China is the second biggest country trading in cryptocurrency, with America being the first, but it is no secret that it has recently been aggressively pursuing ways to restrict the use of cryptocurrency within its borders. Earlier this year the Chinese government shut down multiple computer farms where bitcoin was being mined, and, just last month, made all cryptocurrency transactions illegal. The latest step in the government’s campaign against the currency came in September when The People’s Bank of China (PBoC) outlawed “overseas facilities offering services inside China”. The PBoC has further suggested that any local staff assisting with the operation of these businesses will be “investigated according to the law”, including anyone simply providing marketing or IT support services to foreign cryptocurrency platforms.
The PBoC claim that their ban was necessary as cryptocurrencies threaten people’s safety. They say it breeds “illegal and criminal activity such as gambling, illegal fundraising, fraud, pyramid schemes and money laundering”. Users, thought to be in China, received roughly $150m worth of cryptocurrency in the form of digital coins between January and June this year, so the ban will undoubtedly prove to be a huge loss to the crypto markets. However, the ban will be difficult to enforce as an intrinsic part of crypto is its decentralised exchanges that collect very little information about their customers, if any at all. This makes identifying users of crypto exchanges very difficult for regulatory agencies and governments. Additionally, restricting access to crypto platforms online is unlikely to deter the more tech-savvy traders who will likely access the banned platforms via Virtual Private Networks (VPN). Evidently, bans like these are not infallible and can be circumvented, proven by countries such as Egypt where crypto trading has been banned under Islamic law since 2018, yet 4% were reported to own cryptocurrencies in 2020.
When a country restricts a cryptocurrency provider from operating in their vicinity, the provider commonly bypasses the restriction by still allowing customers to come to them, but not soliciting customers in those locations (i.e. via ad campaigns, events etc). For example, Binance is one of the largest cryptocurrency trading platforms in the world and has many users based in the UK even though it is not authorised to operate within it. Many crypto platforms operate in a similar way and evade regulators by being particular about where they register their business and where they operate from. Financial regulators attempt to deter investors from using these platforms by stating that these offshore providers are not officially authorised. Sometimes, like China, they will threaten to pursue legal action against anyone doing business with these platforms.
Some countries have embraced the futuristic currency, like El Salvador who recently became the first country to adopt Bitcoin as legal tender, but cryptocurrency is more often criticised and eyed with suspicion by governments. The criticism commonly centres around the fact that cryptocurrency cannot be regulated, that it is used by criminals, and that it can help citizens to circumvent capital controls. China has also highlighted the environmental damage crypto can cause because of the amount of electricity required to mine it. While all three are valid reasons, the matter of regulation is, I believe, the crux of the issue for governments as they are not in control of it. Cryptocurrency is a market disruptor, it upsets the established financial systems, and as it becomes more widely adopted, more mainstream, and easier to use, governments will scramble to ban it or place any regulation on it that they can.
Alongside the ban, China is attempting to undermine the popularity of cryptocurrency by creating it’s own e-currency, the first country to do so. In development since 2014, the digital version of their yuan currency, officially known as the Digital Currency Electronic Payment (DCEP) is currently been trialed in a handful of Chinese cities. The currency is intended to digitalise and replace some of the physical cash in circulation. Tellingly, the deputy governor of the PBoC Fan Yifei said that there is a need for this digital currency as physical currency is easy to counterfeit and used for illicit purposes due to the anonymity of it. Inevitably, the DCEP will enable the government to more closely monitor its people and the economy.
Crypto’s unregulated and decentralised nature threatens to destabilise the financial order that the Communist Party of China and its leader Xi Jinping have worked so hard to establish over recent decades. So, until crypto can be controlled or regulated, it is easier to place a blanket ban on transactions. Unlike other countries who are coming around to the idea of digital currencies, we are unlikely to see China lifting or softening their restrictions any time soon.
Robert Caple 