that the country enforces on the digital currency.

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