What is the truth behind crypto mining ban?No matter how strongly and firmly The People’s Bank of China or PBoC argues that they have banned crypto in their country to ensure economic stability and prevent financial crimes, it is true but only partially.
There is much, much more to it. The good thing is that you will not have to scour through the internet to know all about it because you are fortunately in the right place.
This is an article that will tell you about all the reasons along with the truth behind such a move.
You may wonder why exactly China, for example, would ban crypto mining in the country when it was the major contributor in terms of Bitcoin mining accounting to half of it.
It is also in accordance with their new economic policy which focuses on greater intervention of the state and to epitomize the common prosperity aspect.
The PBoC also emphasized on the risks of cryptocurrencies disrupting the entire traditional financial system due to its extremely speculative nature.
But, it seems that the actual reasons are not revealed and therefore people are left to guess what these could be.
Yes, it is true that it is not that the Chinese government has banned crypto for the first time in 2021.
It has been done several times before but it was the most severe of all bans last year. Well, here is all that you should know.
What is the Truth Behind Ban on Crypto Mining?
The list includes names like Egypt, Oman, Morocco, Iraq, Qatar, Algeria, Bangladesh, Tunisia, and China, and the list tends to grow longer.
If you are familiar with the crypto industry you will understand that a ban on it is not at all a surprise.
Here are the reasons why with specific reference to the ban by China in particular.
China has always maintained a hostile relationship with this digital asset and it dates back to 2013.
This was the first time when China rolled out the first set of restrictions.
You may feel that the ban in 2021 by China on crypto has put the final nail in the coffin but it is far from the truth.
Instead, you should consider it just as another reiteration of the directives that the central banks of the country issued on crypto 8 years back.
If you look at the history and timeline of the country, the facts about the crypto ban by China as well as the precursors will be clearer to you.
- OnDecember 5, 2013 the PBoC along with the Ministry of Industry and Information and other financial authorities issued a notice jointly to prohibit the commercial banks from handling Bitcoin related transactions. They said then that it can help in money laundering because it lacked central or national authority.
- On September 4, 2017 China imposed new bans on crypto ICOs or Initial Coin Offerings saying that these are illegal mechanisms to raise funds. However, the main intention was to promote the weakening Yuan and stop the outflow of money from the country illegally.
- In April 2019 the attention was on Bitcoin mining this time. The NDRC or National Development and Reform Commission of China considered Bitcoin mining to be highly polluting and it labeled the coin as ‘undesirable’ in their list of industry segments that ought to be either encouraged, or controlled or phased out by the local government. However, later on the NDRC removed Bitcoin from the list after giving much thought to it.
- Almost all through 2020, as it was indicated a year back, the government of China squeezed its grip on the crypto exchanges operating within the boundaries of it. The activities of these crypto exchanges were monitored to find out whether or not there are any frauds or money laundering issues. And, finally in August that year, the PBoC blocked more than 100 foreign sites that offered crypto exchange services.
- And, lastly in 2021, crypto trading and mining was banned in China completely. The major mining hubs introduced policies to stifle the Bitcoin miners and the State Council also took proactive measures as did the provincial governments to wipe out crypto mining. They all said that it is energy-intensive and prevented them from achieving their environmental goals.
However, the most important question is why is China in particular so hell-bent on imposing a ban on crypto?
Is it a calculative strategy to lower the price of crypto and then buy them back at a low price?
Well, this may sound remotely true but there is a possibility of it, and, of course, there is a lot more to it.
Banning crypto by any country can be an effect of several good reasons.
One primary reason is that the country desperately wants to put their national currency out of the competition offered by these innovative, unregulated, unmonitored, transparent, and deliberately decentralized digital coins.
Also, as it is in the case of China, they desperately want to promote their Digital Yuan and this is quite practical and proactive.
They are justifying their position by saying that they want to put a check on the swelling electricity consumption due to mining crypto coins.
This reason, however, seems to be justified enough because China alone contributed three-fourth of Bitcoin mining and therefore consumed a lot of energy.
The ban has brought the level significantly down to nearly 40% and it is expected to go down further this year end.
However, this does not seem to be a strong enough reason because there are several other crypto coins that are eco-friendly such as Cardano, Chia, and IOTA that are available in the market.
These coins consume much less energy in comparison to Bitcoin. Then the question is: why ban all crypto coins completely?
Moreover, the newfound conception of ‘Green Bitcoin Mining’ derived 56% of the energy required for mining the coin globally from renewable sources.
Therefore, a strict regulation would have done the job instead of a complete blanket of crypto mining.
With all these controversies in their reasoning and substantiating, it seems that the energy consumption aspect amounts to nothing!
