China declares transactions involving cryptocurrencies illegal
Country steps up its campaign to block use of unofficial digital money
China’s central bank has intensified its clampdown on cryptocurrencies by making all transactions in the virtual assets illegal, triggering a drop in the price of bitcoin on Friday.
The move signals the latest attempt to rein in cryptocurrency use in China, where regulators fear it might weaken the Communist party’s control over the financial system and promote criminal activity.
In a notice issued on Friday, the People’s Bank of China said bitcoin, ethereum and other digital currencies disrupted the financial system and were used in money-laundering and other crimes. “Virtual currency derivative transactions are all illegal financial activities and are strictly prohibited,” the bank said on its website.
The price of bitcoin fell more than 8% immediately after the announcement, dropping to just over $41,000 (£30,000).
Chinese banks have been banned from handling decentralised cryptocurrencies like bitcoin since 2013, although the People’s Bank of China is currently developing an electronic version of the country’s yuan for cashless transactions that can be tracked and controlled by Beijing.
In May this year, China’s regulators issued a fresh notice to banks and payment firms, saying they were not allowed to offer clients any services involving cryptocurrencies. That reflected official concern that cryptocurrency mining and trading might still be going on, or that the state-run financial system might be indirectly exposed to risks.
The crackdown by one of the world’s largest economies raises questions over the future of cryptocurrencies, the use of which has only been supported by a limited number of companies and governments.
“China’s latest move could really disrupt the evolution of crypto and not necessarily in the way it wants to,” Daniel Lane, a senior analyst at stock trading platform Freetrade, said.
“Sweeping and heavy-handed reforms might scare off crypto users in the short term but it might just prompt the industry to go back underground. A bit like the music industry found when illegal torrenting destroyed CD sales – eventually it’s more beneficial to innovate alongside user habits rather than fight them.”
However, Lane suggested it was likely to be only a short-term blow to the industry. “To think a ban will stop all activity is optimistic at best and quite naive at worst,” he said. “Ironically, taking a whole country out of open discussions on crypto’s evolution from here just means diehard corners of the market will recede into more nefarious practices rather than move further towards regulation.”
Investor reaction to China’s latest crypto crackdown on Friday was relatively muted compared with May’s announcement, which knocked bitcoin’s value by nearly a third to $30,000 (£21,000).
“China’s actions haven’t held back cryptos rise too much in the past so I wouldn’t be surprised to see it bounce back once more”, Craig Erlam, a senior market analyst at forex broker OANDA said.
El Salvador is so far the only country in the world to have adopted bitcoin as legal tender, in a move that its president said was meant to promote “financial inclusion”, investment and economic development. However, the decision, which came into force this month, prompted a mass demonstration in El Salvador’s capital last week.