China "turns off" Bitcoin

This article is reprinted from "China News Weekly," by Chen Weishan, original title: "China's 'Shutdown' of Bitcoin"

After reaching an all-time high in April this year, the price of Bitcoin plummeted, with China's intensified regulatory policies in mid to late May undoubtedly being one of the triggers.

Starting from May 18, China has been releasing a series of regulatory policies regarding cryptocurrencies: on May 18, the Inner Mongolia Development and Reform Commission established a reporting platform for virtual currency "mining" enterprises; on the same day, the China Internet Finance Association, the China Banking Association, and the China Payment and Clearing Association issued an "Announcement on Preventing Risks of Virtual Currency Trading Speculation"; on May 21, the Financial Stability and Development Committee of the State Council called for a crackdown on Bitcoin mining and trading activities, firmly preventing individual risks from spreading to the social domain; on May 26, the Inner Mongolia Development and Reform Commission released an eight-point proposal for soliciting opinions on resolutely cracking down on and punishing virtual currency "mining" activities.

From viewing Bitcoin trading as a commodity that ordinary people could freely participate in back in 2013, to the withdrawal of domestic virtual currency exchanges in 2017, and now the explicit crackdown on mining activities, China's regulatory policies on cryptocurrencies are the strictest among major economies in the world. Given the influence of Chinese players in the cryptocurrency world, every statement from Chinese regulators directly reflects significant fluctuations in Bitcoin's value.

Chinese Regulation Shakes Bitcoin Prices

"The price of Bitcoin is like a child's face, changing at will, often soaring and plummeting." A former Bitcoin "mine" owner told a reporter from "China News Weekly" that due to a sharp drop in Bitcoin prices, his "mine" incurred losses and was shut down before the outbreak of the pandemic in 2020, when Bitcoin's price hovered around seven to eight thousand dollars, causing him to miss out on the Bitcoin market that started in mid-last year.

By the end of 2020, Bitcoin's price had approached $30,000, and this trend continued into 2021, peaking at $64,863 on April 14.

"Central banks around the world had to adopt extremely loose monetary policies to cope with the impact of the pandemic, leading to abundant liquidity in the market. At the same time, the loose monetary environment raised concerns among some institutions about the depreciation of fiat currencies, prompting them to turn to some safe-haven products, and institutions began to recognize Bitcoin and other cryptocurrencies as a type of investable asset." When explaining why Bitcoin experienced a surge, a senior figure in the cryptocurrency circle believed that the trend of foreign institutions, especially Wall Street institutions, supporting Bitcoin was very evident over the past year. "Research reports also categorize cryptocurrencies as an investable asset class and provide clients with services related to cryptocurrency assets."

Investing in cryptocurrencies is not limited to institutions; companies like Tesla are also involved. Tesla reported a profit of $438 million in the first quarter of 2021, with nearly a quarter coming from Bitcoin trading. Its financial report showed that Tesla purchased $1.5 billion worth of Bitcoin in the first quarter of this year and made a profit of $101 million after selling part of it.

Tesla's "speculation" in cryptocurrencies is backed by Elon Musk's support for cryptocurrencies. "Another reason fueling the enthusiasm for cryptocurrencies this year is the endorsement from business leaders like Musk, whose statements on social media can easily disrupt coin values." The aforementioned senior figure in the cryptocurrency circle stated that besides these reasons, technological advancements also provide underlying support. "An important trigger for this market surge was the explosion of the decentralized DeFi ecosystem, which has spawned many functions and platforms similar to traditional financial institutions."

In his view, the influences of loose monetary conditions, institutional entry, and technological evolution are still ongoing. "Especially in recent times, institutions may not have exited the market, as the number of addresses holding large amounts of coins is still increasing, and some even believe that certain institutions are bottom-fishing."

However, the short-term effects brought by Musk are diminishing. On May 12, Musk questioned the high carbon emissions generated by Bitcoin mining and trading on social media, announcing that Tesla would suspend Bitcoin payments. As a result, Bitcoin's price dropped by more than 10% that day, falling to around $49,000.

A senior cryptocurrency analyst told "China News Weekly," "Since the beginning of this year, Bitcoin's price trend has been upward, even showing some overheating sentiment. Later, animal coins and even meaningless air coins emerged, indicating that a correction is necessary, and there is indeed a bubble in the price."

Just a week after Musk's questioning, on May 19, Bitcoin experienced a drop "with a fluctuation large enough to rank among the top ten in history," the aforementioned senior analyst told reporters. On May 19, Bitcoin directly broke through the $40,000 mark, even approaching the $30,000 mark, with a maximum drop of 30% in one day, ultimately narrowing the drop to over 13%. Other types of cryptocurrencies were also not spared; according to statistics from Bitcoin Home, the total amount of liquidation across major exchanges within 24 hours reached $7.006 billion, approximately 46 billion yuan, setting a record for the largest single-day liquidation in cryptocurrency history.

