How will the State Council’s first public request to “crack down on bitcoin mining, etc.” affect the cryptocurrency market?

While there are only two sentences related to the cryptocurrency industry in this meeting, the future of landing policies remains to be seen. But with the high level of this one, the outcome may not be too optimistic.

How will the State Council's first public request to "crack down on bitcoin mining, etc." affect the cryptocurrency market?

According to the Chinese government website, on May 21, the Financial Stability Development Committee of the State Council (hereinafter referred to as the Financial Committee) held its fifty-first meeting to study and deploy the next phase of key work in the field of finance. There are three main parts, the first is to further serve the number of the real economy, the second is to resolutely prevent and control financial risks, and the third is to continue to deepen reform and opening up.

The second point includes: hold bottom-line thinking, strengthen the financial risk all-round scanning and early warning, promote the reform of small and medium-sized financial institutions to transform the risk, focus on reducing credit risk, strengthen the supervision of financial activities of platform companies, crack down on bitcoin mining and trading practices, and resolutely prevent the transmission of individual risks to the social sector . To maintain the smooth operation of the stock, bond and foreign exchange markets, crack down on securities violations, and severely punish financial crime activities. To closely guard against external risk shocks, effectively deal with imported inflation, strengthen expectations management, enhance market supervision, and make good response plans and policy reserves.

Related to the cryptocurrency industry: cracking down on bitcoin mining and trading practices, and resolutely preventing the transmission of individual risks to the social sector.

In fact, a similar document was issued internally as early as the beginning of 2018.

According to Firstrade, the Leading Group of the Internet Financial Risk Special Rectification Office (hereinafter referred to as the “Mutual Fund Rectification Office”) recently issued a notice to provinces (autonomous regions and municipalities) and Shenzhen’s Leading Group Office of the Internet Financial Risk Special Rectification Work for Bitcoin, dated January 2, 2018.

In the aforementioned notice, the Office of Mutual Fund Regulation said that, according to the relevant departments, there are some so-called “mining” enterprises that produce “virtual currency”, which consume a lot of resources while also fueling the wind of “virtual currency” investment speculation. For the next work arrangements, the Office of Mutual Fund Regulation put forward two requirements: First, to actively guide the jurisdictional enterprises to orderly exit the “mining” business, and please actively coordinate with the relevant departments under the jurisdiction of the multi-measures to take a comprehensive approach to electricity, land, taxation and environmental protection measures to guide the relevant enterprises to orderly exit; and require the local regulation office to report the current “mining” enterprises under the jurisdiction of the basic situation and guidance by January 10 The withdrawal of the situation. Second, in order to grasp the progress of work around the timely, the local remediation office is required to fill in the situation of “mining” enterprises under its jurisdiction by the 10th of each month.

However, the “Financial Stability Development Committee of the State Council”, which met on May 21, 2021, is at a much higher level than the “Leading Group of the Internet Financial Risk Special Rectification Office” in early 2018. The former is headed by Vice Premier Liu He, who is in charge of the economy; the latter is headed by just the deputy governor of the central bank, a difference of several levels between the two sides.

As there are only two short sentences in the meeting, the future landing policy remains to be seen. But with the high level of this time, the results may not be too optimistic.

However, some industry sources have also pointed out that bitcoin as a virtual commodity is not illegal, and mining as a computing process to produce bitcoin does not appear to be illegal. From this perspective, does the fact that the term used in the meeting is ‘crackdown’ rather than ‘ban’ imply that restrictions are being imposed primarily from the perspective of preventing financial stability and high energy consumption, rather than ‘across the board’. Of course this is only a good guess for industry players. The probability is that the follow-up will be to issue a letter to the provinces and municipalities asking for a crackdown on mining, but the extent to which the provinces and municipalities land on the ground and crack down will also depend on the attitude of the top brass.

The sudden call for a crackdown on bitcoin mining is fortuitous, but also due to the recent heat of public opinion both at home and abroad playing up the high energy consumption of bitcoin mining. A previous study by scholars at Tsinghua University and the Chinese Academy of Sciences, published in a sub-publication of Nature, said that Chinese bitcoin mining consumes more energy than a single European country and undermines China’s carbon neutrality policy, elevating it to such a political level that it vaguely feels like a mountain of rain is coming. More recently Musk has brought the issue of Bitcoin’s energy consumption to a climax, which may have ultimately led to today’s meeting decision.

Currently many cryptocurrency mining regions, such as the northwest and southwest, have very serious local debt and abandoned power. Bitcoin mining is not a small help to the finances, employment, and income of residents in poor areas, and also helps new energy facilities to gain revenue and further expand their scale. I believe that similar rational analysis and research, all kinds of industry players will continue to provide feedback through various channels.

As for the trading behavior, the country itself has banned any institutional participation in the transaction, individual and personal transactions are not yet illegal, it should be noted that the latter phrase “resolutely prevent the transmission of individual risks to the social sector” alludes to the previous frenzy triggered by animal estates, and various types of animal coins have repeatedly been on the hot seat. After the three associations of the central bank issued the article, the industry was worried whether the central bank would follow up with the article, but did not expect to follow up with the higher level of the State Council Financial Stability Development Committee. However, it is not known whether the exchanges are currently overseas and whether they will take tough measures similar to those against P2P.

It should also be noted that very few countries around the world have banned bitcoin mining, and developed countries and regions, including Hong Kong, are also moving further and further down the road of bitcoin compliance, with Hong Kong approving compliant exchanges and multiple funds in the last year. Previously, Li Bo, deputy governor of China’s central bank, said that many countries, including China, are studying what kind of regulatory environment should be in place for such a form of investment to ensure that speculation on such assets does not pose serious financial risks, if cryptocurrencies are used as an investment tool. Until we figure out what kind of regulatory rules are needed, we will continue to maintain the current initiatives and practices.

In this regard, we also expect Chinese policymakers to study and learn from international experience on the basis of social and financial stability, and to explore a suitable path for the development of the industry in China.

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