China Declares All Transactions Involving Cryptocurrencies Are Illegal
China’s central bank said the rising popularity of cryptocurrencies has fostered 'money laundering, illegal fund-raising, fraud, pyramid schemes, and other illegal and criminal activities.”
China's central bank has doubled down on its moves to crush cryptocurrency and announced that all transactions involving cryptocurrencies are illegal, effectively signaling an outright ban.
People’s Bank of China said in an announcement on Friday services offering transactions, trading, token issuance, and derivatives for cryptocurrencies are “all illegal financial activities and are strictly prohibited.” They added that overseas virtual currency exchanges that provide services to Chinese residents through the Internet were also engaging in illegal financial activity.
The announcement, written in Chinese, is currently not mentioned on the English language version of the website.
Cryptocurrency markets have been struggling in recent weeks and this announcement triggered another downturn, with the price of Bitcoin falling by more than $2,000 (£1,460) in the wake of the news, while other leading cryptocurrencies like Ether, EOS, Litecoin, and Dash all saw significant losses.
Meanwhile, China's National Development and Reform Commission (NDRC), an important macroeconomic management agency, has recently said it would launch a nationwide crackdown on cryptocurrency mining, according to Reuters. The NDRC said that crypto mining activity is risky and contributes very little to China's economic growth. It also cited environmental concerns, arguing that the cryptocurrency mining industry consumes a vast amount of energy and could hamper the country's carbon neutrality goals.
This latest move by China has been brewing for a while. In May 2021, they signaled a crackdown on cryptocurrency payments saying banks and online payment channels should not accept cryptocurrencies as payment or offer services related to them.
The reason behind this crackdown, which is also being seen in many countries across the world, is multifaceted. In their recent statement, China’s central bank said the rising popularity of cryptocurrencies has resulted in “disrupting economic and financial order, breeding money laundering, illegal fund-raising, fraud, pyramid schemes, and other illegal and criminal activities.”
However, as any crypto-bro would love to tell you, the volatile new world of cryptocurrency also threatens to shake up the global financial system and undermine the strength of national fiat currencies.
The Chinese Government has been testing its own national digital currency, electronic Chinese yuan, or any, in a number of major cities across the country. Many other countries, including the UK and the US, have also started developing their own central bank digital currency (CBDC). Like cryptocurrencies, CBDCs attempt to provide digital money that can move faster and make online financial tools more accessible. Unlike cryptocurrencies, CBDCs will not be decentralized and central banks will maintain some degree of control over them.
Confusion reigns after China slams door on crypto
China effectively banned all trading in cryptocurrencies last week, leaving investors scrambling for legitimate options to cash in their holdings.
Bitcoin miners landed firmly in the crosshairs of Chinese authorities starting this spring
Shenzhen, China – Moves by Chinese authorities to close regulatory loopholes around cryptocurrency trading and mining late last week essentially banned all such activities in China overnight. And many crypto holders are still scrambling to deal with the fallout.
For many companies that made big bets on crypto over the past several years – particularly companies in the tech industry – options may be limited for cashing in their holdings.
The directive from the People’s Bank of China declared all virtual currency-related business activities illegal, cutting the country off from overseas crypto exchanges. That could potentially lead to punishment for investors who deal with exchanges abroad.
“What is a little unclear is when the timeline for the literal cut-off date is,” said Winston Ma, an adjunct professor at New York University and expert in global financial regulation.
“When is that magic date for no more transactions, no more crypto holdings?” he asked Al Jazeera in a video call.
Ma said that technically last Friday – the day the notice was issued – could be considered the effective date, but even that hasn’t been specified.
“Especially listed companies, they have far more compliance obligations than retail investors, so you can imagine they have to think about what the right way is to comply with this regulation,” Ma said.
Nearly a week later, that lack of clarity remains.
“This is a space I continue to watch as we do not really know what is going to take place,” Kevin Desouza, professor of business, technology and strategy at Queensland University of Technology, told Al Jazeera in an e-mailed response to questions. “There are too many variables in play right now to say with any certainty what the options are.”
This uncertainty has led to constant calls, emails and messages from confused clients to people like El Lee, chief operating officer of Singapore-based crypto asset custodial firm Digital Treasures Management.
The headquarters of the People’s Bank of China, which issued a directive last week effectively banning cryptocurrency trading and mining in China overnight [File: Jason Lee/Reuters]
“Honestly no one saw this coming,” Lee told Al Jazeera in a video call regarding the swiftness of the actions, not necessarily that it was unknown regulations would eventually tighten. “I think the key thing this time is that it outlaws anything dealing with virtual currency.”
