After a strong start to the year, bitcoin and its fellow cryptocurrencies hit hard times yet again this week. The biggest news, and most wounding setback, was China’s announcement of new regulations banning all cryptocurrency mining and transactions. The government left no wiggle room: In the world’s most populous nation, buying, selling, and otherwise dealing in crypto is now flat-out illegal.
On Friday, 10 government bodies, including the People’s Bank of China, issued a joint statement vowing to crack down on cryptocurrencies and condemned the technology as a threat to citizens’ assets and a tool for facilitating criminal activities like money laundering. The price of Bitcoin fell about 8 percent on the news, but regained its footing somewhat later in the day. Other, smaller cryptocurrencies took even bigger hits.
China has been instituting increasingly restrictive laws on cryptocurrencies in recent years. The country previously made it illegal for corporations to provide cryptocurrency-related services and to run cryptocurrency exchanges in the country. These new regulations go even further, and essentially amount to a wholesale ban on most every activity that allows the cryptocurrency ecosystem to function. Now, even cryptocurrency exchanges outside of the country won’t be allowed to serve people living in China. The country’s National Development and Reform Commission also announced that it was cutting power off for cryptocurrency mining operations, which expend large amounts of electricity to solve complex mathematical puzzles for which they’re rewarded with units of digital currency. The agency escalated its campaign to root out unauthorized mining from the country last week by targeting people who pretend to be data researchers in order to hide these energy-intensive activities.
China has in the past been a popular site for mining due to low electricity costs in areas like Inner Mongolia, but the country is currently experiencing an energy crisis and trying to become carbon neutral by 2050, a goal that cryptocurrency is making harder to meet. In 2019, China was home to 75 percent of the world’s Bitcoin energy consumption. That number dropped to 46 percent in spring 2021, and will likely drop even more sharply with the new restrictions announced on Friday.
The Chinese government’s move to rein-in cryptocurrency also has to do with its desire to exert more control over economic activity in the country. Bitcoin and its brethren were designed as a tool for facilitating transactions without institutional authorities like banks or governments, so allowing them to flourish in any country takes some power away from state actors. China is now trying to supplant bitcoin by creating its own digital currency known as eCNY, which will be backed by the government. However, eCNY has only superficial similarities to bitcoin and doesn’t use blockchain, the ledger technology at the heart of all cryptocurrencies.
The unveiling of new restrictions in China wasn’t the only development weighing on cryptocurrency this week. Prices for bitcoin and other cryptocurrencies also fell on Tuesday in the wake of the collapse of the megadeveloper Evergrande, which used to be China’s second-largest building company. Evergrande’s revenues have not been able to catch up with its lavish borrowing, and now the company is more than $300 billion in the hole. The failure of such a massive entity tanked the stock market and also sparked a huge selloff of cryptocurrencies. Investors tend to cash in on their riskier assets when there’s turmoil in the markets, and cryptocurrencies are one of the riskiest financial bets you can make. Bitcoin dropped 5.7 percent in price from Monday to Tuesday.
U.S. regulators are training their sights on Bitcoin as well. Securities and Exchange Commission Chair Gary Gensler spoke at length about cryptocurrencies in an event hosted by the Washington Post on Tuesday, and he didn’t seem too optimistic about their future. Gensler noted that he doesn’t think there’s a “long-term viability” and later signaled that the SEC is working “overtime” to create new regulations for cryptocurrency markets that are likely to be quite a bit more aggressive than what’s already on the books. Of particular concern for the cryptocurrency is that Gensler left the door open to regulating stablecoins, or cryptocurrency that’s pegged to fiat currency, as securities. If that were to be the case, a number of cryptocurrency lending and trading platforms would be in serious violation of SEC rules. Say a prayer for the Winklevii.