After reaching the highest point in history in April this year, the price of Bitcoin has plunged all the way. The overweight of China’s regulatory policies in mid-to-late May is undoubtedly one of the incentives.
Starting on May 18, China has intensively released its regulatory policies on cryptocurrencies: On May 18, the Inner Mongolia Development and Reform Commission established a virtual currency “mining” corporate reporting platform; on the same day, China Internet Finance Association, China Banking Association, China Payment and Clearing Association Issued the “Announcement on Preventing the Risks of Virtual Currency Trading Hype”; On May 21, the Financial Commission of the State Council of China requested to crack down on Bitcoin mining and trading, and resolutely prevent the transmission of individual risks to the social field; On May 26, the Inner Mongolia Development and Reform Commission issued eight measures for resolutely cracking down on virtual currency “mining” for comments.
From 2013, when bitcoin transactions were still regarded as commodity trading behaviors that ordinary Chinese people can freely participate in, to the withdrawal of domestic virtual currency exchanges in 2017, and to the clear crackdown on mining behavior, China’s regulatory policies on cryptocurrencies are in The most stringent among the major economies in the world. In view of the influence of Chinese players in the cryptocurrency world, every statement made by the Chinese regulators will directly reflect the large fluctuations in the value of Bitcoin.
Chinese regulation shakes up Bitcoin prices
“The price of Bitcoin is like a child’s face, and it changes when it changes. It often skyrocketed and plummeted.” A former Chinese Bitcoin “mining farm” owner said that his “mining farm” was at a loss due to a sharp drop in the price of Bitcoin and was shut down before the outbreak of the pandemic in 2020. At that time, the price of Bitcoin was hovering at seven or eight thousand US dollars, he also missed the bitcoin market opened in the middle of last year.
By the end of 2020, the price of Bitcoin has been close to $30,000. This trend will continue in 2021 until it hits the highest price in history of $64,863 on April 14.
“In order to deal with the impact of the pandemic, central banks of various countries have to adopt some extremely loose monetary policies, resulting in ample liquidity in the market. At the same time, loose funding has caused some institutions to worry about the depreciation of the legal currency, so they turned to some safe-haven products. Institutions began to recognize cryptocurrencies such as Bitcoin as a type of investable asset allocation. “When explaining why Bitcoin ushered in a wave of market trends, a veteran in the Chinese Bitcoin circle believes that in the past year or so, the trend of blessing by foreign institutions, especially Wall Street institutions, is obvious. “In the research report, cryptocurrency will also be listed as an investable asset class, and at the same time, customers will be provided with cryptocurrency asset-related services.”
There are not only institutions that invest in cryptocurrencies, but also companies like Tesla. Tesla’s profit in the first quarter of 2021 reached 438 million U.S. dollars, and nearly a quarter came from Bitcoin transactions. According to its financial report, Tesla bought $1.5 billion worth of Bitcoin in the first quarter of this year, and sold some of it for a profit of $101 million.
Tesla’s “speculation of coins” is behind the cryptocurrency of Musk’s platform. “Another reason that fueled the enthusiasm for cryptocurrency this year is that business leaders like Musk’s platform can easily disturb the value of the currency by his comments on social media.”The aforementioned veterans in the Bitcoin circle said that in addition to the above reasons, technological evolution also provides the underlying support. “An important tipping point of this round of market is the outbreak of the decentralized DeFi ecosystem, which has spawned many functions and platforms similar to traditional financial institutions.”
In his view, the impact of the three factors – easy funding, institutional entry, and technological evolution – continues to be felt. “Especially from the recent period of time, the institutions may not exit the market, because the addresses on the chain with a large number of coins are still increasing their holdings, and some people even think that some institutions are entering the market by buying bottoms.
However, the short-term effects of Elon Musk have weakened the impact of cryptocurrencies. On May 12, Elon Musk questioned the excessive carbon emissions generated by Bitcoin mining and trading on social media and announced that Tesla suspends payments by Bitcoins. Affected by this, Bitcoin fell more than 10% that day, falling all the way to about 49,000 US dollars.
A senior analyst of China’s cryptocurrency said, “Since this year, the price of Bitcoin has been trending upwards, even showing some overheating sentiment. In the later period, animal coins and even air coins, which are meaningless, have themselves adjusted. There is indeed a bubble.”
Just a week after Elon Musk questioned it, on May 19, Bitcoin ushered in a drop that “the shock range was enough to rank among the top ten in history,” said the aforementioned senior Chinese analyst. On May 19, Bitcoin directly broke through the $40,000 mark, and even approached the $30,000 mark, with a maximum drop of 30% in one day, and the final drop narrowed, but it also exceeded 13%. Other types of cryptocurrencies have not been spared. According to the statistics of the Bitcoin Homes website, the total amount of liquidation in major exchanges within 24 hours was 7.006 billion US dollars, about 46 billion yuan, which has created the largest single-day liquidation record in the history of cryptocurrencies.
At the end of May, the price of Bitcoin was almost “halved” in comparison with the historical high it reached this year. “The reason for the recent decline must be China’s latest regulatory policies. The two countries with the greatest influence on cryptocurrencies in the world are China and the United States. China’s policies are absolutely crucial,” said the aforementioned Chinese veteran in the Bitcoin circle.
