Is China Really Cracking Down on Cryptocurrency?

If you just got invested in cryptocurrencies over the past year, congratulations! You’ve finally experienced your first crash!

Given that many investors (particularly retail) have only just started looking at cryptocurrencies since 2020, they have only known growth and rallies.

For seasoned (perhaps diamond) hands in the cryptocurrency space, crashes are par for the course.

To put things in perspective, since 2011, Bitcoin has suffered four crashes of more than 80% and no fewer than 16 crashes of greater than 30% (17 if you include what happened over the past 24 hours).

Welcome to cryptocurrencies!

You’ll come for the profits, you’ll stay cause you’re hanging on for dear life.

And while there are as many reasons being attributed for the recent crash as there are cryptocurrencies, one possible factor that stands out is the allegation that Beijing is cracking down on cryptocurrencies.

But is that true?

On Tuesday, three financial industry associations, which include banks and online payment firms, reminded their members to not offer any cryptocurrency-related services, including account openings, registration, trading, clearing, settlement, and insurance.

But those restrictions are not new, and have been in place since 2017, when Beijing basically banned cryptocurrency trading in China.

That the “reminder” came from a trade association and not Chinese authorities should be telling.

For years, Chinese have been trading cryptocurrencies, using it to spirit away capital from the Middle Kingdom and running some of the biggest cryptocurrency exchanges on the planet.

And it’s estimated that as much as 75% of all Bitcoin mining occurs within China as well.

One possibility is that cryptocurrencies aren’t the target, but clearing the path for China’s digital yuan could be.

Controlled by the People’s Bank of China, China’s digital currency provides Beijing with a heightened ability to monitor economic activity and its people, and more importantly, gives Communist apparatchiks the power to financially “erase” undesirables.

Being both programmable and trackable, a digital yuan would give Beijing hitherto unfathomable control over China’s enormous economy, allowing Chinese policymakers to know every consumer choice and give the Chinese Communist Party the power to directly affect spending behavior, for instance by setting a expiration date on certain digital currency issuances.

Yet that attempt to gain such power over the economy has the potential to also spur a demand for cryptocurrencies in the future, because the greater Beijing’s desire for control, the stronger the urge from Chinese nationals to send at least a part of their net worth offshore through anonymous stores of value and mediums of exchange (can you think of any?).

If nothing else, the media headlines which said that China was “cracking down on crypto” were entirely misleading.

It was an industry association and not an official pronouncement from the People’s Bank of China, reminding financial institutions not to give in to the temptation to provide cryptocurrency services and to possibly protect the Chinese from the volatile swings the nascent asset is so notorious for.

Think of it as a public service message more than anything else.

Because China has more or less “banned” cryptocurrencies since 2017, none of this is new news.

But it didn’t help with the current bearish sentiment in the market anyway, from Elon Musk’s tweets, to a risk-off sentiment in broader markets, the Chinese financial industry association announcement didn’t do anything to help.

Some cryptocurrency investors already have “diamond hands” (never selling regardless of conditions), but it looks like increasingly they’ll need diamond constitutions as well.

Hang on tight and welcome to the cryptocurrency club.