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China has recently announced it will ban all forms of cryptocurrency. Now, the virtual economy has gotten jabbed in the past by similar actions, but this time might put a lid on the coffin.
Over the years, the Chinese government has dropped many restrictive measures on cryptocurrency - bitcoin, in particular. Sources say there have been eighteen different occasions where crypto was put in check. Each time, there was a new layer of limitations on how citizens could use crypto.
This time, the Asian superpower declares that all crypto transactions are illegal, including mining. We can interpret this in many ways, but on the surface, it looks like you can no longer pay for Chinese products or services with cryptocurrency.
The whole ordeal sure sounds like a bummer to everyone, but things might not be as bleak as they seem. Most investors would have expected bitcoin’s price to fall badly, but it didn’t. The most recent bitcoin crash had a lot more to do with El Salvador’s ambitious experiment than anything. The price has gone up since then, zooming past China’s breakup text.
That said, there will be economic ripples. Eastern-oriented exchanges will soon start seeing some effects. The most affected are Chinese citizens who have been banking on crypto’s success. How they’re going to deal with the new full-size ban, we’ll have to wait and see.
Let’s talk about some of the things that might happen in the short term.
The Devil in the Details
China said that all crypto transactions would become illegal. But what exactly qualifies a transaction?
According to Investopedia, a transaction is an agreement between two parties, which involves goods, services, and money. So, in other words, you can no longer make retail purchases or pay for services using cryptocurrency.
On the flip side, there are a lot of things that don’t qualify as transactions. For example, holding cryptocurrency. Bitcoin wallets like Exodus and Electrum have been around forever and aren’t regulated by any centralized entity. The government can still track the coins, but only when they move.
While pertaining to no financial benefits, hoarding stacks of crypto doesn’t seem to violate the new law. Technically, Chinese citizens could still get richer by the minute as long as the coins they hold maintain an uptrend.
Aside from holding, the matter of transactions raises other questions. Is buying crypto illegal? When you purchase coins with fiat currency, would it make them a product?
While the ban does specify that all crypto exchanges are barred from serving Chinese residents, what about decentralized platforms like Uniswap? Going after these guys would be a long and arduous process, but China and trying hard have always gone hand in hand.
At some point in 2019, China had accounted for 75% of bitcoin mining energy around the world. Due to low electricity costs and cheap equipment, the country was the center of the crypto mining industry for the longest time. It became so prevalent that there was a noticeable shortage of computer graphic cards and increased power shortages.
That number has since dropped significantly after the 2020 pandemic and China’s recently growing energy crisis. With all that going on, China really doesn’t have the time to deal with bitcoin mining. In that regard, the crypto ban seems to make perfect sense.
Chinese miners now have two options: take their mining offshore or sell their equipment and call it a day.
The first option seems much more time-consuming. Some people own a warehouse worth of mining rigs. There are mining companies with thousands of heavy-duty computers. Packing up and leaving isn’t doable if you’re one of them.
What they might do is sell their equipment at low prices to cut their losses. We may see a sharp rise in hardware supply within months. They could sell to individuals who would then take their stuff out of the country and continue mining. Either way, the grind goes on.
China has strongly stated that crypto exchanges are barred from providing services to its residents. Many reputable platforms are already in the process of terminating their Chinese accounts in light of that. While they do operate outside of governmental regulations, the reaction may have been a matter of inconvenience.
Decentralized exchanges like Sushiswap are a different story. They are based mostly on a peer-to-peer network. China would have to go after individual liquidity providers or ICO holders for every case. The developers could block Chinese IPs, but they would easily bypass that with a VPN. Not to mention that it would take away the core element of decentralization.
Chinese crypto holders might quickly sell their coins on DEX for stablecoins like the USDC before the bill takes effect. This would prevent losses from future fluctuations. Later, they could get out of the country and exchange the stablecoins for fiat currencies.
Let’s Wrap up with the Why
China says the ban on cryptocurrency was due to its speculative nature. It doesn’t make sense to the Chinese government that people invest in uncertain futures. While that’s an interesting take, Tencent stocks fell by 6% following China’s most recent restriction on video games.
Certainly, nobody at one of the world’s largest tech companies saw that one coming.
On the other hand, China is also normalizing its own digital currency - the Digital Chinese Yuan (e-CNY.) This little coin will replace the citizens’ longing urge for crypto. It will provide fast payment and seamless transactions, just like bitcoin. The only difference is it’s centralized, and the government has full control over its circulation. This isn’t a new concept by any means. Western countries like the US and the UK have also mentioned minting their digital currency.
The Asian leader is confident that the digital yuan would overpower the allure of bitcoin and every other of its kind. If that’s true, his may be the end of the road for crypto enthusiasts in China.
However, people say the more taboo something is, the more alluring it becomes.
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