China's Crypto Crackdown

If you’ve been following the price of Bitcoin and other cryptocurrencies, you probably couldn’t help but notice the recent significant price drops that most coins faced. There are many likely reasons for this change, including the increased scrutiny of Bitcoin’s energy consumption. However, other significant factors are negatively impacting Bitcoin’s price, including recent sentiment released by Chinese state policymakers.

On May 21, a memo leaked from China’s State Council, a body that sets Chinese policy, that was summarized as calling for a “crackdown” on Bitcoin mining. The fear generated from this memo sent the already declining price of Bitcoin from $41,000 to near $36,000, with many investors looking to sell because of the uncertainty around this news.

China is a huge player in the crypto market and not just because of the sheer size of their population. According to ARSTechnica.com, 75% of all Bitcoin mining occurs in China. Based on this number, it’s easy to see why any proposed policy change in China could have a profound impact on crypto’s price.

Mining

You currently have 75% of the hashing power of the network being thrown into limbo because of this potential crackdown. Miners have already spent significant amounts of money on hardware and maintenance. Now that they are possibly facing a future without mining in China, they are looking to other countries to set up and host their miners, with many projects even exploring relocating to the US. It is not abnormal for Chinese investors to look to the traditional American markets, so many are unsurprised that Chinese miners are looking towards that market.

Despite this option, mining services cannot be migrated instantaneously, which may result in a short-term bear market. However, once mining farms are set up, this trend could reverse.

Even high-profile exchanges are taking this potential order very seriously. Huobi, a popular exchange, has suspended their mining activity. Other mining farms are following suit, as the uncertainty of the order still looms over their business.

We’re likely to see a bump in the road when it comes to these mining operations relocating and getting set up. Additionally, the uncertainty around the memo will only contribute to this hurdle. However, these barriers are largely temporary, as the large mining operations will surely find another way, or place, so they can continue mining.

What about trading?

While not specifically mentioned in the memo, many have interpreted that the potential order may affect crypto trading as well. Huobi has limited all leveraged trading tools, but is still allowing basic trades to go through.

Chinese lawmakers have indicated that they are concerned about the financial stability of cryptocurrency, and Huobi’s suspension of their more risky tools and practices is reflective of this policy shift. China has proposed crypto crackdowns before, but the introduction of these leveraged trading tools and DeFi have again gotten the attention of Chinese regulators.

For now, at least, it looks like basic trades will continue to happen. One exchange announced that it was limiting the ability to buy crypto with Chinese fiat, sending their token’s price tumbling so significantly that they quickly had to reverse course.

A warning shot or policy?

There was much confusion when the announcement was leaked. At first, many outlets reported that the practices outlined in the memo would be Chinese policy going forward, but this is not the case. The memo of the leaked policy change was simply a summary of a meeting where these ideas were approached.

While these changes are not policy, yet, this memo does reveal that Chinese regulators are keeping a close eye on crypto, likely as a means of protection of their national economy. No binding policy has been passed as of publishing this post, but that could change quickly, as this body has the ability to create and enforce the law. Even though there has been no official policy change, crypto related projects are taking this memo as a very serious warning.

Jeremy Cogan

Jeremy first heard about blockchain technology in 2016. This sparked an interest that would lead to in-depth research on the potentials of blockchains and cryptocurrencies and becoming a founding team member of the Blockchain Institute. Jeremy also is a lead instructor for the institute and has designed several courses.