China’s cryptocurrency regulations will propel similar regulations globally
Winston Ma from the NYU School of Law examines how China’s approach to cryptocurrencies will influence the development of global cryptocurrency regulations
Before China’s State Council's Financial Stability Committee vowed to crack down on the cryptocurrency's mining and trading activities in May 2021, few people – even among global financial professionals – realised that China accounts for more than 70% of the world's bitcoin and other cryptocurrencies’ supply. Because the majority of global cryptocurrencies are mined and traded in China, Chinese regulations in this new industry have profound global implications.
The 2021 crackdown is not the first time China has strengthened regulation of cryptocurrencies. China issued similar bans first in 2013, and then in 2017, when China accounted for 90% of global bitcoin trading. The 2017 rule issued by China’s central bank, the People’s Bank of China (PBOC), and other ministries, essentially shut down local cryptocurrency exchanges, forcing major exchanges including Binance and Huobi to relocate overseas.
Nevertheless, onshore Chinese investors could still trade cryptocurrencies on platforms owned by overseas exchanges. As the price of bitcoin jumped multiple times since late 2020, Chinese trading activities also heated up.
As such, the May 2021 crackdown was viewed by the cryptocurrency market as just another rule announcement without serious enforcement. For example, Hong Kong's Bitcoin Association said in a tweet in response to China's reiterated ban: "For those new to bitcoin, it is customary for the People's Bank of China to ban bitcoin at least once in a bull cycle."
But this time is different. Coming from the State Council's Financial Stability Committee, the highest level financial regulator of China led by vice premier Liu He, the new cryptocurrency crackdown is a significant upgrade of existing regulations. Furthermore, it is the first time the State Council has explicitly targeted cryptocurrency mining activities, which indicates a determination to crack down cryptocurrency trading from its origin, as China is the largest cryptocurrency mining field in the world.
The Chinese government has suggested that investor protection, carbon neutrality, and financial stability are the three key factors for the new regulations. The regulatory development of China, the largest cryptocurrency mining field and trading market in the world, will be an important reference case for other countries that start developing regulations for the cryptocurrency mining and trading activities.
See also: Bitcoin, cryptocurrencies and litigation
Investor protection – cutting off the cash flow channel between uneducated investors and offshore exchanges – is a motivation for new regulations. For the Chinese regulators, bitcoin and other cryptocurrencies are not investment tools, rather, they are speculative instruments with high volatility. China has a clear record of cracking down on all kinds of products for fear that bubbles will eventually burst and lead to riots of disgruntled retail investors — whether it is in beans, garlic, tea, or the more recent, peer to peer loans.
Since the State Council’s decision in May, three Chinese financial associations – the National Internet Finance Association of China, the China Banking Association, and the Payment and Clearing Association – have issued a new rule to ban financial institutions from cryptocurrency-related businesses. The rule is designed to make it more difficult for individuals to buy cryptocurrencies using various payment channels. The associations have reminded investors that virtual currencies "are not supported by real value”.
To ensure all the rules will be seriously enforced, the PBOC summoned representatives of multiple institutions, including state-owned commercial banks and Alipay, and told them to “strictly implement” recent notices and guidelines from authorities on curbing risks tied to cryptocurrency transactions. As China-focused exchanges that are registered overseas allow Chinese individuals to open accounts online, and cryptocurrency transactions by Chinese individuals can be made through banks, or online payment channels such as Alipay or WeChat, the financial firms were also instructed to go through their systems to investigate and identify customers with accounts in virtual currency exchanges, in which case, the institutions have to cut off the accounts’ ability to send or receive money for transactions.
Another motivation for new cryptocurrency regulations is China’s goal towards carbon neutrality.China’s new environmental policy is a key factor in the mining crackdown and was not part of previous cryptocurrency regulations. President Xi Jinping, in a speech last November to the UN General Assembly - months before the cryptocurrency crackdown, pledged to have the nation’s carbon emissions peak before 2030 and realise carbon neutrality by 2060.
