Cryptocurrency Bitcoin saw a crashing decline on Wednesday (May 19), falling by upwards of $10,000 to $31,664, with the biggest drop of more than 20% during the day, causing high concern in the market.
One of the main reasons for bitcoin’s recent plunge was a tweet sent by Musk, CEO of electric car Tesla, on May 12. In the tweet, Musk said that Tesla would suspend the use of bitcoin as a currency for car purchase transactions and that he would consider using a cryptocurrency with lower energy consumption. The comment triggered bitcoin’s first big drop.
Analysts said Wednesday’s sharp drop in bitcoin was related to an article published by the People’s Bank of China (the central bank) on Tuesday. China’s central bank said in a May 18 article that “recent virtual currency prices have skyrocketed and plummeted, and speculative activities in virtual currency trading have rebounded, seriously infringing on the safety of people’s property and disrupting the normal economic and financial order.”
China’s central bank said that in order to prevent the risk of speculation in virtual currency trading, the China Internet Finance Association, the China Banking Association and the China Payment Clearing Association issued a joint announcement to resist speculation in virtual currency.
The three trade associations are known as the three major associations of China’s financial industry. The joint announcement of the three regulators pointed out that virtual currency is a specific virtual commodity, not issued by the monetary authority, does not have monetary attributes such as legal compensation and compulsory, is not real money, and should not and cannot be used as money in circulation in the market. The announcement prohibits financial institutions in China from conducting business related to virtual currencies, including the exchange of virtual currencies with RMB and foreign currencies.
The announcement said that virtual currency trading contracts are not protected by current Chinese laws, and “the consequences and losses caused by investment transactions shall be borne by the relevant parties.” China has so far not banned individuals from holding cryptocurrencies.
This is not the first time the Chinese government has come down hard on virtual currencies. in 2017, China shut down local cryptocurrency exchanges. in June 2019, the People’s Bank of China issued a statement saying it would block access to all domestic and foreign cryptocurrency exchanges and initial token exchange sites, with the aim of suppressing all cryptocurrency trading by banning foreign exchange transactions.
The joint announcement by China’s three major financial regulators was seen as a joint effort to “block” virtual currencies. On Wednesday, bitcoin plunged from $45,600 to $38,570, its lowest level since early February and well below the record high of $64,870 set last month. Analysts warned that bitcoin could fall to $30,000.
“Elon Musk is starting to move,” German cryptocurrency analyst Timo Emden told AFP. “It will take a while for cryptocurrencies to recover from this shock …”
China’s central bank is trying to promote the digital yuan, which it believes is heavily regulated, and is currently conducting nationwide pilots. Analysts believe the digital yuan could give China’s central bank (rather than the big tech giants) access to more data and control over payments in a country where consumers already use mobile and online payments extensively.
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