For anyone trying to change crypto into Chinese yuan, that would be “relatively impossible”, said Lee, under the new regulations. Other options may exist for switching a cryptocurrency like Bitcoin over to stablecoin on a decentralised exchange and later exchanging it for fiat currency outside of China, he said.
Lee also noted that there are still questions about how the regulations will address past issues that arose where intermediaries engaged in trades and potentially committed fraudulent activities – and whether those activities could be punished retroactively.
“The question on that is whether the law applies backward, because the new ruling came after those activities,” Lee said.
“Does it apply to those speculative cases or is it just forward-looking? There’s no way to tell whether it is retrospective.”
Down with Bitcoin
Since 2017, crypto traders and miners in China – wary of the tightening regulatory noose – have been relocating abroad.
But this year, nails for the crypto industry’s coffin in China have been multiplying fast.
Bitcoin miners landed firmly in the crosshairs of authorities starting this spring. Miners run banks of powerful computers in a race to verify transactions in exchange for new Bitcoins. Their “rigs” consume vast amounts of electricity.
From May through June, crypto mining bans spread from Inner Mongolia, to Yunnan, to Sichuan in what authorities said was an effort to meet energy efficiency targets, although most of the energy used was either not grid-connected or excess supply not sold to the grids.
Not surprisingly, sales of cryptocurrency mining equipment have taken a hit. And this week, Alibaba Group announced a ban on all sales of such equipment along with any other hardware and software used in mining and trading on its global wholesale platform starting on October 8.
The pending death of the industry in China is also on display in Shenzhen’s famous Huaqiangbei market, where virtually any electronic equipment or component can be found within a few city blocks.
A year ago, two floors of SEG Plaza were primarily populated by vendors of crypto mining equipment and software. Now, the few that are left are mainly scattered about the fourth floor, crowded out by stalls with printers, walkie-talkies, used computers and other gadgets.
“The regulations have definitely hit our business,” a crypto mining machine salesman who declined to provide his name said. “There’s not much we can do about it, and [we] can’t sell here now, but we’re still selling overseas.”
The salesman estimated that only around 40 percent of the crypto machine shops were still operating in the building and said most of his exports are going to Russia at the moment.
Lee said the megatrend he’s been seeing in recent months is that crypto-related companies have been shifting out of China or are already out. Miners are looking for new locations where they are welcome, and crypto-related trading businesses are setting up shop in places with crypto-friendly regulatory regimes.
For miners that means places like Kazakhstan, Uzbekistan and even Texas in the United States, and for crypto trading businesses, big moves have been made into Southeast Asia.
“Singapore is one of the hotbeds for that right now,” Lee said of those transitions, which will likely pick up pace the more coronavirus pandemic restrictions loosen.
Up with blockchain
Questions linger over how the government’s crypto crackdowns will impact innovation in areas like blockchain, as well as flexibility in financial flows for China’s tech industry, which has been increasingly squeezed by authorities in Beijing.
Beijing in recent months has become more and more set on establishing China’s digital yuan currency as the top dog, with all other cryptocurrencies seen as problematic due to national concerns about cross-border capital flow and potential tax evasion.
“It does not impact innovation at the global level,” Desouza said. “However, these actions will set the Chinese firms back. But, the central government is betting on their centrally controlled digital currency strategy to be far superior to the current bottom-up emergent approach. The simple issues of scale at which the digital currency will be deployed gives them an edge.”
China’s moves can partly be read in relation to bifurcation between the US and China in the evolving struggle for tech supremacy, according to Ma, as well as something of a bifurcation within China itself.
While now shunning cryptocurrencies due to potential financial stability risks, China is still going all in when it comes to heavily promoting blockchain-related technologies that are critical to the future digital economy.
Ma points to a speech given by Chinese President Xi Jinping on the same day the cryptocurrency and mining notice was issued. Xi’s speech emphasised science and technology innovation.
“To me, it means the government is very focused on real technology innovation instead of financial trading-driven innovation,” he said. “So, if going forward, you see the US side focused on the trading side of crypto, and the China side focused on the technology side of blockchain, that’s a very interesting bifurcation.”
Why Is Facebook Getting Into Cryptocurrency?
The company says the Diem coin can help fix our payment system, but experts are unconvinced
Facebook is on the cusp of launching an ambitious new cryptocurrency-based payment system that it says will boost financial inclusion and slash transaction fees. But experts have questioned whether the technology will really achieve those goals.
