Bitcoin (BTCUSD) and other cryptos plunged on Chinese regulatory crackdown but recovered

    Bitcoin (BTCUSD-Bitfinex) made a panic low around 40700.00 from 45089.00 in a sharp movement after China’s Central Bank PBOC declared all activities related to digital coins are illegal and must be banned. In a statement, the PBOC said the latest notice was to further prevent the risks surrounding crypto trading and to maintain national security and social stability.

    PBOC statement/FAQs in full:

    Notice on Further Preventing and Disposing of the Risk of Hype in Virtual Currency Trading

    The people’s governments of all provinces, autonomous regions, and municipalities directly under the Central Government, and Xinjiang Production and Construction Corps:

    Recently, virtual currency trading hype activities have risen, disrupting economic and financial order, breeding illegal and criminal activities such as gambling, illegal fund-raising, fraud, pyramid schemes, and money laundering, and seriously endangering the safety of people’s property. To further prevent and deal with the risks of virtual currency transaction speculation and effectively maintain national security and social stability, in accordance with the “People’s Bank of China Law”, “The People’s Republic of China Commercial Bank Law”, “The Securities Law of the People’s Republic of China”, and “Network Security of the People’s Republic of China” The Law of the People’s Republic of China on Telecommunications, the Regulations on the Prevention and Handling of Illegal Fund Raising, the Regulations on the Administration of Futures Trading, the Decision of the State Council on the Clean-up and Rectification of Various Local Trading Places and the Effective Prevention of Financial Risks, and the General Office of the State Council on the Clean-up and Rectification of Various Transactions The relevant matters are hereby notified as follows:

    1. Clarify the essential attributes of virtual currency and related business activities

     (1) Virtual currency does not have the same legal status as legal currency. Virtual currencies such as Bitcoin, Ether, and TEDA have the main characteristics of being issued by non-monetary authorities, using encryption technology and distributed accounts or similar technologies, and exist in digital form. They are not legal and should not and cannot be used as currency in the market. Use on circulation.

     (2) Virtual currency-related business activities are illegal financial activities. Carrying out legal currency and virtual currency exchange business, exchange business between virtual currencies, buying and selling virtual currencies as a central counterparty, providing information intermediary and pricing services for virtual currency transactions, token issuance financing, virtual currency derivatives transactions, and other virtual currency-related Business activities suspected of illegal sale of tokens and tickets, unauthorized public issuance of securities, illegal operation of futures business, illegal fund-raising and other illegal financial activities are strictly prohibited and resolutely banned in accordance with the law. Those who carry out related illegal financial activities constitute a crime shall be investigated for criminal responsibility in accordance with the law.

     (3) The provision of services by overseas virtual currency exchanges to Chinese residents through the Internet is also illegal financial activity. For the domestic staff of relevant overseas virtual currency exchanges, as well as legal persons, unincorporated organizations and natural persons who know or should know that they are engaged in virtual currency-related businesses and still provide them with services such as marketing promotion, payment and settlement, technical support, etc., they shall be investigated in accordance with the law (responsibility).

     (4) There are legal risks involved in virtual currency investment transactions. Any legal person, unincorporated organization, or natural person investing in virtual currency and related derivatives that violates public order and good customs will be invalid and the relevant civil legal acts shall be invalid, and the losses arising therefrom shall be borne by them; suspected of disrupting financial order or endangering financial security, the relevant departments shall be subject to law Investigation.

    2. Establish and improve a working mechanism to deal with the risks of virtual currency trading hype

     (5) Departmental coordination and linkage. The People’s Bank of China, together with the Central Cyberspace Administration, the Supreme People’s Court, the Supreme People’s Procuratorate, the Ministry of Industry and Information Technology, the Ministry of Public Security, the State Administration of Market Supervision, the China Banking and Insurance Regulatory Commission, the Securities Regulatory Commission, and foreign exchange bureaus, has established a work coordination mechanism to jointly resolve major issues in the work. Issues supervise and guide all regions to carry out their work in accordance with unified deployment.

    (6) Strengthen territorial implementation. The provincial people’s governments are generally responsible for preventing and disposing of risks related to virtual currency trading speculation within their administrative regions. The local financial regulatory authorities will take the lead, with the participation of branches of the financial regulatory department of the State Council and the competent authorities of cybersecurity and informatization, telecommunications, public security, and market supervision. Establish a normalized working mechanism, coordinate and mobilize resources, actively prevent and properly handle issues related to virtual currency trading speculation, and maintain economic and financial order and social harmony and stability.

     3. Strengthen the risk monitoring and early warning of virtual currency trading speculation

     (7) Comprehensive monitoring and early warning. Provincial people’s governments give full play to the role of local monitoring and early warning mechanisms and combine online monitoring and offline investigation to improve the accuracy and efficiency of identifying and discovering virtual currency trading hype activities. The People’s Bank of China, the Central Cyberspace Administration of China and other departments continue to improve the technical means of encrypted asset monitoring and realize the full-chain tracking and full-time information backup of virtual currency “mining”, transaction, and exchange. Financial management departments guide financial institutions and non-bank payment institutions to strengthen the monitoring of virtual currency transaction funds.