It also seems that the banning of crypto by China specifically is more of a coordinated attack on the crypto industry and market.
This is backed by less or no facts and more willingness to do it so that the government can have full control over the financial activities.
Moreover, the timing of this crypto ban by China raises quite a few eyebrows given the fact that the country is trying hard to promote the government-backed, in-house, digital currency, eCNY.
Therefore, it is evident that they will try to unseat Bitcoin which is very popular among the crypto users.
Another significant point that raises some questions on the good intent of China especially to ‘save the environment from crumbling’ due to carbon emissions is their deliberate absence from COP26, the global conference on climate held in Scotland.
Is it that they want to go alone, or do they want to be the leader, or is it simply that they have other secret intentions to impose such a ban on crypto?
Just like China, the other countries that banned crypto, have good reasons to be increasingly fearful of Bitcoin that may destabilize their traditional financial system. These are as follows:
- Back in time, Bitcoin fueled illegal transactions on the dark web. Of late, Bitcoin is used extensively for paying off ransomware attacks. Both these incidents indicate that Bitcoin certainly is not a reliable, effective and acceptable medium of exchange to make day to day transactions.
- Secondly, the value of Bitcoin is highly unstable. One moment the price may be low and in the next instant it can increase significantly, and vice versa. Therefore, the time difference between a request of coins and its delivery can cause significant discrepancies in the actual amount paid.
- Moreover, the Bitcoin blockchain network is known to be very slow. Therefore, if there is a large volume of transaction to be processed, it can neither be done quickly nor cheaply.
- Add to that, there is another significant issue with Bitcoin which is mainly due to its speculative nature. This digital asset typically does not have any intrinsic value and instead the value proposition of it entirely depends on the scarcity of the coin. Typically, Bitcoin has a finite supply of 21 million which puts a hard cap on it much unlike the fiat currencies that can be printed at will by the central banks.
With all these worrying factors, it is quite understandable why the government of China is so concerned knowing the fact that several households have channeled their savings into this vulnerable and speculative asset.
This is not a thing they expected, especially given the fact that they are still trying to come out of the effects caused by the speculative bubble of the housing market, which they encouraged before.
Losing control over the domestic traditional payments systems is also a worthy concern of the governments.
They think that this may render their traditional money issued by the central bank irrelevant.
Countries that have imposed a complete ban on crypto such as China also are wary about the comparative stability of the new crypto coins called the stablecoins.
These are the coins that are backed by fiat currencies and their stable value may make them a useful and effective alternative to traditional fiat currencies to make payments.
Apart from that, the stable coins may also be used by people to circumvent the regulations regarding cross-border financial flows.
If such a thing is allowed to happen then it will be very difficult for the government, if not impossible, to control the exchange rate of renminbi.
And, most importantly, the central banks of most of the countries have already started to design digital versions of their national fiat currencies, for example, the Digital Yuan of China.
As said earlier, these need to be promoted and given a clear playing field without the stiff competition from crypto currencies. And, hence the complete ban.
Also, with respect to Digital Yaun, there seems to be another good reason that China has banned crypto in 2021. It is that: allowing the cryptocurrencies to coexist with their state-backed digital currency will be a serious threat.
Crypto will give a lot of competition to it especially when the Chinese government is trying to promote it and make it available to the foreigners visiting the country during the 2022 Winter Olympics in Beijing.
This, they think, will cause some serious setbacks in the successful adoption of their digital currency.
Therefore, it is quite understandable that the Chinese government will be least interested to allow any other digital coin to rise and prove to be a good enough and attractive alternative mode of payment.
The timing seems to be just right for a complete ban on crypto, especially Bitcoin which is a very popular and widely used crypto coin in almost all over the world.
Therefore, the governments of these countries, especially the Chinese government, consider cryptocurrencies to be an effective conduit to evade capital controls and government regulations.
So, the ‘power crunch’ and ‘conservation of energy’ perspectives are not the only reasons for a complete ban on crypto in most of the countries.
However, in the process what the governments overlook is the possibilities and prospects of blockchain technology that powers the cryptocurrencies.
This innovative technology can be used effectively and beneficially in several different areas of finance as well as other industry sectors including automotive, law, real estate and more, which eliminates the need of intermediaries to facilitate a transaction.
The whole intention of the governments of the countries banning crypto was and is to make its future murky, but, fortunately or unfortunately, this act of theirs has opened another significant avenue.
It has made digital payments more easily accessible which also involves low cost.
Therefore, if these new technologies are permitted to develop further, it will also widen the accessibility to fundamental banking and financial services.
