China “fires up” bitcoin

“The two countries in the world that have the most influence over cryptocurrencies are China and the United States, and China’s policies are absolutely pivotal.”

China "fires up" bitcoin

Published in 2021.6.7 Total Issue No. 998 of China Newsweek

After reaching an all-time high in April this year, bitcoin’s price dived all the way down, and the increase in Chinese regulatory policies in mid-to-late May was undoubtedly one of the triggers.

On May 18, China released its regulatory policies on cryptocurrencies: on May 18, the Inner Mongolia Development and Reform Commission set up a reporting platform for virtual currency “mining” enterprises; on the same day, the China Internet Finance Association, the China Banking Association and the China Payment and Clearing Association issued a “Notice on Preventing the Risk of Speculation in Virtual On May 21, the Financial Committee of the State Council requested to crack down on bitcoin mining and trading, and resolutely prevent the transmission of individual risks to the social sector; on May 26, the Inner Mongolia Development and Reform Commission issued eight measures on resolutely cracking down and punishing virtual currency “mining” behavior For comment.

From 2013, when bitcoin trading was still considered as a commodity that the general public could freely participate in, to 2017, when domestic virtual currency exchanges were retired, to this explicit crackdown on mining, China’s regulatory policy on cryptocurrencies is the toughest among the world’s major economies. Given the influence of Chinese players in the cryptocurrency world, every statement made by Chinese regulators is a direct reaction to significant fluctuations in the value of bitcoin.

Chinese Regulation Shakes Up Bitcoin Prices

“The bitcoin price is like a child’s face, it changes at the drop of a hat and often goes up and down.” A former bitcoin “mine” owner told China Newsweek that his “mine” lost money because of a plunge in bitcoin prices and was shut down before the outbreak in 2020, when bitcoin prices hovered at $7,000 to $8,000, and he He also missed out on the bitcoin market that started in the middle of last year.

By the end of 2020, the price of bitcoin was approaching $30,000, a trend that continued in 2021 until it touched an all-time high of $64,863 on April 14.

“Central banks had to adopt some extremely accommodative monetary policies in response to the epidemic shock, leading to a very abundant liquidity in the market. At the same time, the easy money surface triggered some institutions to worry about fiat currency devaluation and turn to some safe-haven products, and institutions started to recognize cryptocurrencies like bitcoin as a class of investable asset allocation.” In explaining to reporters why bitcoin has seen a wave of interest, a cryptocurrency veteran believes that the trend of foreign institutions, especially Wall Street institutions, adding to their holdings has been evident over the past year or so. “Cryptocurrencies will also be listed as an investable asset class in research reports, while cryptocurrency asset-related services will be provided to clients.”

It’s not just institutions that are investing in cryptocurrencies, but also companies like Tesla. Tesla reported a profit of $438 million in the first quarter of 2021, with nearly a quarter coming from bitcoin trading. Its earnings report showed that Tesla bought $1.5 billion worth of bitcoin in the first quarter of the year and sold some of it for a profit of $101 million.

Tesla’s “coin speculation” is backed by Musk’s stand on cryptocurrencies. “Another reason that has fueled cryptocurrency enthusiasm this year is that business leaders like Musk are standing up for the cryptocurrency, and what he says on social media can easily move the value of the currency.” The aforementioned cryptocurrency veteran said that in addition to the aforementioned reasons, the evolution in technology has also provided the underlying support. “An important trigger for this round is the outbreak of decentralized DeFi ecology, which has given rise to many functions and platforms similar to those of traditional financial institutions.”

In his view, the impact of three factors – loose funding, institutional entry, and technological evolution – continues to be felt. “Especially from the recent period, institutions may not have exited the field, because those addresses on the chain that hold a large number of coins are still increasing their holdings, and some even believe that some institutions are plunging into the field”.

But the short-term effects of Musk’s influence on cryptocurrencies are waning. on May 12, Musk took to social media to question the high carbon emissions generated by bitcoin mining and trading, announcing that Tesla was suspending bitcoin payments. As a result, bitcoin fell more than 10 percent that day, all the way down to around $49,000.

A senior cryptocurrency analyst told China Newsweek, “Since this year, bitcoin prices have trended upward, even showing some overheated emotions, and late in the day there have been animal coins, even air coins that have no meaning, which themselves have the need to be adjusted, and the price does have a bubble.”

In the week after Musk questioned, May 19, bitcoin ushered in “shock amplitude enough to rank in the top ten in history” a decline, the aforementioned senior analysts told reporters. May 19, bitcoin directly through the $40,000 mark, even approaching the $30,000 mark, the highest drop of 30% in a day, the final decline has narrowed but also more than 13 percent. Other types of cryptocurrencies were not spared either. According to the Bitcoin Home website, the total amount of positions exploded on major exchanges within 24 hours was $7.006 billion, or about 46 billion yuan, which has set a record for the largest single-day explosion in cryptocurrency history.

