The fallout from the crypto crackdown and what happens next – Cointelegraph Magazine

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The summer of regulatory action has now become a global phenomenon. Lawmakers and politicians are waving their fingers and threatening the industry’s leading virtual asset service providers, a term coined by the FATF to describe exchanges, wallets, custodians and even DeFi platforms.

But when it comes to cracking down on cryptocurrency, few places do it with the efficiency and experience of the Chinese government.

Unlike the United States, Chinese regulators do not have a public discourse on this matter. Decisions are made behind closed doors, and announcements arrive quickly, posted on government websites or in speeches from well-prepared officials.

The directives come from the highest level and are quickly reiterated and applied by officials below the provincial or municipal level, by public enterprises and by financial institutions. This style of top-down regulation tends to make the “China ban” seem very repetitive and harsh. In reality, the same regulation can be repeated dozens of times by different branches, scaring the public but having very little additional impact on the industry.

3000 kilos of #bitcoin miners packing for airlift to the United States. pic.twitter.com/d07y5GUBB3

– 8BTCnews (@btcinchina) June 21, 2021

What’s the matter this time around?

While possession of cryptocurrency was never officially banned, the need for reform in other areas of the industry was likely present. According to Winston Ma, former managing director and head of North America at China Investment Corporation, the Chinese government has pushed regulations to protect consumers, move closer to carbon neutrality goals and achieve greater financial stability.

While the latter reason is more subjective, it cannot be denied that China’s opportunistic mining industry and high speculative retail investors were operating largely unchecked at the start of the year.

Ma will be among the first to see the effectiveness of the changes underway, especially for the mining industry, telling Magazine:

So far, the impact from an energy perspective is most evident: After the central government launched the cryptocurrency crackdown in May, major coal-based electricity producers such as the Inner Mongolia and Xinjiang, which were previously the two main cryptocurrency mining centers in China, were among the first regions to quickly develop local rules to clean up mining companies.

It will not be a short term adjustment. Most of the big mining companies have moved overseas, and the overall hash rate of BTC mining is still down about 40% from the spring highs, before the crackdown. Energy and climate policies have been the focal point of China’s all-important five-year plan that was released this spring, reinforcing the importance of cleaner energy use for the foreseeable future.

Despite its importance to the crypto community, mining does not contribute much to the national GDP. Chinese miners’ incomes were just under $ 7 billion for the 12-month period to June, a figure far too small to shake things up for the government.

Revenue from the Didi rideshare app alone was more than three times that of 2020, and the Chinese government has had very little hesitation in cracking down on it after it emerged it had provided data. user to US regulators. Didi apps have been removed from nationwide app stores, and now competitors are lining up for a massive market share if Didi fails to resolve his legal issues.

Although Chinese miners raise money, it was not enough to avoid government regulation (data as of June 2021)

Sally Wang, vice president of portfolio marketing at Sino Global Capital, notes that while Chinese regulators do not tolerate risk areas that threaten financial stability, there has been a huge increase in blockchain use cases. at national, regional and municipal levels.

We’ve seen miners leave China, and we’ve also seen big fintechs, like Alibaba, experimenting with NFTs. The tokenless blockchain projects in China have seen tremendous growth.

This kind of development has allowed players to continue contributing to a healthy blockchain ecosystem in China, with local governments supporting major events like the World Blockchain Conference in Hangzhou and the upcoming Shanghai International Blockchain Week in September.

Influence of the regulator on the drop

The initial crackdown that banned ICOs and exchanges in 2017 caught the crypto industry at a vulnerable time. The majority of world trade volume at the time came from China or was conducted on Chinese exchanges, and the largest were registered and based on the mainland. This left them at the mercy of the authorities and gave the industry a valuable lesson in geographic risk management.

After that, key industry players such as Binance, Huobi, and OKEx began to settle in places like Hong Kong and Singapore, where regulators were more open-minded. Subsequently, these exchanges are now slightly removed from the jurisdiction of the Chinese government, provided that they are not too visible when recruiting Chinese users.

Back to 2017: This chart from Cointelegraph shows how fearful the industry was after the future of many big exchanges was in doubt.

As more and more of the industry moves overseas, the impact of regulators is lessened. Unfortunately, miners keen to take advantage of the low-cost power of China’s abundant hydroelectric and coal-fired power plants have not been so quick to decentralize. This left them in a precarious position, triggering a wave of panic after China cracked down on miners earlier this year. The good news for investors is that miners have now responded by relocating overseas as well, reducing the need for any future negative regulations against the mining industry.

Reading tea leaves with regulators

Retail remains a major uncertainty, as large Chinese-predominant exchanges like Huobi and OKEx account for around 20% of global volumes, according to the FTX volume monitor. Binance accounts for over 50% of the global volume and probably also has a large percentage of Chinese users.

Although users cannot directly buy cryptocurrency with fiat on these platforms, P2P transactions still allow savvy users to easily buy on platforms like Binance, using Chinese bank accounts and apps. payments to conduct transactions between the yuan and stablecoins.

At this point, the government has failed to slow down this volume, even though bank accounts are sometimes frozen to transact in P2P markets. The sheer volume of digital transactions makes this difficult to monitor, but the government may not be interested in eliminating these channels altogether. Completely shutting down stock exchanges and retail investors might be possible, but it could leave China frozen, horseless in the race, which China is reluctant to do.

Wang believes the exchanges that have large volumes from China will continue to adapt, telling Magazine: Products available to new users. Wang refers to what happened earlier this year when exchanges like Huobi limited user access to futures, a popular but high-risk commodity that is often more akin to gambling than gambling. ‘investment.

Ma remains less convinced of the short-term future:

Chinese securities and banking regulators have yet to release new cryptocurrency trading regulations. Uncertainty could mean real and long-term downward pressure on cryptocurrency prices.

Ma isn’t the only one worried about what’s next. Many in the Chinese community, including early entrepreneur Bobby Lee, have expressed similar concerns, especially after seeing regulators target so many companies and individuals in China’s private tech sector this summer.

If more action is taken against retail traders, many Chinese users might worry about their ability to cash in in the future, leading to more fear in the markets. The question then is whether the scandals, scams and social unrest linked to speculative investments could force the government to act. The best bet for cryptocurrency holders is an increase in more technology-driven sustainability. Soaring prices for even tokens like Dogecoin and Shiba Inu may be attractive to traders in the short term, but it increases the likelihood that the government will put pressure on retail users and the exchanges that serve them.

A Chinese proverb from which we can draw wisdom is the idea of ​​killing the chicken to scare the monkey.

In this story, a man slaughters a chicken to teach his precious dancing monkey a lesson. By comparison, Chinese regulators won’t hesitate to crush one company if it means others will follow suit.

The international crypto community should hope that major Chinese projects will be able to navigate these new policies unscathed and continue to build a healthy blockchain ecosystem. Chinese entrepreneurship has historically produced the biggest exchanges and big mining companies like Bitmain and Canaan, not to mention many of the leading venture capitalists and investors who have helped shape the industry. The next move from regulators could be important, as we could find out if the best players become the Chicken or the Monkey.

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