This will be a significant help to those low-income households as well as to those people who stay in an area where there is no proper financial institution or system existing.
However, you may ask now, are China and these countries finally out of the crypto game after their complete ban? Well, not really.
China, in particular, is one of the largest manufacturing countries of crypto mining equipment.
Therefore, the local governments are typically not motivated by such enforcements.
Moreover, a lot of crypto mining activities take place in the relatively poorer parts of China such as Sichuan, Xinjiang, Inner Mongolia, Guizhou, and others.
Crypto mining activities still happen in these areas, albeit on a much smaller scale.
However, they are always wondering what their next step would be and where they will move if they ultimately have to.
Moreover, some Chinese industry observers think that the ban on crypto by the government will not go as far as prohibiting the ownership of crypto coins even if it is made very clear that if they are scammed by any crypto-related schemes they will not get any legal protection.
And, scams are not uncommon in China.
Also, people will find other ways to trade crypto coins such as through VPNs or Virtual Private Networks or even via Over the Counter or OTC trading where crypto coins are exchanged for cash between peers.
Everything here is done offline.
However, in these processes the amount of risks involved will be much higher and there will be less legal protection for the investors.
From the perspective of the government, there is nothing to worry about because they believe that this will eventually narrow down the retail exposure to digital assets.
On the other hand, a few crypto enthusiasts believe that the crackdown on crypto and major exchanges by the governments will push the crypto traders to the so-called DeFi or Decentralized Finance platforms.
These are also blockchain-based platforms that provide different types of services and these companies are typically not controlled by a single company or a party.
They say that if such a platform is truly decentralized over and above its name then it will not have to comply with these regulations and will stand strong irrespective of what China or any other country thinks, does or says about cryptocurrencies.
However, there is a problem here.
That is why when the United States Securities and Exchange Commission or the SEC investigated Uniswap they totally disregarded their decentralized label.
Later on, they consulted with the software developers of the project to find an easy way out so that they are not penalized.
If the Chinese government follows the footsteps of the SEC, these so-called DeFi platforms may also be booked.
Therefore, most of the DeFi projects follow the ‘better safe than sorry’ approach, especially after the ban.
Several of these DeFi platforms have removed the Chinese users from the platform and have also blocked their channels on the popular texting service of the Chinese, WeChat.
After all these things discussed, one thing is very clear. It is that the crypto sector in China and other countries are over as of now.
The impatient traders and investors are either moving underground or overseas, or simply throwing in the towel.
The miners too have moved to other countries to build a new mining setup and continue mining crypto from their newfound homes.
Others who are not willing to leave the country due to specific reasons are selling their crypto mining rigs on the market or to any individual they can find at bargain basement prices.
And, prices are falling and things are getting worse by the day.
However, the paradox especially with the Chinese ban on crypto is that though they have eradicated crypto from the country successfully, they still remain exceedingly bullish on blockchain which is the digital ledger technology that underpins most of the crypto coins.
It is more evident and clearly understood when the Chinese President says that they want to become the number one country in Artificial Intelligence or AI, Internet of Things or IoT, and blockchain technology.
Therefore, their plan is very clear. It is to capitalize on the benefits offered by blockchain to the maximum but without crypto.
Lessons for other countries:
Now coming back to the crypto ban issue, China however surely has allowed other countries that still favor crypto mining and transactions to take some right lessons and implement in their approach towards crypto.
It will be extremely unwise to resist oversight and regulation outright or claim that technology will regulate the industry.
Instead, the crypto industry itself should get involved with the regulators and the governments to design a more effective regulation.
This will offer a lot of trust, stability, and legitimacy to the industry for its own benefit.
They have blocked all Chinese IP addresses.
In addition to that, all Chinese citizens are also targeted who are working in any crypto-related company abroad announcing that their work is illegal and they are at the peril of being lawfully investigated.
All these indicate that the crypto industry has taken a more cautious approach when it comes to providing their services to the Chinese people.
However, it is only to be seen in the future how exactly the Chinese citizens are threatened by this new enforcement.
As said earlier, the primary intention to ban crypto by the Chinese government is to ensure capital control and prevent it from moving out of the country which can be done easily with crypto.
This can be noticed very clearly if you consider the fact that the government places a limit of $50,000 annually for purchasing foreign currencies.
This shows its intention to impose stringent capital controls.
Back in the time, people who were rich and lived in China found it very easy to deal with capital controls.
They did so by buying foreign real estate or even by persuading their staff to send money to foreign banks.
Creative invoicing was also a way used by them to get around capital controls for international trades.
However, when Bitcoin was available, the people of China found it that acquiring foreign assets was much easier.