Bitcoin’s price was nearly “decimated” at the end of May compared to its all-time high this year. “The reason for the recent drop is definitely China’s latest regulatory policy, and the two countries in the world that have the most influence on cryptocurrencies are China and the U.S. China’s policy is absolutely pivotal.” The former cryptocurrency veteran said.

Can “mining” be banned?

“We can say it’s a total ban.” Chen Weigang, a bureau-level supervisor of the CBRC’s Key Financial Institutions Supervisory Committee, told China Newsweek.

“It should be that almost nobody will invest anymore, the decline is huge, and in terms of price there must be more selling than buying, otherwise how could it fall so much.” One bitcoin holder told reporters.

“In fact, the trading of virtual currencies, including bitcoin, was banned more than three years ago, and there is currently no exchange in the country.” Chen Weigang said. By ban, he means the “Announcement on Preventing Risks of Token Issuance and Financing” jointly issued by the central bank and seven other ministries and commissions on Sept. 4, 2017, which has explicitly banned virtual currency trading.

About a year later, in July 2018, the central bank revealed that the 88 virtual currency trading platforms that had been searched and discharged had basically achieved a risk-free exit, with bitcoin traded in RMB dropping from more than 90% of the global market to less than 1%, which is considered to have prevented a virtual currency bubble.

After the “9-4 ban”, domestic cryptocurrency exchanges have moved their servers overseas, and the regulatory authorities continue to block virtual currency trading platforms that “go abroad”, and as of the end of May 2018, 110 trading platforms, including Hotcoin and Coinan, have been blocked. As of the end of May 2018, 110 websites of trading platforms, including Hotcoin and Coinan, had been blocked.

Although cryptocurrency exchanges no longer exist in China and related websites have been blocked, cryptocurrency players have not stopped trading.

A source close to the regulation told China Newsweek that there are two main ways to trade cryptocurrencies, including bitcoin, in China, one is to trade on overseas exchanges by “climbing over the wall” and the other is to trade through underground money changers.

“For example, the underground bankers register two companies in China and the United States, use the company in the United States to buy bitcoins, and then the domestic company receives the money for the coins.” He explained to reporters that the controls on such a flow of funds have become increasingly strict, “Previously, payments were often made in the name of business payments, but nowadays such payments also require sufficient proof, such as a sales contract, to ensure that there is a real business transaction, otherwise it is not possible. Although it can’t be completely eliminated, it is becoming increasingly difficult to trade through such avenues, and the regulation of coin speculation funds has been treated the same as anti-money laundering.”

The transaction has long been underground, and this time the regulation has been increased, whether it is the “Announcement on Preventing the Risk of Speculation in Virtual Currency Trading” issued by the three associations, or the Financial Committee’s statement that the trading link still follows the “9-4 ban” requirements. Many industry insiders also said in an interview with reporters that the Financial Committee clearly cracked down on bitcoin mining and trading, “placing mining before trading, and you can see that this time the regulation points to mining”.

From the local regulatory response is also the same, Inner Mongolia first issued rules on May 26, autonomous regions Development and Reform Commission issued on the resolute crackdown to punish the virtual currency “mining” behavior of the eight measures, the scope of the crackdown includes mining big data centers, cloud computing enterprises, communications companies, Internet companies, Internet cafes, as well as for The mining companies and related personnel are included in the blacklist according to the relevant regulations. Inner Mongolia crackdown on mining began in March, when it was announced that a comprehensive cleanup and shutdown of virtual currency mining projects, all out by the end of April 2021, while new virtual currency mining projects are strictly prohibited.

Some mine owners also told reporters, “Actually, the requirement to seize mining sites has always been there, so don’t take it too seriously.” But this time the regulatory stance is apparently more severe, although other places have not yet issued rules like Inner Mongolia, but “China News Weekly” reporter contacted a number of mining farms have said that bitcoin, ethereum and other cryptocurrency mining have been suspended, only retaining less energy-consuming FIL mining project, is transferring the miners outside the country, “the speed of transfer is not so fast, the company There is no previous layout overseas”.

Mars cloud mining also released a message saying that in order to match the spirit of the relevant departments regulation, after careful study decided that Mars cloud mining part of the mining machine will be transferred to Kazakhstan mining, the relevant mining machine on May 23 shutdown, is expected to transfer the cycle in 3 to 4 weeks, and on May 26, 20:00 Beijing time from the blocking of mainland domestic IP access.

“Domestic mining is still difficult to ban completely, this time mainly for corporate mining behavior. Control can be achieved through financial audits on the income and expenditure side, such as corporate mining must eventually be reflected as revenue, profit appreciation, if part of the profit belongs to mining from, you can not allow the enterprise to account, through this way can block the mining behavior of enterprises.” Chen Weigang said some individuals buy mining machines to mine, especially in some areas richer in hydropower mining, how to block remains to be seen in the next step. “But the equivalent of cutting off the big players, the remaining small players, although the number is large, but the total amount is not large.”

Regulatory fallout poses challenges

“This round of domestic regulatory policies may still be more for the consideration of reducing energy consumption.” The aforementioned senior cryptocurrency analyst told China Newsweek.

