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China's Sweeping Cryptocurrency Ban Was Inevitable

Every time Beijing announces a crackdown on their industry, the running joke among the crypterati is that China has already banned cryptocurrency 18 times. Chinese government agencies have issued a string of increasingly restrictive but never conclusive legal prohibitions of various aspects of crypto since 2013; all the while, China’s crypto industry has thrived. Turns out the 19th time might be the charm.On September 24, China’s central bank and its National Development and Reform Commission issued two documents. One outlawed cryptocurrency mining following an earlier crackdown in May, and the other declared all cryptocurrency transactions illegal and all companies providing cryptocurrency trading services to Chinese citizens as engaged in illicit financial activity. Some of the usual nonplussed aplomb was deployed on crypto Twitter, but the general reaction to the ban is that this time China is serious.“The ban is sweeping, absolute, comprehensive. It is not focused on some partial aspect,” says Jonathan Padilla, a cofounder and deputy director of Stanford University’s Future of Digital Currency Initiative, who has conducted field research at China’s central bank. “And it seems that top-level government officials are taking this on.” The authorities signing off on at least one of the two documents include the Ministry of Public Security, the Supreme People's Court, and the Supreme People's Procuratorate—suggesting that aggressive enforcement is likely.Several exchanges, wallets, and other cryptocurrency companies have announced that they will stop providing services to users in mainland China and enforced a sweeping block of all Chinese IP addresses on their services. Given the wording of the official document, which explicitly singles out overseas exchanges catering to Chinese residents, the industry appears to have taken an overcautious approach. “How much individual citizens will be threatened by the new level of enforcement remains to be seen,” says Luisa Kinzius, a director at China-focused consultancy Sinolytics. “[But] the announcement is also targeting any Chinese citizen working for crypto-related companies abroad, declaring their work as illegal and putting them at risk of being legally investigated.”The ramp up of China’s repression of bitcoin and other cryptocurrencies was always going to happen. Crypto’s borderless and unregulated nature runs counter to the Chinese government’s vision for a state-dominated economy. In addition, Beijing sees cryptocurrencies as the epitome of mindless guesswork. “The Chinese government just restated in its new 14th five-year plan— China’s economic planning outline for the next five years—that the financial system should primarily serve the real economy, not speculation,” Kinzius says. “China is very hesitant towards pure financial speculation due financial stability concerns—and, of course, cryptocurrency is very much driven by speculation.”Those general concerns are now compounded by recent developments. In September 2020, China announced its plan to end its year-on-year growth of 22CO2 emissions by 2030 and become carbon neutral by 2060. That necessarily entails a crackdown on cryptocurrency mining, the energy-consuming and often carbon-belching process used to maintain a cryptocurrency’s network, which Chinese authorities regard as having almost no benefit for the country's economy. On the other hand, China is currently piloting its Digital Chinese Yuan, a state-backed digital currency designed to offer the surface-level convenience of cryptocurrency with none of the privacy and decentralization benefits of it—or, arguably, its lack of governmental oversight. From Beijing’s point of view, to allow the coexistence of the Digital Chinese Yuan with any other virtual asset doesn’t make sense. China, Kinzius says, was interested in “avoiding competition [from] cryptocurrencies,” especially as it prepares to make the Digital Chinese Yuan available to foreign users during the 2022 Beijing Winter Olympics.“​​To ensure a successful adoption of the digital currency, China has no interest in other rising, attractive alternative payment options,” she says.