China’s total ban clears path for new powers in crypto market

The global crypto market has a vacancy to fill following a total ban on all forms of activities in the market declared by the Chinese. With China out, the space is now clear for new powers and the world would be looking to see which country becomes the most dominant player in the market.

Unfortunately, Nigeria as well as many African countries would not be among the new powers given that the country is among the list of states prohibiting the growth of the crypto market. Most African countries are also on this list.

The price of bitcoin, the world’s largest cryptocurrency, took a plunge of nearly 5 percent on Friday after the People’s Bank of China (PBOC) declared a total ban on all crypto transactions, mining, and overseas exchanges from providing services to investors in the country.

The PBOC notes on its website that cryptocurrencies including bitcoin and Tether are not fiat currency and cannot be circulated.

“The “Notice” once again emphasise that virtual currencies that are issued by non-monetary authorities, use encryption technology, distributed accounts, or similar technologies, and exist in digital forms, such as Bitcoin, Ethereum, etc., including so-called stable currencies such as (Tether), are not – it does not have the same legal status as legal tender and cannot be circulated in the market as currency,” the PBOC wrote.

“The “Notice” clearly stated that virtual currency exchange, virtual currency trading as a central counterparty, provision of matching services for virtual currency transactions, token issuance financing, and virtual currency derivative transactions are all illegal financial activities and are strictly prohibited, resolutely banned in accordance with the law. Overseas virtual currency exchanges that provide services to Chinese residents through the internet are also illegal financial activities.”

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The news sent the price of major cryptocurrencies downward with coins like bitcoin trading at below $42,000 as of Friday, a level it has been struggling to cross following another decline earlier in the week. Ether was below its $3,000 peak on account of the news. The prices recovered slightly on Sunday with Bitcoin trading at $43,274 and Ether at $3,052.

China, the world’s most populated country, is estimated to control between 65 percent and 75 percent of the world’s bitcoin mining activities as of 2018 and 2020. These activities are mostly located in four provinces: Xinjiang, Inner Mongolia, Sichuan, and Yunnan.

The latest announcement is considered a wider crackdown, since 2017 when the country intensified its campaign to push crypto trading and its effect out of the mainstream Chinese economy. Experts say the decentralised nature of cryptocurrencies is a major concern of Chinese financial regulators.

China’s campaign to control bitcoin has been going on since 2014 and within that period the price of bitcoin has skyrocketed to new highs in 2017, 2020, 2021.

In September 2019, China accounted for 75 percent of the world’s Bitcoin energy use. By April 2021, that had fallen to 46 percent.

Bitcoin mining requires a considerable amount of power and many miners in China prior to now have established their mining farms in Chinese cities with considerable energy capacities.

For example, Sichuan and Yunnan’s hydropower make them renewable energy meccas, while Xinjiang and Inner Mongolia are home to many of China’s coal plants. A major factor at play in the Chinese campaign is the desire to reduce energy consumption and at the same time meet climate targets.

In July 2021, China ordered bitcoin mining operators to shut down or face consequences. The authorities said the move was to curb its carbon emissions rates which are one of the highest in the world.

The announcement forced many miners to relocate to countries like the US, Kazakhstan, etc, with more friendly policies for the market.

A report by Glassdoor, which monitors the market, said mining activities were beginning to recover as miners resettle and begin mining activities in cities like Texas in the US.

As of August, the price of bitcoin surged to over $50,000 for the first time since April, raising investors’ hope that the bulls were back and could push the price to erase the all-time high of $64,000 recorded earlier this year.

The Chinese latest clampdown is bound to rattle the market as it means that exchanges owned by Chinese nationals or those that are mostly focused on providing trading platforms for Chinese people would be targeted. These exchanges could see their primary customer base wiped out as the government shut out residents in mainland China from trading or investing in cryptocurrencies.

Experts, however, say the crackdown represents opportunities for other countries to dominate the crypto market.

“Beijing is so hostile to economic freedom they cannot even tolerate their people participating in what is arguably the most exciting innovation in finance in decades,” Pat Toomey, a US Senator from Pennsylvania said. “Economic liberty leads to faster growth, and ultimately, a higher standard of living for all.

Michael Saylor, founder/CEO of Microstrategy, an investment company that owns a major share of bitcoins and other cryptocurrencies, agrees with Toomey.

“Nothing has created more wealth in the past decade than technologies banned in China,” Saylor said.

The US and countries like El Salvador are in the run for control of the market. Controlling the cryptocurrency market is not really possible due to the decentralised nature of the blockchain technology, which powers the bitcoin network. In Bitcoin’s case, blockchain is used in a decentralised way so that no single person or group has control – rather, all users collectively retain control.

This characteristic has been a growing concern for central banks around the world and is mostly responsible for China’s onslaught on the market and the attempt to develop a Central Bank Digital Currency (CBDC) which can be controlled by the financial regulators. There are about 81 countries, including Nigeria, that are clamouring for a CBDC.

The knotty issue of decentralisation notwithstanding, countries adopting cryptocurrencies see the market as too important to ignore. First, it is now a $2 trillion industry and every major Wall Street bank is either helping their investors gain exposure to it or plans to do so as soon as possible.

The US is considered the next power in the market. The country’s largely neutral position on cryptocurrency has led to the influx of mining companies fleeing the Chinese clampdown. While the US federal government is yet to make an official position on the market, many states in the country are opening their arms to embrace bitcoin companies.

But while it has not been able to institute a regulation for the market, the US has not been quiet about the risk the dollar and its economy face with the growth of the market.

Hence, recently, Gary Gensler, US Securities and Exchange Commission chair termed cryptos as the ‘Wild West’ and wants a robust oversight regime over the industry. It is unlikely that the market operators would resist regulatory policies given that many of them have long pushed for the government to regulate the market because it would instil confidence in investors. Operators that spoke with BusinessDay say regulation is inevitable, hence the reason many operators have since adopted regulatory measures at various levels to prepare them for when the government decides to make it official.