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    Explained: Why is China cracking down on Bitcoin?

    Explained: Why is China cracking down on Bitcoin?

    Explained: Why is China cracking down on Bitcoin?
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    By CNBCTV18.com  IST (Published)


    Here is China's new bellicose stance against cryptocurrency explained.

    China is doubling down on its anti-crypto stance as it seeks to firmly root out all crypto operations from the country. Beijing had last month announced it had banned financial institutions from allowing cryptocurrency services and transactions.
    The People's Bank of China (PBOC) had on June 21 said it had asked banks to crack down harder on cryptocurrency trading. With provincial governments banning Bitcoin mining, China was expected to shut down 90 percent of its previous mining operations.
    Here is China's new bellicose stance against cryptocurrency explained.
    What was China’s stance on Bitcoin earlier?
    Until the recent crackdowns, Bitcoin in China had been a grey area when it came to enforcement. While cryptocurrency was not regulated or legal, authorities had turned a blind eye to many cryptocurrency operations.
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    In some cases, local governments even encouraged cryptocurrency operations like Bitcoin mining. Bitcoin mining, a process that consumes a large amount of electricity, was a key source of income during energy-rich seasons in several Chinese provinces. Local support, cheap and plentiful electricity, and already established supply chains for hardware made China a key region for Bitcoin. China was responsible for 75 percent of the Bitcoin hashrate — global bitcoin supply.
    However, crackdowns were initiated before as well. China has introduced a slew of measures aimed at restricting the use of cryptocurrency in the country. The first series of crackdowns restricted bitcoin trading and the use of Initial Coin Offerings by companies.
    While Bitcoin prices had slumped as a result, they had quickly recovered. The recovery was seen as a powerful point for Bitcoin, as advocates claimed that even a strong central authority like China was not able to influence Bitcoin prices for long.
    The ban was further empowered in 2019 when the ban on cryptocurrencies was extended from just domestic entities to foreign exchanges and ICOs as well. While prices again slumped in the short term, they quickly recovered to be higher than ever before.
    What are the new bans?
    On May 18, while Bitcoin reached the apex of its price till now, the PBOC intensified China’s fight against cryptocurrency. Three industry bodies, the National Internet Finance Association of China, the China Banking Association, and the Payment and Clearing Association, had said all financial institutions were to stop supporting any cryptocurrency-based transactions or services.
    As a result, Bitcoin fell from its peak to around $35,263 without much upside to it. The new bans have come from the same local governments, like that of the Sichuan province that had once promoted or even encouraged Bitcoin mining. The crackdown from local authorities meant that over 90 percent of China’s mining capacity was closed.
    Other regions like Northwest China's Xinjiang Uygur Autonomous Region, North China's Inner Mongolia Autonomous Region and Southwest China's Yunnan Province have all announced rules curbing Bitcoin mining, reported the state-owned Global Times.
    Why is China banning Bitcoin?
    China's issues with Bitcoin are because of the Communist Party of China’s extreme need for centralised control. The presence of a widespread decentralised currency, which could perhaps remain unaffected by national regulations would be unacceptable in the country.
    Other factors driving the Chinese government’s policy against cryptocurrency have been its widely speculative nature and rising environmental costs.
    China, under President Xi Jinping, has committed to becoming carbon-neutral by 2060. While a lofty goal, it would prove much harder to achieve while Bitcoin mining siphoned more energy than the country of Argentina did in a year. Though Bitcoin miners often prefer hydroelectricity, the reason behind their presence in the Sichuan province, during winter or arid months, mining operations often use cheap and polluting coal power.
    What do experts say?
    China’s ban has perhaps shown that even a decentralised global encrypted currency can be affected by national regulations if enough of it is concentrated in one region. A high concentration of mining activity also compromises the entire structure of the public ledger that the blockchain is based on.
    "That’s the problem with having a majority of the hashrate in any one country—not just China, but anywhere. It makes it vulnerable to the nation-state or government of that region. That is a concern," explained Nishant Sharma, founder of Beijing-based BlocksBridge Consulting, to the Time.
    Other consultants have similar opinions. The ban has led to an exodus of large-scale mining operations that are rapidly turning to Western Countries, as there is renewed interest in Bitcoin.
    "We do not want to face every single year, some sort of new ban coming in China," said De La Torre, vice president of Hong Kong-headquartered mining pool Poolin. "So we’re trying to diversify our global mining hashrate, and that’s why we are moving to the United States and to Canada."
    Another dark horse in terms of potential crypto centres could be El Salvador. The small Central American country just passed legislation to make Bitcoin a legal tender and is trying to attract cryptocurrency investors. Other countries and states may soon follow suit.
    "You will see jurisdictions adopting a very favorable stance and creating the equivalent of special zones to encourage miners to host locally," said Castle Island Ventures founding partner Nic Carter. "We’re seeing it at the state level here. You’re also going to see it at the country level, you might even see subsidized electricity for mining."
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