Analysis Of The Week: China's Crypto Clampdown

Analysis Of The Week: China's Crypto Clampdown​

The Story

Cryptocurrencies dropped like a stone on 19 May 2021, with Bitcoin falling from over $45,000 on Tuesday to $32,000 on Wednesday, in the wake of a clampdown in China.

A directive warned that “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” (Reuters).

In a message posted from China’s central bank on its WeChat account (MarketWatch), Beijing banned financial institutions and payment companies from providing services related to cryptocurrency transactions, and warned against accepting cryptocurrency as payment. The move signalled a clear intention to clamp down on speculation and fraud, stating that virtual currency “is not a real currency” and “should not and cannot be used as currency in the market” (Financial Times).

Dogecoin lost 40% of its value, and exchange bases such as Coinbase and Binance buckled as traders rushed to sell. The chaos followed falls of over 10% for bitcoin the previous week after Tesla CEO Elon Musk announced that the electric vehicle manufacturer would no longer accept Bitcoin payments. He cited the environmental impact of the cryptocurrency, 75% of which is mined in China.

Bitcoin slid again on 21 May 2021, as China’s Stability and Development Committee chaired by Vice Premier Liu He and the State Council said in a statement that tighter regulation is needed to protect the financial system. By 23 May 2021, crypto mining companies in China, including Huobi Mall and BTC.TOP, had announced suspension of their operations (Al Jazeera).

The Background

The People’s Bank of China’s policy strives for stability across investment, trade, and employment as well as the economy. The notorious volatility of cryptocurrencies, in particular market leader Bitcoin, conflicts with these aims. In 2017, China closed its local cryptocurrency exchanges, which had previously accounted for the majority of the world’s trading (Financial Times).

Cryptocurrency trading has been illegal in China since 2019 (BBC), but it has still been possible to trade Bitcoin online: because of its decentralized nature, Bitcoin is difficult to ban completely.

What It Means For Businesses And Law Firms

In a comment on Pinsent Masons’ website, Shanghai-based Senior Associate Leo Xin noted “The statement reemphasises the regulatory attitudes addressed in the Notice on Guarding against the Risks of Bitcoin issued in 2013.”

As ‘mining’ rigs potentially move away from China and into North America, opportunities and risks will present themselves. The need for greater regulation in the turbulent world of cryptocurrency is widely recognised, with concerns of market manipulation and uninformed retail investments. On 20 May 2021, the US Treasury Department announced it would require transfers of the asset class worth more than $10,000 to be reported to the Inland Revenue, noting that “Cryptocurrency already poses a significant detection problem by facilitating illegal activity broadly including tax evasion”. NYU Law School adjunct professor Winston Ma also told Reuters that he expects the Chinese government to roll out regulation for crypto assets in the future.

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