The best part was that it did not fall under the supervision, scrutiny, and control of the Chinese authorities.
Therefore, it was easy for them to circumvent the rules related to capital control by using the digital asset.
In fact, it was much easier in comparison to traditional currency exchanges that are based on conventional banking systems.
It was all due to the decentralized nature of Bitcoin and the underlying blockchain technology.
This was the case for not only Bitcoin but for all crypto coins based on blockchain technology.
The government of China has always been worried about capital flight in spite of trying their best to by placing more stringent capital controls.
However, how far these restrictions were useful is debatable because it could not stop capital flight from the country.
On the contrary, it increased considerably between 2009 and 2018.
In 2017, the Chinese government imposed some restrictions when PBoC banned all crypto exchanges from operating in China.
However, owning crypto coins or mining them was not forbidden then as it was in the 2021 restrictions.
At that time, capital flight control was not cited as the reason for the 2017 restrictions but the authorities did place some extra limitations on making overseas investments by any Chinese company.
This restriction along with those imposed on the crypto exchanges in 2017 was however considered as an indication of the ensuing tightening of foreign investment by Chinese companies.
This specific crypto coin therefore became more favored by the people following the ban on crypto exchanges in China in 2017.
This ban by the PBoC made trading Bitcoin for Tether illegal for all crypto exchanges but it was still doable by the Chinese crypto traders to obtain Tether by making discreet trades through the OTC brokers or via any foreign bank accounts.
Now, with relation to capital controls, you should consider the common prosperity factor to understand the truth behind banning crypto.
Continuing with the example of the Chinese ban, it can be said that the threat to capital flight still remained even after the bans imposed by the Chinese government.
This, however, became all the more noticeable and a priority for the PBoC and the Chinese government especially after the COVID 19 pandemic in order to stabilize the crumbling economy.
As a result, China especially launched its very own ‘common prosperity campaign.’
This was the result of their fear that bigger capital flight will be fuelled due to the comparatively faster recovery of the US economy.
This is because the Chinese citizens will be more inclined to acquire assets in the United States to ensure greater and better financial security.
Ideally, the common prosperity campaign of China is considered to be a much heavier capitalistic approach to manage their economy.
At the same time, it is also considered to be an economic strategy that looks into the matter more intrinsically.
The primary objective of this prohibition was to curb down the outward investments and in its place encourage the rich people of China to accept the elevated income taxes and to contribute their wealth internally.
Through the common prosperity program, China wanted to curtail capital flights and support the domestic exchange of the wealth of the people.
Otherwise, its effort to redistribute wealth will be made far more difficult, if not unachievable.
The goal would be very hard to accomplish if the rich people of China succeeded in circumventing capital controls, which were already strict enough, by acquiring overseas assets through the offshore crypto exchanges.
Therefore, a ban was very necessary on the operation of the crypto exchanges.
Therefore, it is quite clear that the prohibition of crypto by the Chinese government is considered to be a strong response to the perpetual setback of capital flight out of China.
And, it was the cryptocurrencies that were making this chronic issue of capital flight even worse given the fact that an enormous quantity of capital flight has already occurred through the crypto exchanges.
Hence, the ban was imposed on them.
However, considering all political aspects, imposing such a strict restriction on crypto will be quite difficult for any country to enforce.
This means that capital flights are highly likely to continue and it is only time that can tell what and how severe the final economic impact of it will be.
Things will fade over time and so will the stand of these countries that ban crypto trading, investment, and mining.
It is quite difficult for any country whether it is China or any other to control something that is as innovative as cryptocurrencies.
Moreover, enforcing such bans on crypto will be made more difficult due to the internet which is typically the ‘breeding ground’ of these innovative digital coins.
Therefore, the countries like China will need to do a lot more than simply labeling crypto illegal. It will hardly put off domestic investments in crypto.
The growth of crypto cannot be confined within the border of a country because there will be other exchanges outside its peripheries accessible at that time due to the internet and therefore its scope for growth cannot be restricted.
Therefore, in the end it can be said that though a few countries like China are trying hard to put cryptocurrencies in shackles by imposing bans on its use in one or in all forms, it will not be permanent since it will not be very effective.
The popularity of these decentralized, immutable, and transparent coins will continue to increase and that too at a rapid pace.
This is because it can be traded all over the globe from anywhere through the internet which will scale it much higher and beyond the temporary Fear, Uncertainty, and Doubt or FUD.
When countries impose a ban on crypto in all forms or in one, there are lots of reasons behind it than the apparent.
Most people do not realize it and make panic sales. However, this article will educate them and to desist such activities.