By the end of May, Bitcoin's price compared to its historical high earlier this year was nearly "cut in half." "The recent drop is definitely due to China's latest regulatory policies; the two countries with the greatest influence on cryptocurrencies in the world are China and the United States, and China's policies are absolutely crucial," said the aforementioned senior figure in the cryptocurrency circle.

Can "Mining" Be Completely Banned?

"It can be said to be a comprehensive ban." Chen Weigang, a supervisor at the China Banking and Insurance Regulatory Commission, told "China News Weekly."

"There should be almost no one investing anymore; the decline is significant. In terms of price, there are definitely more sellers than buyers, otherwise, how could it drop so much?" a Bitcoin holder told reporters.

"In fact, trading in virtual currencies, including Bitcoin, has been banned for more than three years now, and there are currently no exchanges operating domestically." Chen Weigang said. The ban he referred to was the "Announcement on Preventing Risks of Token Issuance and Financing" jointly issued by the central bank and seven ministries on September 4, 2017, which explicitly prohibited virtual currency trading.

About a year later, in July 2018, the central bank revealed that the 88 virtual currency trading platforms identified had basically achieved a risk-free exit, with Bitcoin trading in RMB dropping from over 90% of the global share to less than 1%, which was considered to have avoided a virtual currency bubble.

After the "9.4 Ban," domestic cryptocurrency exchanges moved their servers overseas, and regulators continued to block "offshore" virtual currency trading platforms. By the end of May 2018, 110 websites of trading platforms, including Huobi and Binance, had been blocked.

Although cryptocurrency exchanges no longer exist domestically and related websites have been blocked, players in the cryptocurrency circle have not stopped trading.

A person close to the regulators told "China News Weekly" that there are currently two main ways to trade cryptocurrencies, including Bitcoin, domestically: one is to trade on overseas exchanges by "climbing over the wall," and the other is through underground banks.

"For example, an underground bank registers two companies in China and the U.S., uses the company in the U.S. to purchase Bitcoin, and then the domestic company receives the payment for the Bitcoin." He explained that the regulation of such capital flows has become increasingly strict, "Previously, the funds often disguised as business payments, but now such payments also require sufficient proof, such as sales contracts, to ensure there is genuine business interaction; otherwise, it cannot be realized. Although it cannot be completely eliminated, trading through such channels is becoming increasingly difficult, and the regulation of speculative funds has been treated similarly to anti-money laundering."

Trading has long moved underground. This time, with the intensified regulation, whether it is the "Announcement on Preventing Risks of Virtual Currency Trading Speculation" issued by the three associations or the Financial Stability and Development Committee's statement, the trading aspect still follows the requirements of the "9.4 Ban." Many industry insiders interviewed by reporters also stated that the Financial Stability and Development Committee's clear crackdown on Bitcoin mining and trading "places mining before trading, indicating that this regulatory focus is on mining."

The response from local regulators reflects this as well. Inner Mongolia was the first to issue detailed rules on May 26, with the eight measures published by the Autonomous Region Development and Reform Commission targeting big data centers, cloud computing companies, telecommunications companies, internet companies, internet cafes, and entities providing site and power support for mining enterprises, while enterprises and individuals engaged in mining activities will be included in the blacklist according to relevant regulations. The crackdown on mining in Inner Mongolia began in March, when it announced a comprehensive cleanup and shutdown of virtual currency mining projects, with all projects to exit by the end of April 2021, while new virtual currency mining projects were strictly prohibited.

Some mine owners told reporters, "In fact, the requirements for sealing off mines have always existed, so there's no need to take it too seriously." However, this time the regulatory statement is clearly more severe. Although other regions have not yet issued detailed rules like Inner Mongolia, several mines contacted by "China News Weekly" reporters indicated that mining for Bitcoin, Ethereum, and other cryptocurrencies has been suspended, retaining only the less energy-intensive FIL mining projects, and are in the process of transferring mining machines overseas, "The speed of transfer is not that fast, as the company previously had no layout overseas."

Mars Cloud Mining also announced that to cooperate with the regulatory spirit of relevant departments, it has decided after careful consideration that some mining machines will be relocated to a mining site in Kazakhstan, with the relevant machines shutting down on May 23, and the expected transfer period is 3 to 4 weeks, with access from mainland IPs blocked starting at 20:00 Beijing time on May 26.

"Domestic mining is still difficult to completely ban; this time mainly targets corporate mining activities. Control can be achieved through financial audits of income and expenditure, as corporate mining will ultimately reflect in revenue and profit growth. If part of the profit comes from mining, it can be disallowed from being recorded in the company's accounts, thus blocking corporate mining activities." Chen Weigang said that for individuals purchasing mining machines, especially in regions rich in hydropower, how to block this remains to be observed in the future. "But it is equivalent to cutting off large holders; although there are many small holders, their total amount is not large."

Regulatory Discrepancies Bring Challenges

"This round of domestic regulatory policies may be more about reducing energy consumption." The aforementioned senior cryptocurrency analyst told "China News Weekly."

