Why is China getting tougher on cryptocurrencies?

The price of cryptocurrencies has seen dramatic swings in recent weeks as Chinese authorities have hardened their stance on the “mining” and trading of these digital assets, which have become very popular in China.

Bitcoin fell nearly 9 percent again at 10H30 GMT on Monday, June 21, after Beijing ordered power companies in Sichuan province to cut off power to the virtual currency “mining” companies.

The action by Beijing authorities has prompted experts in the sector to ponder what prompted Beijing to act now and the impact of the change on the market, AFP said.

Why the tougher stance on cryptocurrencies?

As the importance of the financial system grows, so does Beijing’s need to control it. And cryptocurrencies, particularly Bitcoin, present a challenge for Beijing because China’s central bank is unable to track the flow of funds through these assets.

As a remedy, and to “prevent and control financial risks,” Beijing authorities have made the choice to ban cryptocurrency trading in China. Analysts note that Beijing is trying to control capital flows and remains concerned about the increase in illegal investments and fundraising.

Jeffrey Halley, Asia-Pacific analyst at international trading firm Oanda, said, “China doesn’t have an open capital market and cryptocurrencies are a way to get around that, which is unacceptable to the authorities.”

In addition, a tougher stance on cryptocurrencies has allowed China to launch its own virtual currency, a project the country’s central bank has been working on since 2014, which would allow Beijing to better control transactions.

The creation and trading of cryptocurrencies has been an illegal activity in China since 2019, and Beijing’s recent crackdown will quickly result in the huge mining industry for cryptographic digital currencies losing business.

Why does the situation in China matter?

Today, nearly 80% of Bitcoin transactions are managed through data centers set up in China, which are heavy consumers of energy.

The availability of very cheap equipment and energy has led to the emergence of companies specializing in cryptocurrency trading and has encouraged the creation of new cryptocurrency assets, an industry that is particularly energy-intensive because of the need for powerful computing power.

And a large portion of the industry’s electricity comes from factories that use lignite, a highly polluting form of coal that could prevent China from meeting its climate goals, a situation that could also partially explain Beijing’s reaction.

According to the Bitcoin Electricity Consumption Index published by the University of Cambridge, the virtual currency’s “mining” activities are expected to consume 0.6% of the world’s electricity in 2021, equivalent to the consumption of a country like Norway.

What is China’s vision for virtual currencies?

In March this year, China launched the testing phase of its digital yuan. This virtual currency should enable Beijing to conduct international transactions in its own currency, where most world trade is currently denominated in US dollars (over 80% of transactions).

Jeffrey Halley, Asia-Pacific analyst at international trade firm Oanda, said, “The goal is to make the yuan more accessible internationally while maintaining complete control over the value of the currency.”

Many countries are trying to launch their own virtual currencies, such as the European Central Bank, which is expected to decide this summer whether to launch a virtual euro currency.

Experts believe, however, that these state-owned currencies will have a hard time overshadowing existing cryptocurrencies, as part of the appeal of existing cryptocurrencies comes from the very fact that they are not controlled by the state.

Leonhard Weese, co-founder of the Hong Kong Bitcoin Association, noted, “Bitcoin is currently only a trivial form of payment, and its main advantage is that it cannot be easily seized, banned or devalued.