China Declares Cryptocurrency Transactions Illegal, Causes Price Drop

China Declares Cryptocurrency Transactions Illegal, Causes Price Drop

A move many may have expected from China has finally come to pass. The country’s central bank is taking a strict approach to cryptocurrencies, deeming all transactions using virtual assets as illegal, a decision that has caused a drop in the price of bitcoin on Friday.

China Declares Cryptocurrency Transactions Illegal, Causes Price Drop
Bitcoin | Source: Fandom

This decision is the country’s latest step in trying to reduce the prevalence of cryptocurrency within the nation, as regulators fear that it might weaken the Communist party’s control over the financial system and promote criminal activity.

A notice issued on Friday stated that the People’s Bank of China said that bitcoin, ethereum, and other digital currencies disrupted the financial system and were used in money laundering and other crimes.

Virtual currency derivative transactions are all illegal financial activities and are strictly prohibited.

The People’s Bank of China

After the announcement, the price of bitcoin immediately dropped more than 8%, coming down to just over $41,000 (£30,000).

Decentralized cryptocurrencies such as bitcoin have been banned from Chinese banks since 2013. The People’s Bank of China is currently developing an electronic version of the country’s yuan that can be used for cashless transactions and can also be tracked and controlled by Beijing.

China Declares Cryptocurrency Transactions Illegal, Causes Price Drop
Ethereum | Source: Fandom

Earlier this year in May, Chinese regulators had issued a fresh notice to banks and payment firms, disallowing the offer of any services involving cryptocurrency. This reflected the CCP’s concern that cryptocurrency mining and trading might still be in effect in the country or that state-run financial systems might be indirectly exposed to risks.

This crackdown on cryptocurrencies by one of the largest economies in the world has now raised questions about the future of cryptocurrency, an asset that is currently used only by a limited number of companies and governments.

Daniel Lane, a senior analyst at stock trading platform Freetrade, said

China’s latest move could really disrupt the evolution of crypto and not necessarily in the way it wants to.

Daniel Lane, Senior Analyst, Freetrade

Sweeping and heavy-handed reforms might scare off crypto users in the short term but it might just prompt the industry to go back underground. A bit like the music industry found when illegal torrenting destroyed CD sales – eventually it’s more beneficial to innovate alongside user habits rather than fight them.

Daniel Lane, Senior Analyst, Freetrade

But Lane speculates even this decision will be just a short-term blow to the industry.

To think a ban will stop all activity is optimistic at best and quite naive at worst. Ironically, taking a whole country out of open discussions on crypto’s evolution from here just means diehard corners of the market will recede into more nefarious practices rather than move further towards regulation.

Daniel Lane, Senior Analyst, Freetrade

Compared to the May announcement, investor reaction to the move was fairly muted.

China’s actions haven’t held back cryptos rise too much in the past so I wouldn’t be surprised to see it bounce back once more.

Craig Erlam, Senior Market Analyst, OANDA

El Salvador is currently the only country in the world to have adopted bitcoin as legal tender, a move the president said was meant to promote “financial inclusion,” investment, and economic development. However, the decision, which came into effect this month, sparked a mass demonstration in El Salvador’s capital last week.

About Cryptocurrency

A cryptocurrency, crypto-currency, or crypto is binary data designed to work as a medium of exchange. Individual coin ownership records are stored in a ledger existing in the form of a computerized database (known as the blockchain) using strong cryptography to secure transaction records, control the creation of additional coins, and verify the transfer of coin ownership.

Bitcoin and Ethereum are two of the most well-known forms of cryptocurrency, and within each, there are a number of different coins which have their own value and price, depending on how popular they are.