In the global distribution of Bitcoin computing power, China holds an absolute leading position with 65.08% of the computing power, far exceeding the United States, which ranks second with only 7.24%. Specifically, the top four provinces in computing power distribution are all located in the west: Xinjiang, Sichuan, Inner Mongolia, and Yunnan, with Xinjiang alone accounting for over 35%.

Behind this is a massive amount of electricity consumption. According to an index released by the Cambridge Centre for Alternative Finance, based on levels at the end of May, the annual electricity consumption for mining is estimated to be about 115.54 TWh, which accounts for 0.53% of the world's annual electricity consumption. Comparatively, it ranks 33rd globally, situated between the UAE and the Netherlands.

In addition to the excessive carbon footprint, how to regulate cryptocurrencies like Bitcoin as investment products, and whether they can even be considered investment products, has become a focal point of recent regulatory statements from various countries.

"Some people confuse two concepts: Bitcoin and other cryptocurrencies are not fiat currencies. Currency must be guaranteed by national sovereignty. The evolution of currency forms shows that the value has been declining from precious metal currencies like gold and silver coins to paper money and digital currencies, yet people are now speculating on the value of Bitcoin itself." Chen Weigang believes that Bitcoin is not even an investment product; it can only be considered a "speculative product." "The 'tulip mania' that was popular in Europe back then at least had a bouquet of flowers to show; today's Bitcoin is just air, with nothing behind it."

In the "Financial Stability Review" released by the European Central Bank in May, the speculation of cryptocurrency prices was also likened to "tulip mania," warning of its risks and speculative nature. On May 19, when Bitcoin's value experienced severe fluctuations, European Central Bank Vice President Luis de Guindos stated that Bitcoin is a fundamentally very weak asset with high volatility. Cryptocurrencies should not be regarded as "real investments" because their potential value is difficult to discern. However, de Guindos also stated that the volatility of the cryptocurrency asset market would not pose a risk to overall financial stability.

Overseas regulation has indeed tightened recently, but it focuses more on standardizing cryptocurrency trading to prevent risks and avoid illegal activities such as tax evasion. For instance, Gary Gensler, chairman of the U.S. Securities and Exchange Commission, pointed out during a congressional hearing on May 26 that crypto assets have both commodity and security characteristics, and there is a need to strengthen regulation of cryptocurrency exchanges to ensure that investors receive the same protections as in securities trading. The U.S. government also recently proposed that cryptocurrency transfers exceeding $10,000 must be reported to the U.S. tax authorities.

On May 21, the Hong Kong Special Administrative Region government suggested that cryptocurrency exchanges operating in Hong Kong must obtain permission from Hong Kong's market regulatory authorities, meaning they must operate with a license and can only provide services to professional investors.

"Overseas regulatory agencies have been strengthening their oversight of cryptocurrency exchanges. This year, there are exchanges like Coinbase that have gone public, and Coinbase operates quite conservatively, for example, it does not offer leveraged trading tools to retail investors, only to qualified institutions." The aforementioned senior cryptocurrency analyst stated, "Due to regulation, the operations of exchanges are relatively standardized, and institutions trust the exchanges, creating a virtuous cycle. Most Wall Street institutions will place large amounts of funds in exchanges like Coinbase rather than in smaller, unregulated exchanges."

He believes that "the regulatory statements abroad are indeed tightening, but they are not as severe as in China. Domestic regulation has not chosen to gradually standardize cryptocurrency trading but has, to some extent, implemented a 'one-size-fits-all' shutdown."

In fact, back in 2013, the central bank and five ministries issued a notice to prevent Bitcoin risks, clearly stating that Bitcoin is not a fiat currency while asserting that "Bitcoin trading, as a form of commodity trading on the internet, allows ordinary people the freedom to participate at their own risk." However, regulatory stances have gradually tightened since then, and the investment structure dominated by retail investors domestically may be one of the reasons.

"Cryptocurrency trading should not encourage individual participation due to its high volatility, and investing in cryptocurrencies requires a very high level of understanding." A person from the "crypto circle" told "China News Weekly" that currently, more than a dozen cryptocurrency ETF funds have been established globally, and institutional investment should become mainstream.

Chen Weigang also believes that Bitcoin trading abroad is more of a game among institutions and consortiums, while in China, it is primarily retail investor-driven. "Just like the previous P2P lending, which actually appeared earlier in countries like the UK and the US, but at its peak in China, the range of participants was very broad. The current speculation on Bitcoin is similar. Just because something can exist abroad does not mean it has a reasonable existence in China."

"In fact, if all exchanges are completely banned, or if there is a discrepancy between domestic and foreign regulations, it will also pose challenges for regulation, as anyone can register an account on relevant websites, and the generated code is a Bitcoin receiving address, completely anonymous and untraceable. However, because there are subsequent trading links, exchanges may still be able to trace the holder's information. In this case, exchanges can act as 'informants' for regulators." A senior figure in the "crypto circle" revealed to "China News Weekly" that, to his knowledge, some exchanges, although unable to operate domestically, still maintain close cooperation with domestic regulatory authorities and are willing to provide information to the government.