Can “mining” be actually banned?
“It can be said to be a complete blockade.” Chen Weigang, the Director-General Supervisor of the Board of Supervisors of Key Financial Institutions of the China Banking and Insurance Regulatory Commission, said.
“It should be that almost no one will invest again, and the decline is huge. In terms of price, it must be sold more than bought, otherwise, how could it fall so much,” said a Chinese Bitcoin holder.
“In fact, virtual currency transactions including Bitcoin were banned more than three years ago. There is currently no exchange in China.” Chen Weigang said. The ban he referred to refers to the “Announcement on Preventing Token Issuance Financing Risks” jointly issued by the Central Bank of China and other seven ministries on September 4, 2017, in which virtual currency transactions have been explicitly prohibited.
About a year later, in July 2018, the People’s Bank of China revealed that the 88 virtual currency trading platforms listed in the search have basically achieved a risk-free exit. Bitcoin traded in RMB has dropped from more than 90% of the global share to less than 1%, is considered to have avoided a virtual currency bubble.
After the “9·4 ban”, China’s domestic cryptocurrency exchanges have moved their servers abroad one after another, and the Chinese regulatory authorities continued to block “going overseas” virtual currency trading platforms. As of the end of May 2018, 110 trading platform websites including Huobi, Binance have been blocked.
Although cryptocurrency exchanges no longer exist in China and related websites are also blocked, China’s Bitcoin circle players haven’t stopped trading.
A person close to the Chinese regulatory authority revealed that there are currently two main ways to trade cryptocurrencies, including Bitcoin, in China, one is trading on overseas exchanges through “Over the Great Firewall”, another is trading through underground banks.
“For example, an underground bank registers two companies in China and the United States, uses the company in the United States to buy bitcoin, and then the Chinese company receives the money for the purchase.” He explained that the control of such capital flows has become more and more stringent. “Previously, payment transactions were often carried out in the name of business payments. Now such payments also require sufficient proof, such as sales and purchase contracts, to ensure that there is a real business exchange, otherwise, it will not be possible. Although it cannot be completely eliminated, it is becoming more and more difficult to trade through such channels, and the supervision of speculation funds has been treated like anti-money laundering.”
The transaction has long been transferred to the underground in China. This time, the supervision has been overweight. Whether it is the “Announcement on Preventing the Risk of Virtual Currency Trading Hype” issued by the three associations or the statement of the Financial Stability and Development Committee of the State Council of China, the “9·4 ban” is still followed for the transaction link. Many Chinese industry insiders also stated that the Financial Commission has clearly cracked down on Bitcoin mining and trading, “put mining before trading, and you can also see that this time supervision is directed to mining.”
This is also true from the response of local supervision. Inner Mongolia first issued detailed rules on May 26. Among the eight measures issued by the Development and Reform Commission of the Autonomous Region on resolutely cracking down on virtual currency “mining” behavior, the scope of the crackdown includes major mining operations. Data centers, cloud computing companies, telecommunications companies, Internet companies, Internet cafes, etc., as well as entities that provide venues and power support for mining companies, and companies and related personnel with mining activities are included in the untrustworthy blacklist in accordance with relevant regulations. The crackdown on mining in Inner Mongolia began in March. At that time, it was announced that virtual currency mining projects will be completely cleaned up and shut down. All of them will be withdrawn by the end of April 2021. At the same time, new virtual currency mining projects are strictly prohibited.
There are also Chinese mine owners who said, “In fact, there are always requirements for the closure of mines, so don’t take it too seriously.” But this time China’s regulatory stance is obviously more stringent. Although other places have not yet issued detailed rules like Inner Mongolia, many Chinese mines have stated that the mining of cryptocurrencies such as Bitcoin and Ethereum has been suspended, and only retains less energy consumption. The FIL mining project is transferring mining machines overseas, “the transfer speed is not so fast, the company has no overseas layout before.”
Mclouds also announced that in order to comply with the regulatory spirit of relevant Chinese authorities, after careful research and decision, some of the mining machines of Mars Cloud Mine will be transferred to the Kazakhstan mine. The relevant mining machines would be shut down on May 23. The expected transition period is 3 to 4 weeks, and from 20:00 on May 26th, Beijing time, access to IPs in mainland China would be blocked.
“China’s mining is still difficult to completely ban, this time it is mainly aimed at corporate mining. Management and control can be achieved through financial audits on the income and expenditure side. For example, corporate mining will eventually be reflected in revenue and profit appreciation. If part of the profit is derived from mining, the company can not be allowed to enter the account. This way can block the companies’ mining behaviors.” Chen Weigang said that some individuals buy mining machines to mine, especially in areas with abundant hydropower. How to block them remains to be seen. “But it is equivalent to cutting off large households. Although the number of remaining small households is large, the total amount is not large.”
Regulatory gap brings challenges
“This round of China’s regulatory policies may be based more on the consideration of reducing energy consumption,” said the aforementioned senior cryptocurrency analyst.
