China’s war on bitcoin just hit a new level with its latest crypto crackdown

Budrul Chukrut | LightRocket | Getty Images

China’s central bank said Tuesday it had called for the shutdown of a company that “was suspected of providing software services for virtual currency transactions.” The statement, issued by the Beijing office of the People’s Bank of China, also warned institutions not to provide other services related to virtual currency, including providing business premises or marketing.

Lashing out against digital currencies is nothing new for the authoritarian state.

In 2013, the country ordered third-party payment providers to stop using bitcoin. Chinese authorities put a stop to token sales in 2017 and pledged to continue to target crypto exchanges in 2019.

But typically, each time Beijing has lashed out at the crypto industry, the sting has worn off and the rules eventually softened.

This time, however, appears to be different.

In May, China banned financial institutions and payment companies from providing crypto-related services. In June, there were mass arrests in China of people suspected of using cryptocurrencies in nefarious ways. That same month, regulators dialed up the pressure on banks and payment businesses to stop providing cryptocurrency services, and Weibo, the Twitter of China, suspended crypto-related accounts.

As of July, half the world’s bitcoin miners have now gone dark following Beijing’s call for a severe crackdown on bitcoin mining and trading.

“China’s government is doing everything they can to ensure that bitcoin and other cryptocurrencies disappear from the Chinese financial systems and economy,” said Fred Thiel, Marathon Digital Holdings CEO and Bitcoin Mining Council member.

Why now?

So why China has essentially declared war on cryptocurrencies in 2021?

“We’re all wondering,” said Nic Carter, founding partner at Castle Island Ventures.

One theory is that it’s part of a broader law-and-order push ahead of the hundredth anniversary of the Chinese Communist Party this year.

“They’re cracking down on all sorts of undesirable behavior,” Carter said.

Crypto has long been synonymous with crime in the mainland.

“The largest-ever Ponzi in crypto was likely Plus Token, which was a Chinese project,” he said.

In that scheme, scammers swindled $5.7 billion from investors and dozens were arrested. “That will be lingering in their memory,.”

Another theory is that China is clearing the runway for its very own digital yuan, a central bank digital currency that’s been in development since 2014.

“Part of this is to ensure the adoption of China’s central bank digital currency, and part of this is most probably to ensure financial surveillance activities are able to see all economic activity,” explained Thiel. The digital yuan could, theoretically, enable the government greater power to track spending in real-time.

But Carter argues that bitcoin and the digital yuan are different to the point that they can’t really be considered direct competitors.

“That’s certainly the most commonly cited reason,” Carter said. “I just don’t know if I believe it. They’re such distinct systems from each other.”

The most likely motivator, according to Carter, is that Beijing is looking to stem capital outflows via stablecoins and cryptocurrencies. “China choking off the flow of yuan to crypto is a big deal,” he said.

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