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What Beijing's new crackdown means for cryptocurrencies in China

Many of the new rules expand on previous restrictions aimed at cryptocurrencies and close loopholes that had allowed some finance and payment firms to continue in the trade

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cryptocurrency | China

Reuters  |  Shanghai 

What Beijing's new crackdown means for cryptocurrencies in China

Chinese regulators have tightened restrictions that ban financial institutions and payment companies from providing services related to cryptocurrency, marking a fresh crackdown on digital coins.

Many of the new rules expand on previous restrictions aimed at cryptocurrencies and close loopholes that had allowed some finance and payment firms to continue in the trade.

WHAT ARE THE NEW MEASURES?

Three financial industry associations on Tuesday directed their members, which include banks and online payment firms, not to offer clients any services involving cryptocurrency, such as currency exchanges, registration, trading, clearing and settlement.

The directives were made in a joint statement from the National Internet Finance Association of China, the Banking Association and the Payment and Clearing Association of China, and posted by the People's Bank of (PBOC).

Additionally, institutions were prohibited from providing saving, trust or pledging services and issuing financial products related to cryptocurrencies. Crypto-related information services, insurance and derivatives trading are also banned.

Firms were also urged to step up monitoring of money flows involved in trading.

WHAT WERE EARLIER RULES IN AGAINST CRYPTOCURRENCIES?

China does not recognise cryptocurrencies as legal tender and the banking system does not accept cryptocurrencies or provide relevant services.

In 2013, the government defined bitcoin as a virtual commodity and said individuals were allowed to freely participate in its online trade.

However, later that year, financial regulators, including the PBOC, banned banks and payment companies from providing bitcoin-related services.

In September 2017, China banned Initial Coin Offerings (ICOs) in a bid to protect investors and curb financial risks.

The ICO rules also banned trading platforms from converting legal tender into cryptocurrencies and vice versa.

The restrictions prompted most such trading platforms to shut down with many moving offshore.

The ICO rules also barred financial firms and payment companies from providing services for ICOs and cryptocurrencies, including account openings, registration, trading, clearing or liquidation services.

By July 2018, 88 virtual currency trading platforms and 85 ICO platforms that had withdrawn from the market, the PBOC said.

WHY HAS CHINA TIGHTENED REGULATION?

The global bitcoin bull run has revived cryptocurrency trading in China.

Tuesday's industry directive warned speculative bitcoin trading had rebounded, infringing "the safety of people's property and disrupting the normal economic and financial order."

Many Chinese investors were now trading on platforms owned by Chinese exchanges that had relocated overseas, including Huobi and OKEx. Meanwhile, China's over-the-counter market for cryptocurrencies has become busy again, while once-dormant trading chartrooms on social media have revived.

China-focused exchanges, which also include Binance and MXC, allow Chinese individuals to open accounts online, a process that takes just a few minutes. They also facilitate peer-to-peer deals in OTC that help convert Chinese yuan into cryptocurrencies. Such transactions are made through banks, or online payment channels such as Alipay or WeChat Pay.

Retail investors also buy "computing power" from cryptocurrency miners, who design various investment schemes that promise quick and fat returns.

Meanwhile, cryptocurrencies' potential threat to China's fiat currency, the yuan, has spurred the PBOC to launch its own digital currency.

WHAT'S THE IMPACT OF THE CRACKDOWN?

The fresh crackdown makes it more difficult for individuals to buy cryptocurrencies using various payment channels, and could impact miners' business by making it harder for them to exchange cryptocurrencies for yuan.

But banks and payment companies also face challenges of identifying money flows related to cryptocurrencies.

Hong Kong's Bitcoin Association said in a tweet in response to China's reiterated ban: "For those new to bitcoin, it is customary for the People's Bank of China to ban bitcoin at least once in a bull cycle."

(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

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First Published: Wed, May 19 2021. 13:55 IST
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