China Bans ALL Crypto, The End For Bitcoin?
We cover everything related to stocks and investing on friday, the price of bitcoin tanked as much as eight percent before pairing some of the losses. At the time of recording this video, its only down about four percent from the recent highs, the cause of the drop was an announcement by the peoples bank of china that all crypto related transactions will be illegal in the country. The question now is how bad is this for cryptocurrencies going forward and will other countries follow suit? Well delve into both of these topics in this video on september 24th, the peoples bank of china, which is a countrys central bank, released a strongly worded statement on their website about cryptocurrencies. They said that hype around the virtual currencies had disrupted financial and economic order. Theyve also enabled illegal activities such as gambling, illegal fundraising, pyramid schemes and money laundering. They even go so far as to say that cryptocurrencies threaten national security and social stability. They say that all cryptocurrencies are illegal and cannot be used as currency in the market. Any person or entity that facilitates the exchange of crypto issues, new coins or conducts any business related to crypto shall be investigated for criminal responsibility. It is also illegal for overseas crypto exchanges to offer services to chinese residents over the internet, and, finally, anyone who engages in the trading of crypto has their civil rights invalidated. Our understanding of this is that if a chinese resident is a victim of a crypto scam, they will have no legal recourse to try to get their money back.
Basically, china is completely banning all cryptocurrencies and will use the full force of the law to enforce this. These recent developments in china shouldnt come as too much of a surprise as chinas been increasingly clamping down on crypto for the past few years. In 2013 they banned financial institutions from holding or trading crypto. In 2014, they prohibited banks and payment providers from holding crypto trading accounts on behalf of clients. In 2017, they banned crypto exchanges from operating within the country leading to the closure of 173 such exchanges, and in 2019 they told local governments to gradually crack down on crypto miners and eventually force them to shut down operations. At the time china accounted for roughly 75 of global bitcoin mining bitcoin mining is highly energy. Intensive and miners took advantage of the countrys cheap coal based energy to power. Their mining operations. Miners often developed symbiotic relationships with local governments to use energy when demand was low and pay the governments a portion of the mining profits, but the central government was not amused by the increasing prevalence of bitcoin mining. The university of cambridge keeps track of global bitcoin hash rate share by country. China is represented by the yellow area, as you can see in 2019, they account for about 75 percent of bitcoin mining by april of 2021. This had declined to less than 50 with the united states and kazakhstan. Picking up most of the slack with the new regulations, chinas share will probably go to zero pretty quickly with the country still accounting for nearly half of global bitcoin mining.
This could cause a huge disruption in the mining industry, bitcoin miners verified bitcoin transactions and in exchange they have the possibility of earning newly created bitcoins importantly, they compete with other miners and whoever verifies a transaction. First gets the bitcoin in the early days. It was relatively easy to win new bitcoins because there wasnt a whole lot of competition, but as bitcoins price rose, large companies have invested hundreds of millions of dollars in sophisticated mining facilities with so much competition. Its very difficult to mine, a single bitcoin with 50 of the worlds mining capacity to be taken offline, the market will become much less competitive, at least for a while. This should benefit non chinese miners. After a few years, other countries will pick up the slack and offset the decrease in chinese mining, so this shouldnt have any long term effect on bitcoin or other cryptos. So why is the chinese government cracking down so heavily on crypto? The biggest reason is social and financial control over the population. Bitcoin is a decentralized protocol, and transactions cannot be tracked as easily by the government. Bitcoin and other cryptocurrencies are popular among criminal elements who use it to launder money and secret. China also keeps strict controls on capital outflows from the country and actively manages its currency exchange rate. Even people who made their money by legitimate means may want to use crypto as a way to circumvent capital controls and transfer their money out of the country.