     (8) Establish an information sharing and rapid response mechanism. Under the leadership of the provincial people’s governments, local financial regulatory authorities, together with branches of the financial management department of the State Council, cybersecurity and informatization departments, and public security agencies, strengthen the effective connection of online monitoring, offline planning, and fund monitoring, and establish virtual currency transaction hype information sharing And cross-validation mechanism, as well as a rapid response mechanism for early warning information transmission, verification, and disposal.

     Fourth, build a multi-dimensional, multi-level risk prevention and disposal system

     (9) Financial institutions and non-bank payment institutions shall not provide services for virtual currency-related business activities. Financial institutions and non-bank payment institutions shall not provide services such as account opening, fund transfer, clearing, and settlement for virtual currency-related business activities, shall not include virtual currency in the scope of collateral, shall not carry out virtual currency-related insurance business or use virtual currency. If virtual currency is included in the scope of insurance liability, and clues about violations of laws and regulations should be reported to the relevant departments in a timely manner.

    (10) Strengthen the management of Internet information content and access related to virtual currency. Internet companies are not allowed to provide services such as online business premises, commercial display, marketing promotion, and paid diversion for virtual currency-related business activities. If clues of violations of laws and regulations are found, they should promptly report to relevant departments, and provide technical support and assistance for related investigations and investigations. According to the clues transferred by the financial management department, the competent authorities of network information and telecommunications shall promptly shut down Internet applications such as websites, mobile applications, and small programs that carry out virtual currency-related business activities in accordance with the law.

    (11) Strengthen the registration and advertising management of market entities related to virtual currencies. The market supervision department strengthens the registration management of market entities, and the registered names and business scope of enterprises and individual industrial and commercial households must not contain words or content such as “virtual currency”, “virtual assets”, “encrypted currencies” and “encrypted assets”. The market supervision department and the financial management department shall strengthen the supervision of related advertisements related to virtual currency in accordance with the law, and promptly investigate and deal with relevant illegal advertisements.

     (12) Severely crackdown on illegal financial activities related to virtual currencies. After discovering clues to illegal financial activities related to virtual currency, the local financial supervision department, together with the branches of the financial management department of the State Council and other relevant departments, promptly investigate and identify in accordance with the law, properly handle them, and seriously investigate the legal responsibilities of related legal persons, unincorporated organizations and natural persons for crimes. If it is, it shall be transferred to the judicial organ for investigation and punishment according to law.

     (13) Severely crackdown on criminal activities involving virtual currencies. The Ministry of Public Security deploys public security agencies across the country to continue to carry out in-depth “special operations against money laundering crimes,” “special operations against cross-border gambling,” and “card-breaking operations”, and severely crackdown on illegal operations, financial fraud and other criminal activities in virtual currency-related business activities in accordance with the law. Criminal activities such as money laundering and gambling are implemented by virtual currency, and criminal activities such as illegal fund-raising and pyramid schemes using virtual currency as a gimmick.

     (14) Strengthen industry self-discipline management. China Internet Finance Association, China Payment and Clearing Association, and China Banking Association strengthen member management and policy publicity, advocate and urge member units to boycott illegal financial activities related to virtual currencies, and follow relevant self-discipline management to member units that violate regulatory policies and industry self-discipline rules Provide for punishment. Relying on various industry infrastructures to carry out the virtual currency transaction speculation risk monitoring, and timely transfer of problem clues to relevant departments.

     Five, strengthen organization and implementation

    (15) Strengthen organizational leadership and overall coordination. All departments and regions should attach great importance to responding to the risk of virtual currency trading speculation, strengthen organization and leadership, clarify work responsibilities, and form a long-term work mechanism of central coordination, territorial implementation, block integration, and joint responsibility, maintain a high-pressure situation, and dynamically monitor risks, Take effective measures to prevent and defuse risks, protect people’s property safety in accordance with the law, and spare no effort to maintain economic and financial order and social stability.

    (16) Strengthen policy interpretation and publicity and education. All departments, regions, and industry associations should make full use of various media and other communication channels to publicize the illegality and harmfulness of related business activities such as virtual currency speculation through legal policy interpretation, typical case analysis, investment risk education, etc. And its manifestations, etc., to enhance the public’s awareness of risk prevention.

    DTD: September 15, 2021

    Overall, although PBOC has banned all activities related to crypto business activities, it seems that still there is no ban on no ban on crypto possession. And although the PBOC statement is dated 15th September, only published on the PBOC site on Friday; already there were rumors of PBOC crackdown on cryptos in mid-September and BTCUSD corrected from 50K levels. The PBOC specifically targeted overseas crypto exchanges declaring that it was illegal for them to provide online services to residents in China. The market now thinks that China may be looking to prevent any large-scale capital outflows via stablecoins and cryptos amid the Evergrenade debt crisis and overall risk to China’s $60T housing market.

