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Why is China clamping down on cryptocurrency?

In May of this year, Chinese financial regulators published a statement reminding users of the dangers of virtual money, warning that continuing to trade Bitcoin and other currencies online would leave them vulnerable.

Chinese official institutions restricted banks and payment companies from engaging with crypto-related enterprises again in June, following previous bans enacted in 2013 and 2017. Local governments around the country have shut down crypto-mining businesses after the government’s senior administrative cabinet threatened to crack down on Bitcoin sales and mining.

In September, China’s most powerful regulators declared a nationwide ban on cryptocurrency, declaring all cryptocurrency-related financial transactions unlawful. The government’s announcement made it clear that anyone involved in “illegal financial activity” will be penalised. Bitcoin’s price dropped by more than $2000 as a result of this occurrence.

For a long time, the Chinese government has regarded cryptocurrencies as a threat to its control over cash movements in the country. The administration of the country has also stated that they intend to punish “illegal” crypto-mining activities as a preventative measure against the dangers of a decentralised and unregulated economy with a blind and disorderly development.

China also says that its efforts to regulate bitcoin are part of a larger effort to meet its carbon reduction targets. The fact that Bitcoin and other cryptocurrencies require a lot of energy to mine is a widespread criticism. The act of producing Bitcoin to spend or trade consumes a staggering amount of electricity—more than the entire country of Finland, which has a population of 5.5 million people.

China has also been experimenting with its own government-controlled digital money. The e-yuan has the potential to be considerably faster and cheaper than standard online payment systems, as well as more efficient than Bitcoin (which requires massive computing power). It would also make it easier for the government to collect data and keep track of residents’ daily transactions, as well as having restricted access to their money. Making cryptocurrencies illegal could therefore be part of a larger push to divert individuals away from popular private financial service providers like AliPay and WeChat.

According to Sam Bankman-Fried, CEO of FTX (one of the largest cryptocurrency exchanges), China’s cryptocurrency sanctions may provide a wonderful chance for North American crypto mining to take off. Bitcoin mining is unlikely to stop, but businesses may migrate to Texas, which has a comparatively relaxed regulatory environment and low electricity costs.

The struggle to catch up with the $2 trillion cryptocurrency sector is a challenge that affects governments all over the world. Cryptocurrency regulation differs by nation, and there are valid concerns that these tokens could pose a threat to the global financial system. While the jury is still out on whether cryptocurrencies will be the future of global banking and trade or what destroys the western economic system as we know it—it can’t be denied that the market continues to grow in popularity.