The carbon neutrality policy cuts back coal power, which has been a major energy source for the country. According to London-based climate data provider TransitionZero, China needs to halve its carbon dioxide emissions from coal-based power plants by 2030 to achieve the policy. To meet climate targets, cryptocurrency mining is one of the focus areas as it is one of the many high energy consumption industries in China. Additionally, members of the Financial Stability Committee include the National Development and Reform Commission, the national energy regulator.
After the central government initiated the cryptocurrency crackdown campaign in May, major coal-based power producers such as Inner Mongolia and Xinjiang, which were previously the top two cryptocurrency mining hubs in China, have been among the first regions that quickly developed local rules to clean up mining businesses.
Furthermore, China’s carbon neutrality policy created an energy shortage within the country due to its drastic reduction in coal-fired power, which means that even mining with renewable energy, like hydropower is subject to new regulations. Sichuan and other provinces also had to shut down all mining businesses in June, whether they were powered by coal or hydro.
A third motivating factor for cryptocurrency regulation is to maintain financial stability as well as to push forward China’s central bank digital currency. On July 16, the PBOC issued a white paper on its development of China’s digital currency, the e-CNY. China has taken the lead in the digital currency push, and it is likely to be the first major economy to introduce a sovereign digital currency. Since 2020, China has been steadily expanding its digital yuan pilot programmes, given the country's rapid development of internet industries such as e-commerce and social network platforms that provide a myriad of application scenarios.
In its white paper, the PBOC cited the rapid growth in cryptocurrencies as a driver for research and development of the e-CNY and said that "cryptocurrencies are mostly speculative instruments, and therefore pose potential risks to financial security and social stability". This is the first time that the PBOC, in an official document, linked its sovereign digital currency issuance with cryptocurrencies’ potential challenges to the international monetary system. According to the PBOC, “cryptocurrencies' lack of intrinsic value, acute price fluctuations, low trading efficiencies and huge energy consumption make them unfit for use in daily economic activities”.
So far, China’s new regulations have already made significant impact in the global cryptocurrency markets. First, China’s mining crackdown has forced a seismic shift in bitcoin mining patterns. By July, bitcoin’s network hash rate, a measure of its computational horsepower, had dropped about 50% since its peak level in May 2021. In the end, 90% of China's bitcoin mining capacity is set to be shut down, according to the Global Times.
Second, from a cryptocurrency trading perspective, China’s tightened regulations and enforcement have contributed to bitcoin’s price dropping about 50% from its all time high price within a few months. At the time of writing , the market is still waiting for the other shoe to drop from Chinese regulators on cryptocurrency trading. After the Financial Stability Committee’s guideline in May, China’s mining regulation has already been put in place, but China’s securities and banking regulators have yet to release new regulations on cryptocurrency trading. The uncertainty could mean real, long-term downward pressure on cryptocurrency prices.
Finally, and probably most importantly, China’s new regulatory framework may influence many countries’ cryptocurrency-related regulations going forward. Since China’s crackdown in May, countries across Asia, Europe and the Americas have started their regulatory actions on cryptocurrency transactions and related exchanges. It may be a coincidence but on the same day that the PBOC issued the e-CNY white paper, US treasury secretary Janet Yellen also called on the President's Working Group (PWG) to develop a regulatory framework for cryptocurrencies, especially stablecoins.
The PWG meeting was held on July 19 2021 and it announced the plan to issue recommendations about stablecoin regulations within the next few months. “The secretary underscored the need to act quickly to ensure there is an appropriate US regulatory framework in place,” the Treasury reported. What can be deduced is that the regulatory development in China is giving the US government a sense of urgency, and the same may also be true for many other governments that have been slow to act on the rapid expansion of cryptocurrencies.
Winston Ma is a founding partner of CloudTree Ventures and an adjunct professor at the NYU School of Law. He is the former managing director and head of the North America office at China Investment Corporation, and author of Investing in China, China's Mobile Economy, The Hunt for Unicorns, and The Digital War.