China declares that all digital coins are illegal

China has expanded its crackdown on cryptocurrencies by declaring that all activities related to digital coins are illegal.

The People’s Bank of China (PBoC), along with nine other government agencies - including the Cyberspace Administration and the Supreme People’s Court, China’s top court - announced on September 24 that it was illegal for overseas exchanges to provide online services to residents in China.

The move appears to be a bid to close a loophole that remained after the PBoC, which is China’s central bank, banned domestic financial institutions from providing cryptocurrency transaction services. In the months since that May ban, Chinese traders have continued to invest in cryptocurrency using foreign platforms.

Chinese banks have been banned from handling decentralised cryptocurrencies, like Bitcoin, since 2013, although the PBoC is currently developing an electronic version of the country’s yuan for cashless transactions that can be tracked and controlled by Beijing.

When China’s regulators issued the fresh notice in May to banks and payment firms, saying they were not allowed to offer clients any services involving cryptocurrencies, it reflected official concern that cryptocurrency mining and trading might still be going on, and that the state-run financial system might be indirectly exposed to risks.

The notice declaring cryptocurrency activities illegal said that “there are legal risks for individuals and organisations participating in virtual currency and trading activities”. It added that all Chinese nationals working for overseas cryptocurrency exchanges would be “investigated according to the law”, as would organisations providing marketing, payment and technical support to them.

Worldwide Impact

As well as the inevitable drop in value of some of the main cryptocurrencies in the weekend after the latest announcement, China’s stance is likely to have other consequences. 

Crypto exchanges and platforms based outside of China will now have to consider making China-based clients off-limits. Most global crypto exchanges already ban clients based in the US. This list will now need to be expanded to include China-based traders. 

The very nature of crypto — including decentralised exchanges that gather little or no information about customers — means in practice, however, that it will be very difficult for exchanges to stop people from holding cryptocurrencies in specific countries, including China and the US. To avoid sanctions, like we saw with Suex earlier this month, crypto exchanges and other digital marketplaces will need to consider implementing more robust due diligence checks on their client bases. 

Mining migration is likely to come about as a result of this announcement. The technology at the core of many cryptocurrencies relies on many distributed computers verifying and checking transactions on a giant shared ledger known as the blockchain. As a reward, new "coins" are randomly awarded to those who take part in this work - known as crypto "mining". 

China, with its relatively low electricity costs and cheaper computer hardware, has long been one of the world's main centres for mining. Following the latest announcement, however, it is likely these mining farms will move elsewhere. 

Research by the Cambridge Centre for Alternative Finance (CCAF)  found China's share of mining fell from 75.5% in September 2019 to 46% in April 2021.