In the global bitcoin arithmetic distribution, China occupies the absolute first place with 65.08% of the arithmetic power share, far exceeding the second-placed United States with only 7.24% of the arithmetic power share. Specifically in China, the top four provinces in terms of arithmetic power distribution are all located in the west: Xinjiang, Sichuan, Inner Mongolia, and Yunnan, with Xinjiang accounting for over 35% of the total.

Behind this is a large amount of power consumption. According to an index released by the Centre for Alternative Finance Research at the University of Cambridge, the annual electricity consumption of mining is estimated to be about 115.54 TWh at the end of May, which intuitively represents 0.53% of the annual global electricity consumption, and if compared with the electricity consumption of various countries, it will be found to be located after the UAE and before the Netherlands, ranking 33rd in the world.

In addition to its excessive carbon footprint, how cryptocurrencies such as Bitcoin should be regulated as an investment, or even whether it can be called an investment, have been the focus of recent regulatory statements from various countries.

“Some people confuse two concepts, cryptocurrencies such as Bitcoin are not fiat money, currency to be guaranteed by the sovereignty of the state, as can also be seen from the evolution of the currency form, from precious metal currency like gold and silver coins to paper money, digital currency, the value of itself has been declining, but today people are speculating on the value of Bitcoin itself. ” Chen Weigang believes that bitcoin is not even considered an investment, only a kind of “speculative work”, “when the popular European ‘tulip’, at least can still see a bouquet of flowers, now the bitcoin is air, nothing There is nothing.”

In its Financial Stability Review released in May, the ECB also compared the speculation in cryptocurrency prices to “tulip mania,” suggesting its risky and speculative properties. On May 19, the day Bitcoin’s value became so volatile, ECB Vice President Kim Doss spoke out, saying that Bitcoin is a fundamentally fragile asset with high volatility. Crypto assets should not be considered a “real investment” because it is difficult to identify their potential value. But Jindos also said that market volatility in cryptocurrency assets does not pose a risk to overall financial stability.

It’s true that overseas regulation has also been tightening recently, but it’s more focused on regulating cryptocurrency transactions to prevent risks and avoid illegal practices such as tax evasion. As Gary Gensler, chairman of the U.S. Securities and Exchange Commission, pointed out when he participated in a congressional hearing on May 26, crypto assets are both commodities and securities in nature, and there is a need to strengthen regulation of cryptocurrency exchanges with the goal of allowing investors to enjoy the same protection they would in securities transactions. The U.S. government also recently proposed that cryptocurrency transfers in excess of $10,000 must be reported to U.S. tax authorities.

On May 21, the Hong Kong SAR government proposed that cryptocurrency exchanges operating in Hong Kong must be licensed by Hong Kong’s market regulator, or “licensed to operate,” and only offer services to professional investors.

“Regulators outside of Hong Kong have been tightening regulation on cryptocurrency exchanges, and this year there are also listed exchanges like Coinbase, which operates quite conservatively, such as not opening up leveraged trading tools to retail investors, but only to qualified institutions.” The aforementioned senior cryptocurrency analyst said, “Because of the regulation, the operation of exchanges is relatively regulated and institutions trust them, forming a virtuous circle, and most of the institutions on Wall Street will place a lot of money on exchanges like Coinbase rather than some small, wild exchanges.”

He argues that “the regulatory stance abroad is indeed tightening, but not as severely as in China, and that domestic regulation has not chosen to gradually regulate cryptocurrency trading, but to some extent ‘shut it down across the board’.”

In fact, in 2013, the central bank and five other ministries and commissions issued a notice on preventing the risks of bitcoin, making it clear that bitcoin is not a fiat currency while stating that “bitcoin trading, as a kind of commodity trading on the Internet, is free for the general public to participate at their own risk.” But since then, the regulation has been gradually tightened, and the country’s retail-oriented investment structure is one of the reasons.

“Cryptocurrency trading should not encourage individuals to participate because of the high volatility and the high cognitive requirements for investing in cryptocurrencies.” Some people from the “cryptocurrency circle” told China Newsweek that more than 10 cryptocurrency ETF funds have been established worldwide, and institutional investment should become mainstream.

Chen Weigang also believes that bitcoin trading abroad is more of a game between some institutions and consortia, but in China, retail investors are the main investors. “Just like the previous P2P, which actually appeared earlier than in China in countries like the UK and the US, but the range of people involved in P2P at its peak in China was very wide, the same is true for this speculation on bitcoin. Just because something can exist abroad doesn’t mean it’s justified to exist in China.”

“In fact, if the exchanges are all blocked, or there is a regulatory gap at home and abroad will also pose a regulatory challenge, because any person can register an account on the relevant website, the code generated is the bitcoin receipt account, completely anonymous and untraceable, but because there is a subsequent transaction link exists, so the exchange may also track the holder’s information, in this In this case, the exchange can act as an ‘informant’ for regulatory purposes.” A senior member of the “cryptocurrency community” told China Newsweek that he understands that some exchanges are unable to operate in the country, but still work closely with domestic regulators and are willing to provide information to the government.

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