In the global distribution of Bitcoin computing power, China occupies the absolute first place with 65.08% of computing power, far surpassing the United States, which ranks second, with only 7.24% of computing power. Specifically in China, the top four provinces in the distribution of computing power are all located in the west: Xinjiang, Sichuan, Inner Mongolia, and Yunnan. Xinjiang accounts for more than 35%.
Behind this is a large amount of power consumption. According to the index released by the Alternative Finance Research Center of the University of Cambridge, estimated at the end of May, the annual power consumption of mining is about 115.54 TWh. Intuitively, it accounts for 0.53% of the global annual power consumption. Electricity comparison shows that it is located after the UAE and before the Netherlands, ranking 33rd in the world.
In addition to the excessively high carbon footprint, how to supervise Bitcoin and other cryptocurrencies as investment products, and even whether it can be regarded as an investment product, is the focus of recent regulatory statements by various countries.
“Some people confuse the two concepts. Cryptocurrencies such as Bitcoin are not illegal currencies. Currency must be guaranteed by national sovereignty. It can also be seen from the evolution of currency forms that precious metal currencies such as gold and silver coins are transformed into paper currencies and digital currencies. The value of the currency itself has been declining, but now people are hyping the value of Bitcoin itself.” Chen Weigang believes that Bitcoin is not even regarded as an investment product, but only as a kind of “special work”. “The ‘tulip’ that was popular in Europe at that time can still see a bunch of flowers. Now Bitcoin is the air, it’s nothing at all.”
In the “Financial Stability Review” released in May, the European Central Bank also compared the hype of cryptocurrency prices to “tulip mania”, reminding its risk and speculative nature. On May 19, when the value of Bitcoin fluctuated drastically, the European Central Bank Deputy Governor Luis de Guindos bluntly stated that Bitcoin is an asset with very fragile fundamentals, and it is highly volatile. Crypto assets should not be regarded as “real investments” because it is difficult to discern their potential value. But at the same time, Guindos said that the volatility of the cryptocurrency asset market will not pose a risk to overall financial stability.
Overseas supervision is indeed tightening recently, but it is more focused on regulating cryptocurrency transactions to prevent risks and avoid illegal acts such as tax evasion. As SEC Chairman Gary Gensler pointed out while participating in a congressional hearing on May 26, crypto-assets are both commodities and securities in nature, and cryptocurrency exchanges need to be regulated more closely with the goal of giving investors the same protection they would enjoy in a securities transaction. The U.S. government has also recently proposed that cryptocurrency transfers of more than $10,000 must be reported to the U.S. tax authorities.
On May 21, the Hong Kong Special Administrative Region government recommended that cryptocurrency exchanges operating in Hong Kong must obtain the license of the Hong Kong market regulator, that is, “licensed operation” and can only provide services to professional investors.
“Overseas regulatory authorities have been strengthening the supervision of cryptocurrency exchanges. There are also exchanges such as Coinbase listed this year. Coinbase’s operation is quite conservative. For example, it will not open leveraged trading tools to retail investors, but will only open to some qualified institutions.” The aforementioned senior cryptocurrency analyst said, “Because of the supervision, the operation of the exchange is relatively standardized, and institutions also trust the exchange, forming a virtuous circle. Most of the institutions on Wall Street will place a large amount of funds on exchanges like Coinbase instead of some small and wild ones.”
He argues that “the regulatory stance abroad is indeed tightening, but not as severely as in China, where regulation has not chosen to gradually regulate cryptocurrency trading, but to some extent ‘shut down across the board’.”
In fact, in 2013, five ministries and commissions including the People’s Bank of China issued a notice on preventing Bitcoin risks. While clarifying that Bitcoin is not an illegal currency, they stated that “Bitcoin transaction is a kind of commodity trading behavior on the Internet. Have the freedom to participate under the premise of taking risks”. However, since then, the regulatory standards have gradually tightened. China’s investment structure with retail investors as the main body may be one of the reasons.
“Cryptocurrency trading should not encourage individuals to participate because of the high volatility and the cognitive requirements for investing in cryptocurrencies are very high.” Some people in China’s “Bitcoin circle” said that there are already more than a dozen cryptocurrency ETF funds established in the world, and institutional investment should become the mainstream.
Chen Weigang also believes that foreign bitcoin transactions are more of a game between some institutions and consortia, but in China, retail investment is the main one. “Just like the previous P2P, in fact, it appeared in the UK, the United States and other countries earlier than China, but the range of people involved in P2P at the peak of China was very wide, and this time the hype of Bitcoin is the same. What can exist abroad does not mean that it is reasonable to exist in China.”
“In fact, if all exchanges are blocked, or there is a gap in domestic and foreign supervision, it will also bring challenges to supervision, because anyone can register an account on the relevant website, and the generated code is the Bitcoin collection account, which is completely anonymous. It cannot be traced, but because there is a follow-up transaction link, the exchanges may also track the holder’s information. In this case, the exchanges can act as an “informant” for supervision.” A senior person in China’s Bitcoin circle revealed that he knew that although some exchanges cannot operate within the country, they still have close cooperation with Chinese regulatory authorities and are willing to provide information to the government.
Source: China News Weekly