    In 2013, China ordered third-party payment providers to stop using BTC. Chinese authorities put a stop to token sales in 2017 and banned crypto exchanges from operating within China in 2019 but individuals in the country continued to find ways to trade bitcoin and other digital currencies via over-the-counter or peer-to-peer transactions, using VPN (to hide IP address). More recently, in May’21, China banned all crypto mining. This time, the Chinese government may also be responding to signs that miners are disguising their activities to stay in the crypto business. China’s economic planning agency (NDRC) also said it is an urgent task for China to root out crypto mining, and the crackdown is important to meet carbon goals.

    Cryptos were already under stress on recent U.S. SEC comments that it has various tools already in hand to effectively deal with and enforce regulations. But on Friday, BTCUSD got some boost from the PBOC panic low after an influential U.S. Senator Toomey batted for the crypto and tweeted China’s crypto pain may be a big gain for the U.S. to nourish the financial innovation. Republican Senator Toomey even urged SEC Chair Gensler for clarity on crypto regulations:

    “Beijing is so hostile to economic freedom they cannot even tolerate their people participating in what is arguably the most exciting innovation in finance in decades. Economic liberty leads to faster growth, and ultimately, a higher standard of living for all. China’s authoritarian crackdown on crypto, including Bitcoin, is a big opportunity for the U.S. It’s also a reminder of our huge structural advantage over China.”

    Bottom line:

    Crypto is a great tech innovation for system transaction efficiency and thus various developing countries are now keen to adopt the technology rather than accepting it as a legal tender (currency). Cryptos may help in a significant reduction of global remittances cost, which is now around 6.5% on an average, almost double of World Bank’s Sustainable Development Goal target of 3.5%; the aim is to reduce average global remittance costs to 2% for the benefit of migrant heavy middle-income countries/developing nations. Also, Cryptos/Blockchain/Ledger distributive technology can help financial inclusion in middle/low income/developing countries, which have a huge unbanked space.

    Apart from the benefit of lower remittance costs and greater financial inclusions, adoption of Cryptos in some form may also benefit certain countries (like Russia, Iran, North Korea, Venezuela, etc) to avoid U.S. controlled SWIFT global remittance system and perpetual risk of politically motivated U.S. economic sanctions; i.e. Cryptos or central bank digital currency (CBDC) may also replace U.S. monopoly over SWIFT payment system and de-dollarization of the world. In that scenario, USD may lose the monopoly status of global reserve currency and there may be increasing acceptance of the digital Yuan/Euro.

    Bitcoin is a victim of the Chinese regulatory clampdown. At present, the demand for new Bitcoins is higher than the supplies, which is supporting its price to some extent despite increasing U.S. production and the Chinese clampdown. But this situation may change by the next few quarters (6-15 months) if the U.S. does not follow China in banning Bitcoin mining and Chinese miners migrate to the U.S. directly or indirectly or China blinks on its Bitcoin mining clampdown and again allows some form of mining. As the U.S. is a democracy, unlike the Chinese autocracy, a complete ban of Bitcoin mining may be tough for the U.S., where mining is now taking the shape of the cottage/home/garage industry (apart from big commercial miners).

    Over the last few years, BTC/USD was seen as a volatile digital alternative of Gold especially after CME introduced the future contract of BTC/USD, paving the way for more speculation, hedging, and trading. There was also a trend of increasing regulatory and institutional willingness to accept BTC/Crypto as a digital asset rather than legal/any form of tender/currency.

    Apart from the Chinese mining crackdown, Bitcoin is also under stress on regulatory uncertainty, and it now seems that G20 central banks/countries including the Fed, ECB, and BOE are taking some gradual steps for an orderly regulatory environment rather than an outright ban. India may also follow this policy of an effective regulation rather than an outright ban.

    There will be no blanket ban on Bitcoins/Cryptos as such a ban may cause a spillover effect on other asset classes like equities due to huge margin calls, with everything being equal. Cryptos/BTC will coexist as an alternative digital/intangible asset with orderly price movement (volatility) and not any form of legal tender/currency. Various countries/central banks including U.S. /Fed may use Crypto as techs for their planned CBDC to enhance financial inclusion as well as efficiency of payment ecosystem with very little cost.

    But at the same time, U.S. Fed/Treasury may not allow such a stable coin (CBDC) as an alternative to USD, which has the status of global reserve currency and empowered the U.S. as the super power of the world; everyone needs USD and U.S. can influence anyone with financial sanctions policy, prohibiting the access of USD in some form.

    Technically, whatever may be the narrative, BTCUSD now has to 40500; otherwise, 38100-28600 levels may be on the card; for any meaningful rally towards lifetime high, BTCUSD needs to stay over 53000 zones.


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