Crypto Could be in Trouble after China Declares all Crypto Transactions Illegal

The People's Bank of China has declared all cryptocurrency-related transactions illegal, vowing to crack down on trading and banning overseas exchanges from providing services to Chinese investors. It has also stated it will stop all companies from facilitating cryptocurrency trading and will strengthen its supervision over such illegal activities.

Once the news broke, Bitcoin (BTC-USD) tumbled 4.5% to trade at $41,509 (£30,357). It continues to stay below the key $50,000 mark and is far off from its all-time high of more than $63,000, which it hit in April this year. Ethereum (ETH-USD), the second-largest crypto by market cap, plunged almost 7% and trading at $2,918.

"We’ve seen little in the way of knee-jerk reaction from clients surrounding this news from China," said Freddie Williams, sales trader at digital asset broker GlobalBlock. "We’ve also seen this before from China where news of bans have been reported over the years, but it has not prevented the adoption of bitcoin and digital assets from continuing their upward trend," Williams said.

This news comes after Evergrande, China’s second-largest real estate developer, was announced to be crumbling under its $300 billion debt crisis. Holding such an integral stake in China’s economy, a possible default on its loans would severely cripple the world economy, more than it already has so far. China’s crypto ban could have the same effect on the crypto market, which could then spill over into the mainstream stock exchange.

Bottom Line

China’s reasoning for the ban is believed to be related to "preventing and controlling financial risks." In June, it banned mining in Sichuan, the country's second-biggest bitcoin mining province, leading to an influx of crypto refugees setting up camp in Eastern Europe and the United States.

In 2017, after bitcoin’s first meteoric rise into the financial mainstream, China banned initial coin offerings (ICOs) as a way to prevent the “serious disruption of the economic and financial order.” In the summer of 2021, china intensified the crackdown on cryptocurrency mining, banning the practice outright in some provinces and restricting it heavily in others. The next logical step was for China to ban crypto trading altogether, which seems to have transpired.

“The real issue is about control, and what governments don’t like is [that] bitcoin takes control of people’s monetary futures away from governments and [places it] in the hands of individuals,” according to Ross Gerber, Gerber Kawasaki Wealth & Investment Management CEO.

To combat the United States over its control over the cryptocurrency market, China released its own coin called the Digital Currency Electronic Payment (DCEP). The country’s state-run digital payment and processing network uses blockchain technology similar to cryptocurrency but is centrally controlled and operated by the Chinese government. Additionally, user data is collected and kept by the state.

The banning of crypto trading might appear to hurt China’s economy initially, but in the long term, this sets China up for future success based on its goal of total economic control of all Chinese markets. Previously, China held more crypto activity than any other nation in the world. The sheer size of the population, 1.4 Billion or around 18% of the world population, coupled with cheap and available electricity, made the East Asian country a hotspot for bitcoin mining and transactions. However, now this area will be solely dedicated to DCEP, to China’s extreme benefit.

However, not all is lost for cryptocurrency.

"We’ve also seen this before from China where news of bans have been reported over the years, but it has not prevented the adoption of bitcoin and digital assets from continuing their upward trend," Williams said.

While cryptocurrency might initially tank, this opens up the opportunity for the United States to sweep into the gaping whole China has left, giving the United States an even more significant advantage in the market. This could potentially give rise to further cryptocurrency development and regulations, providing the market with less volatile digital currencies.