Bitcoin hype continues despite China's crypto ban

China's crypto ban is drawing ever wider circles

China's tendency to curb cryptocurrencies has already become apparent around four years ago off. Back then, the Chinese central bank was repeatedly critical of cyber foreign exchange and announced “draconian measures” to combat them. A short time later, trading platforms were banned from exchanging crypto currencies into fiat currencies. To prevent buyers and sellers from switching to foreign stock exchanges, The Chinese government banned in 2018 Finally, access to crypto platforms and ICO websites. In addition, cryptocurrency transactions via services widely used in China, such as WeChat or Alipay, have now been prohibited.

In May 2021, financial market and banking associations there followed suit once again and warned: Dealing with virtual currencies involves major risks, which is why companies and consumers are called upon to stay away from cryptocurrencies. Financial institutions were also asked to neither accept nor use cryptocurrencies as a means of payment. Their price fluctuations and the associated speculation are jeopardizing the security of the supply of goods overall, the banking associations warned.

On the other hand, mining, i.e. the “mining” of cyber foreign exchange, continued to be tolerated by China's authorities until June 2021. But then the authorities pulled the plug on many mining strongholds. In the southern Chinese province of Sichuan alone, 26 server farms went offline at the end of June. In September 2021, the Chinese Central Bank finally announced that all transactions related to cryptocurrencies be illegal. This also includes foreign platforms that gave Chinese access to digital currencies.

Why is China taking such strong action against cryptocurrencies?

The People's Republic gives several reasons to justify the ban. On the one hand, crypto mining would consume immense amounts of energy, which could possibly lead to shortages elsewhere. Because in order to mine cryptocurrency, server farms must solve complex and therefore energy-intensive computing tasks. This is confirmed by the data from the”Cambridge Bitcoin Electricity Consumption Index“, which assumed an annual energy consumption for Bitcoin mining of almost 111 terawatt hours in October 2021. Roughly as much as the electricity consumption in the Netherlands.

On the other hand, cryptocurrencies are often used fraudulently, facilitate money laundering and therefore disrupt economic order. Because as soon as cryptocurrency exchange rates fluctuate too much, the country's entire economy and money market are affected. According to the Chinese Central Bank, the ban would protect the “economic, financial and social order.”

Miners relocate activities abroad

China's increased regulatory pressure temporarily sent the prices of many cryptocurrencies down in September 2021. The two most important — Bitcoin and Ethereum — lost almost ten percent of its value at times. But the shock wave on the crypto markets was short-lived: Bitcoin reached new highs of over 63,000 dollars at the end of October.

This reaction shows that, in principle, the politically motivated regulation of cryptocurrencies has little effect on their success. As demand tends to increase, miners are simply moving their activities or server farms from China to other Asian countries, to Russia or to the USA.

Because some US states, such as Texas, score points with low energy prices, according to data from Cambridge University Over a third of the crypto mining output now comes from the USA. By contrast, China has fallen back to an unmeasurable share in statistics (as of October 2021).

Many Chinese miners also emigrated to neighboring Kazakhstan, which now has a market share of 18.1%. Russia (11.2%) is in third place, ahead of Canada (9.6%), Ireland (4.7%), Malaysia (4.6%) and Germany (4.5%).

China promotes e-yuan digital currency

Since capital outflows from China using foreign cryptocurrencies and trading platforms have largely been curbed, the country can now introduce its own, state-regulated and controlled digital currency: the digital yuan. The e-yuan is considered to be well advanced and is being tested in field tests with tens of thousands of users and more and more well-known companies Tested across the country. To this end, the Chinese Central Bank has sent e-yuan funds to several hundred thousand randomly selected citizens via an app. The digital money was given an expiration date and could be redeemed in selected stores via the official app. In a further step, foreign athletes and visitors to the Winter Olympics will probably be able to use digital central bank money for the first time next spring.

In contrast to Bitcoin, the digital yuan is not based on a decentralized blockchain, but is issued by the Chinese central bank. The virtual tokens are — like cash — divided into fixed sizes and provided with a serial number. The e-yuan is stored in an app, used in mobile payments and could mean another big step towards a cashless Chinese society.

Regulation gives DeFi a tailwind

With the prestigious e-yuan project, China may be securing a global pioneering role in the introduction of a digital, state-regulated currency. As a result, other countries are now increasingly under pressure to issue their own digital currency in response to the e-yuan. In addition to promoting alternative currencies internationally, China's regulation also offers opportunities for the entire DeFi sector.

This trend was reflected by sharp rise in DeFi tokens such as dYdX, UNI, and SUSHI in response to China's crypto ban. DeFi stands for “Decentralized Finance” — for “Decentralized Finance.” Its basic idea is to democratize financial services, markets and infrastructures and make them completely open. This is how DeFi protocols in the form of digital securities — so-called smart contracts — also used for lending or real estate transactions, for example.

Cryptocurrencies and blockchain are winners

Functions and conditions can be programmed into the blockchain, which are automatically processed and, if necessary, validated. In this way, buyers and sellers can process transactions themselves quickly, securely and cost-effectively, as there is no need for intermediary parties.

The positive effects of China's crypto ban have shown: The end of mining farms in China has not dealt Bitcoin a death blow, but may even have sustainably increased the attractiveness of cryptocurrencies and the blockchain.