What’s Behind China’s Cryptocurrency Ban?

  • The People’s Bank of China argues that the ban on cryptocurrencies is to reduce financial crimes and prevent economic instability.
  • However, China’s cryptocurrency ban arises in fear that cryptocurrencies are circumventing traditional restrictions and facilitating capital flight from the market.
  • China’s cryptocurrency ban is part of a new trend in China’s economic policy towards greater national intervention, symbolized by the “Common Prosperity” campaign.

In late September 2021, the People’s Bank of China (PBOC) banned all cryptocurrency transactions. The PBOC has cited the role of cryptocurrencies not only in promoting financial crimes, but also in increasing risk to China’s financial system due to its speculative nature. Another possible reason behind the ban on cryptocurrencies is an attempt to combat the escape of capital from China.

According to the Chainalysis Blockchain data platform, more than $ 50 billion of cryptocurrencies left East Asian accounts outside the region between 2019 and 2020. The Chainalysis staff believes much of this net outflow, as China has such a huge presence on East Asian crypto exchanges that the percentage of cryptocurrencies was actually a capital escape from China. .. Chainalysis does not have a clear figure on the amount of capital that fled China between 2019 and 2020, but estimates that it could be as high as $ 50 billion.

Capital management and cryptocurrency exchange

China has already set a $ 50,000 annual limit on foreign currency purchases as part of strict capital regulations. Therefore, the capital flight promoted by cryptocurrencies is especially noteworthy.

Previously, rich Chinese people circumvented capital restrictions by buying foreign real estate, making creative claims for international trade, and forcing employees to transfer money to foreign bank accounts. .. Bitcoin has made it easier for Chinese residents to acquire foreign assets. You will be released from the surveillance of Chinese authorities. Given the decentralized nature of Bitcoin and many other blockchain-based cryptocurrencies, it can be used to circumvent capital management much easier than traditional currency exchanges that use banking systems.

Despite the strict capital flight, Chinese authorities have always been wary of capital flight. The effectiveness of these capital flights is controversial, as some commentators claim that capital flight increased significantly between 2009 and 2018. Operating cryptocurrency exchanges in China (the 2017 ban did not lead to a ban on the possession or mining of cryptocurrencies that the 2021 ban ultimately banned). In 2017, Chinese authorities imposed additional restrictions on foreign investment by Chinese companies that year. In a sense, the 2017 restrictions on cryptocurrency exchanges in China can be seen as a precursor to the tightening of foreign investment by Chinese companies that year.

Chain analysis also points out that much of the capital flight from East Asia is facilitated by the stablecoin, Tether (USDT), a cryptocurrency conceptually fixed to the value of the US dollar (USD). increase. Cryptographic trading tethers in China are stable as their value is virtually fixed to the US dollar, according to former Grayscale Research Director Philip Bonello, and easy to exchange for user-selected flat currencies. Therefore, it is especially popular in China.

Currencies included: BTC, DAI, USDC, USDT.

Currencies included: BTC, DAI, USDC, USDT.

Image: Spirogyra

Common prosperity and capital regulation

The threat of capital flight remains a priority for PBOC as the Chinese economy recovers from the COVID-19 pandemic, especially as China launches a “common prosperity” campaign. Former PBOC adviser Li Daokui warns of the relatively rapid economic recovery in the United States. Residents of China may tend to buy assets in the United States for greater financial security, which could fuel a larger capital flight.

In addition, a common driving force for prosperity emphasizes a heavier nationalist approach to managing China’s economy and a more inward-looking economic strategy. In particular, the outlawing of cryptocurrency transactions occurred just one month after the announcement of a common prosperity program. This cryptocurrency ban may also have been brought in to reduce foreign investment and instead encourage wealthy Chinese to accept higher income taxes and donate their wealth domestically.

Overall, there is strong evidence that the ban on cryptocurrencies was a response to the long-standing problem of capital flight from China. Given that a large amount of capital flight has already occurred through cryptocurrency exchanges, PBOC will be aware that cryptocurrencies are exacerbating China. A chronic problem of capital flight.

Through a common prosperity program, China aims to curb capital flight and promote the domestic circulation of people’s wealth. Attempts to redistribute China’s wealth will be much more difficult if the wealthy circumvent China’s already strict capital controls through foreign cryptocurrency exchanges and acquired foreign assets. ..

Nevertheless, despite political demands, it is very difficult to enforce such a strict ban on cryptocurrency transactions. The capital flight enabled by cryptocurrency transactions may continue. Time tells us how serious the final economic impact will be.


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