At the center of the company's plan is a digital wallet called Novi designed to let people trade Diem—a "stablecoin" whose value is pegged to the US dollar. The project is essentially a re-branding of the Libra cryptocurrency and Calibra wallet, which the company unveiled in June 2019 but quickly put on the backburner following significant pushback from lawmakers and regulators.
The plan has undergone a major revamp, and the company now plans to launch by the end of the year, offering free person-to-person transfers both domestically and across borders. In a recent blog post, head of Facebook Financial (F2) David Marcus said the project is aimed at tackling systemic problems with today's "broken payments infrastructure," which leads to high transaction fees, slow cross-border payments, and millions of people around the world remaining unbanked.
"They're pointing to a legitimate problem," says Lee Reiners, executive director of the Global Financial Markets Center at Duke University. But it's far from clear why they need a new cryptocurrency to solve them, he adds.
“Facebook takes great pains to point out that Diem is run by the Diem Association. … It deflects a lot of the criticism around concentration and data privacy concerns.”
The coin at the heart of the proposal is controlled by a consortium of companies called the Diem (formerly Libra) Association, of which Facebook is a member. The project has morphed significantly since 2019, with the association moving its main operations from Switzerland to the US and abandoning plans to peg the coin's value to a basket of currencies, instead opting for what is essentially a digital dollar.
In a revamped whitepaper published last April, the association also dropped a commitment to eventually shift from a "permissioned" blockchain—where the association decides who can validate transactions—to the kind of "permissionless" system used by most cryptocurrencies, where anyone who plays by the rules built into the network can edit records. The move was explained as a response to regulators' concerns about the challenge of ensuring all users were complying with financial regulations, which the Diem Association has committed to honoring.
Another consideration may have been that a permissioned network is able to handle far more transactions per second than the diffuse networks of permissionless systems, says Shin'ichiro Matsuo, research professor of computer science at Georgetown University. But the trade-off is that they sacrifice the main rationale for using a blockchain in the first place—namely its decentralized structure, which prevents any single point of failure in the payment system.
“They’re not going to do this out of the goodness of their hearts. I think they lost that benefit of the doubt a long time ago.”
Blockchains, whether permissioned or not, can have other advantages over conventional payment technology, says Matsuo. Most significant is programmability, which makes it possible to create "smart contracts" and automate the provision of financial products and services. But Facebook's suggestion that the technology will help significantly reduce the cost of transactions seems unlikely, he adds.
The reason it takes a lot of time and money to process payments is not down to the underlying payment technology, but the onerous security checks providers have to conduct to comply with laws aimed at prevent money laundering and other illicit activities. If Facebook is lowering transaction fees, that's a business decision, not a feature of the technology, says Matsuo. "There's no magic," he adds.
For the same reason, the approach is unlikely to significantly boost financial inclusion, says economist and financial commentator Frances Coppola, because the company will have to implement the same identity checks that prevent the bulk of the world's unbanked from opening conventional accounts.
The proposal seems focused on solving problems specific to the USA's slow, expensive and surprisingly backwards payments system, says Coppola. In much of the rest of the world fast, cheap digital payments are the norm—and solutions like the UK's Faster Payments Service or India's Unified Payments Interface have solved many of the problems Diem targets without recourse to a blockchain. "You can do this without cryptocurrency," Coppola says. "I don't see any advantage to having a blockchain other than marketing."
Reiners thinks the decision to rely on a blockchain is driven more by policy considerations than technical merit. By adopting a system that shares responsibility for the coin among the members of the Diem Association, Facebook is able to avoid the level of scrutiny it would receive if it set up its own currency. "Facebook takes great pains to point out that Diem is run by the Diem Association, it's not their thing," he says. "I think it deflects a lot of the criticism around concentration and data privacy concerns."
But those concerns should remain, says Reiners. Facebook is clearly the driving force behind the project and will be the first to release a Diem-enabled wallet, he says. The company has already made clear its intention to integrate Novi with Facebook Messenger and WhatsApp, which could quickly give it access to millions if not billions of users.
And their promise not to leverage transaction fees begs the question what benefit the company sees in the project, says Reiners. "They're not going to do this out of the goodness of their hearts," he says. "I think they lost that benefit of the doubt a long time ago."
His best guess is that the project is aimed at augmenting the company's existing business model of collecting data on its users and selling it to advertisers. "You can imagine how rich a source of data payments information is," says Reiners. "If they can combine what we're buying with all the other data they have on us, then they kind of know us better than we know ourselves."
Facebook and the Diem Association both declined interview requests.