Currently, the chinese government is beta testing its central bank, digital currency, called ecny. Individuals can spend their ecny from a mobile app and is considered legal tender. This means no entity in china can refuse it as payment. The value of one e c and y is exactly the same as a paper. Un, no and the two forms of the currency can be exchanged for each other on a one for one basis, the peoples bank of china will record all the cny transactions on a centralized ledger which it maintains. The purpose of ecny is twofold: firstly, it will make international transactions easier and help evade u.s sanctions. Secondly, it will give the central government greater monitoring capabilities over the spending of chinese citizens. Lets say: a chinese company wants to buy oil from a venezuelan company which is sanctioned by the us. The chinese company needs a way to transfer currency to the venezuelan company. If they go through the traditional banking system, they would have to go through the society of worldwide interbank financial telecommunication or swift. The us could potentially put pressure on swift to block these transactions to maintain economic sanctions against venezuela with the ecny. China can bypass swift and transact with any company in the world without interference from western nations. Another rationale for ecny is that it will give greater monitoring capabilities over the population. China has perhaps the worlds most sophisticated and draconian system of keeping track of their people.
They have an orwellian social credit score system which ranks individuals based on metrics, including timeliness of paying bills, interpersonal relationships and even consumer habits. Your score can be docked if you spend too much on video games. Individuals with low credit scores can be denied service on public transportation, have decreased employment opportunities and, in some cases, have their names publicly displayed on a wall of chain. To date, over 27 million airline tickets have been denied in china on the basis of their flyer. Having too low of a credit score, widespread adoption of the ecny will give the government even greater control over their citizens, behavior, as they will be able to track intimate spending data on every individual, given what an emphasis the government places on monitoring their citizens. Its no surprise that theyre cracking down on decentralized cryptocurrencies, which they cant control or track. So now that china has officially banned crypto. What does this mean for bitcoin going forward? The chinese ban alone probably isnt that significant in the long run, because people can still own and trade bitcoin in other countries. The bigger risk is that other countries could follow in chinas footsteps and also ban crypto. According to a 2019 statistics survey, the top countries in terms of crypto adoption were turkey, brazil, colombia, argentina and south africa. 20 of turkish respondents report that they own crypto. This is compared to only 5 in the us of these top five countries. All of them have unstable currencies with significant risk to inflation.
For example, turkey has faced borderline hyperinflation over the past five years with the exchange rate relative to the us dollar depreciating by 65 percent. It makes sense that people in these countries are attracted to crypto as a way to protect themselves from the debasement of the official currencies. In fact, thats one of the major bull cases for bitcoin modern governments benefit tremendously from controlling their own fiat currencies. During times of crisis, governments can sell bonds which the central bank buys by printing new money. This decreases the value of the currency and causes inflation. When central banks take money printing too far, you get situations like argentina, where the consumer price index has more than quadrupled. In the past four years. The ability of the government to fund their operations via money printing relies on people using their currency for day to day transactions and as a store of wealth. If everyone in argentina started using bitcoin for transactions, the government can print all the pesos they want, but they would be useless because nobody uses them as payment. Decentralized. Cryptocurrencies represent an existential threat to the fiat currency system that almost every government has been employing since the post world war ii era. If crypto ever does start representing a significant percentage of transactions in the real economy, governments around the world will have strong incentive to crack down. Weve already started to see this happening to some extent. This is probably the single biggest risk to the widespread adoption of crypto.
For example, in the past few years, bitcoin became an increasingly popular payment option in turkey as a country suffered double digit inflation, one kebab restaurant owner, told reuters five to ten percent of his customers were paying their bills in bitcoin in 2021, but in april of this Year, the turkish government banned the use of bitcoin for the purchase of any goods or services. The central bank said that crypto could undermine the confidence in methods and instruments using current payments. Basically, they need people to continue using the lira, otherwise theyll lose their ability to fund the government by printing money, while china and turkey are just the two latest examples, many other countries will probably start banning crypto over the coming years. For similar reasons, while this video is not financial advice, investors should consider this risk if theyre, considering investing in cryptocurrencies, alright guys that wraps it up for this video. What do you think about chinas recent crypto crackdown? Do you think other countries will follow suit? Let us know in the comments section below as always.