Following the decision of the Central Bank China to label the Cryptocurrency related transactions illegal, the prices of the Bitcoins came crashing down drastically, but why China decided to label the Crypto related transactions as illegal? and what will be the serious consequencies of the same on the economy? Lets take a look in this article.
Let’s have a look at bitcoin first. Bitcoin is a digital currency that was created in 2009 by an unknown person using the moniker Satoshi Nakamoto. The transactions do not include any middlemen, such as banks.
Bitcoin can be used to purchase right from the Starbucks Coffee to Xbox games, Expedia hotel reservations, and Overstock furniture purchases. However, much of the talk is about how to make money by trading it. Bitcoin’s value skyrocketed into the thousands of dollars in 2017.
A return visit. The Chinese government’s anti-cryptocurrency campaign intensified today, with the country’s central bank declaring all crypto-related transactions illegal.
“There are legal problems for individuals and organizations engaging in virtual currency and trading activities,” the People’s Bank of China said in a joint statement with nine other government agencies.
Even Chinese people working abroad were not exempt, according to the Financial Times, with the government stating that they would be “investigated according to the law.”
Bitcoin and other cryptocurrencies have dropped in value as a result of the news. Bitcoin and Ethereum were down 4.5 percent and 7.5 percent, respectively, at the time of writing.
The move follows previous Chinese Communist Party propaganda that forbade cryptocurrency mining and warned financial institutions against doing so.
The crackdown on cryptocurrency comes as China’s real estate developers grapple with a liquidity crisis that threatens to spread throughout the economy.(reference: https://money.cnn.com/infographic/technology/what-is-bitcoin/index.html)
The Effect of The Dominoes
Developers have borrowed extensively to ride the wave, as real estate accounts for over a third of China’s gross domestic product. However, after President Xi Jinping stated in 2017 that “houses are for living in, not for speculation,” the Chinese Communist Party has turned against the industry in recent years.
Xi may not be motivated solely by ideology in this case—the country has become littered with incomplete or vacant homes as migration to cities has halted and birthrates have decreased.
According to the Rhodium Group, the market’s oversupply could accommodate up to 90 million people. Local governments have significantly reduced land purchases, which are now down 90% year over year.
Outflows of Capital
All of this leads us to the continuation of the cryptocurrency crackdown. The Chinese government has historically restricted cash flow outside of the country, preferring that investors maintain money in the country’s economy.
However, given their relatively anonymous nature and the relative ease with which they can be transferred into other countries’ currencies, cryptocurrencies are more difficult to govern.
The Chinese government’s crypto crackdown isn’t merely because bitcoin mining consumes too much energy, as it did, or because it’s frequently used in unlawful transactions, as it was. It’s because the Chinese government is likely aware of the risks posed by an over-leveraged real estate market, and it’s striving to lessen the effects if and when the market corrects. Cryptocurrencies are caught in the centre of the battle.
According to the Business Insider, Initially, Bitcoin dropped by as much as 9% to around $41,000. However, by Friday afternoon, bitcoin, ether, and tether had recovered from intraday lows.
Since 2013, when it banned banks from accepting bitcoin transactions, China has been waging a years-long assault against virtual currencies. Local bitcoin exchanges were also ordered to shut down in 2017, forcing Chinese citizens to use offshore exchanges. Beijing banned financial institutions from providing cryptocurrency services and bitcoin mining earlier this year.
China is now going much further, focusing on individuals rather than businesses and closing off avenues for getting around previous restrictions.
The PBOC warned on Friday that persons suspected of a variety of actions, including purchasing and selling cryptocurrency and providing pricing information, might face criminal charges. It also targeted offshore virtual currency exchanges that serve Chinese citizens, claiming that they are operating unlawfully.
China has cited environmental concerns about mining, as well as fears about digital assets being used in financial crimes and causing financial instability, as reasons for the crackdown.
However, as crypto activities are prohibited in China, the country has been developing its own digital yuan, which dates back to 2014 and has been tested with commercial institutions since 2017.