There’s no denying that China’s crackdown on Bitcoin mining and trading has caused its decline in value. Before the crackdown, this country was a crucial player in the modern financial ecosystem. But the Beijing’s action prompted other countries to think about this virtual currency broadly. At the same time, El Salvador has made Bitcoin a legal tender. Thus, El Salvadorians can use Bitcoin to pay for services and goods alongside the U.S dollar.
Initially, China banned crypto initial coin offerings. These are the crypto equivalent to initial public offerings of company stocks. After that, the country limited financial institutions from dealing with crypto assets and other cryptocurrencies.
This ban means the law prohibits every domestic cryptocurrency transaction. But people can still conduct these transactions without the direct knowledge of the authorities. For instance, Chinese citizens can purchase this virtual asset via the Bitcoin Prime. Such a platform allows people to sign up, load their accounts with funds, and buy Bitcoins. Also, customers can sell Bitcoins to other users on the same platform and cash out their funds.
Nevertheless, Beijing’s actions demonstrate how central and national banks fear this cryptocurrency, thinking it will destabilize their traditional financial systems. But what prompted China to ban this virtual currency?
Volatility and Stability
Currently, Bitcoin is a prominent cryptocurrency. However, this virtual currency lacks the backing of government credit or precious metals. Bitcoin’s price reflects speculation of its future value. Being a young currency, Bitcoin is also a risky investment whose highly volatile value. This cryptocurrency’s value has been fluctuating rapidly during its existence.
While several factors may have prompted this country to crack down on this virtual currency, authorities stated that wild price swings threaten its financial and economic stability. According to the government, Bitcoin and other virtual currencies interfere with the economic order. Thus, Bitcoin can resolutely hinder individual risks’ transmission to society.
In 2013, China made the first move, restricting banks from making Bitcoin a currency, citing its inherently speculative nature as a threat to the country’s financial stability. Afterward, the government banned all cryptocurrency mining operations within the country.
The Chinese central bank moved ahead to require all banks and payment firms to close accounts of customers who participated in cryptocurrency transactions.
Government’s Right to Print Money
Beijing’s primary concern is protecting the country’s economic growth and financial stability. However, experts believe that the government saw Bitcoin as a threat to its monetary sovereignty. Satoshi Nakamoto created this virtual currency to enable it to function without a central authority. Thus, no central authority can make policies that may affect its value.
The Chinese and other governments make fiat money, whose supply they can control. Thus, the government regulates the amount of fiat currency circulating in the country. Cryptocurrency advocates believe that Bitcoin is purely market-driven. And this makes it powerful than government-issued money that depends on the monetary policies of central authorities like central banks.
The Future of Cryptocurrencies in China
The Chinese government noted that Bitcoin wasn’t a currency with real-world meaning when its popularity rose. However, the government added that Bitcoin isn’t a real currency and people shouldn’t and can’t use it as a currency. But experts have noted that China banned Bitcoin to retain monetary sovereignty. What’s more, they argue that it exceeds economics because the government’s political legitimacy is heavily dependent on the country’s booming economic growth. Anything that challenges economic stability, financial system, or development is a threat to the government. And that’s precisely why the government embarked on a Bitcoin crackdown. How things will turn out for cryptocurrencies in this country is a matter of time. The central bank has already created a digital currency that citizens can purchase and use alongside traditional money.