Next Gen Investing

China is cracking down on crypto again — here's what that actually means, and how it affects U.S. crypto investors


The cryptocurrency market took a hit on Friday after the People's Bank of China confirmed its continued crackdown in the space.

According to a Q&A on its website, the PBOC said that all crypto-related activities are illegal in China, including services like offering trading of digital assets, order matching, token issuance and derivatives. In addition, overseas crypto exchanges providing services in mainland China are also illegal, the PBOC said.

But it's nothing new from China.

"This has to be the 20th time that China has banned bitcoin," Meltem Demirors, chief strategy officer at CoinShares, tells CNBC Make It. "There's always something 'different' about the bans, but this happens all the time and it's never really dramatic in the larger scheme of things."

And it would be quite difficult for any government to effectively ban bitcoin due to its design, James Ledbetter, editor of fintech newsletter FIN and a CNBC contributor, previously told CNBC Make It.

"I don't think even a concerted effort among different countries and different central banks could actually shut down bitcoin," Ledbetter said. "I don't think that's technologically possible. But there are ways that bitcoin could be regulated."

So though each similar announcement from China causes an initial drop in the market, U.S. investors shouldn't worry much – in fact, they should worry more about the potential fallout from U.S. regulation of cryptocurrency, experts in the space say.

Here's what you need to know, according to crypto experts.

China's crypto crackdown isn't new

China has targeted bitcoin since 2013, forbidding financial institutions from handling bitcoin transactions, and over the years, has renewed its crackdown of the crypto market.

"It should surprise no one that China doesn't like bitcoin. It is the pure antithesis of their regime of top-down centralized currency control," Chris Bendiksen, head of research at CoinShares, says.

Just earlier this year, China announced more measures to shutdown crypto mining rigs, which process and verify crypto transactions, and reiterated its ban on Chinese financial institutions providing crypto-related services. It doubled down on forcing miners out, and the PBOC said it plans to step up monitoring of crypto-related transactions.

Now, in its latest ban on all cryptocurrency-related activities, China remains committed to its stance.

This time, the Chinese government is likely motivated by the development of its digital yuan and central bank digital currency, Demirors says.

China is also looking to fulfill its climate targets, aiming to become carbon neutral by 2060, and mining cryptocurrency like bitcoin is extremely energy-intensive, using a lot of computer power.

In turn, some crypto holders in China and Hong Kong are now scrambling to find a way to safeguard their assets, as CNBC reported.

Still, investors in the U.S. won't be impacted much, if at all, experts say.

"You can only ban something once. Every ban after is an admission that you actually couldn't ban it at all," Demirors says.

Impact in the U.S.

The main repercussion from China's crypto crackdowns for U.S. investors is that "it could impact market volatility for investors," says John Wu, president of Ava Labs, a team supporting development of the Avalanche blockchain.

Indeed, following the Q&A from the PBOC, bitcoin fell 4% in 24 hours and is currently trading at around $43,020, according to CoinMarketCap. Ether fell 6% and is currently trading at around $2,973.

This volatility is, in part, why financial experts warn that folks should only invest in cryptocurrency what they can afford to lose. Critics of crypto markets say it is risky and speculative, and further regulation from China can further its intense price swings.

Crypto experts worry more about regulation in the U.S. than in China.

"The bigger risk is the U.S. regulatory apparatus emulates China," Demirors says. "D.C. has been increasingly aggressive with crypto enforcement, and clearly sees crypto as a threat to the government's ability to manage markets."

Recently, U.S. regulators have heightened their focus on the crypto industry.

Gary Gensler, chairman of the Securities and Exchange Commission, has been vocal about regulating crypto markets, with the SEC working overtime to create a set of rules to do so. Others, including Federal Reserve Chairman Jerome Powell and U.S. Treasury Secretary Janet Yellen, have also shared concerns about the space.

Wu notes that depending on the approach, regulation could potentially drive innovation in the crypto industry out of the U.S.

"Just as we've seen with bitcoin miners fleeing China and heading to the U.S. in states like Texas and Wyoming, crypto start-ups will flood to crypto friendly states and countries," Wu says. "Taking reasonable, well-considered measures is a huge opportunity for the U.S. to be a haven for the future of crypto, and entrench itself as a hub for the global economy in the decades ahead."

Others, however, argue that well-thought-out regulation would be beneficial to the crypto industry in the U.S.

"I don't see how an industry as big as crypto could continue to operate without any regulation or oversight," Anjali Jariwala, certified financial planner, certified public accountant and founder of Fit Advisors, previously said. "If people want crypto to become more of a mainstream asset, then I think [it's] a necessary first step."

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What China's crypto crackdown means for crypto and tech
What China's crypto crackdown means for crypto and tech