China Makes Cryptocurrency Transactions Illegal: An Explainer

China has added cryptocurrency mining to a draft list of industries in which investment is restricted or prohibited, although it reduced the number of sectors on the list overall.

• Cryptocurrency restrictions in China are not new.
• In 2017, China shut down local cryptocurrency exchanges at a time when their speculative market accounted for 90 percentof the world’s trade of bitcoin.
• In June 2019, trading cryptocurrency was officially banned in China, when the PBOC stated they would be blocking access to all forms of cryptocurrency exchanges, domestic and foreign, and Initial Coin Offering websites although cryptocurrency transactions continued through foreign online exchanges.
• 2021, however, saw the government double down on its crackdown on cryptocurrencies

What is Cryptocurrency?

• Cryptocurrency is decentralized digital money, based on blockchain technology.
• A cryptocurrency is a medium of exchange that is digital, encrypted and decentralized.
• Unlike the U.S. Dollar or the Euro, there is no central authority that manages and maintains the value of a cryptocurrency.
• Instead, these tasks are broadly distributed among a cryptocurrency’s users via the internet.
• Bitcoin was the first cryptocurrency, first outlined in principle by Satoshi Nakamoto in a 2008 paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System.”
• That cryptographic proof comes in the form of transactions that are verified and recorded in a form of program called a

What is in the latest ban?

• Legal currency and virtual currency exchanges, buying or selling virtual currencies (including overseas sales to Chinese residents), and providing information (including pricing services and technical support) for virtual currency are illegal currently.
• They carry the threat of investigation and prosecution.
• Financial institutions are banned from providing services for cryptocurrencies, including opening accounts, funds transfers, and other activities that facilitate the use of cryptocurrencies.
• Internet companies and websites are also banned from providing payment services in cryptocurrencies.
• Advertisements for cryptocurrencies are also prohibited, with the monitoring of key words relating to them.

 What can be the reasons behind the ban?

• China’s ban basically reflects global concerns about cryptocurrency.
• Governments across US and Asia have raised concerns that digital currencies
  • increase risk
  • promote crime
  • harm investors
  • affect government control of monetary systems
• The Chinese government also reportedthat the trading of virtual currency has contributed to the rise in gambling, fraud, money laundering, pyramid schemes, and other illegal activities.
• Thus, banning cryptocurrency is necessary to maintain social stability and national security.
• It has been also felt that China sees cryptocurrencies as threatening to the digital yuan, an electronic currency at the advanced pilot stage.

The concept of digital rupee in India

• About 100 million Indians own cryptocurrencies, according to a recent study.
• Top crypto exchanges serving the Indian market:
  • WazirX
  • CoinDCX
  • CoinSwitch Kuber
  • ZebPay
  • UnoCoin
• Legality: At the moment, there is no legislature that covers cryptocurrencies in India. But this doesn't mean that owning cryptocurrenciesis illegal. 

IMF’s warning to India

• International Monetary Fund (IMF) has recently warned against the adoption of Crypto currency, saying it can threaten financial stability of emerging markets.
• According to the IMF, Crypto currency poses new challenges to financial stability and consumer protection risks remain substantial given limited or inadequate disclosure and oversight.
• IMF’s financial experts said, anonymity of crypto assets also creates data gaps for regulators and can open unwanted doors for money laundering, as well as terrorist financing.

Conclusion

Cryptocurrencies — digital commerce tools that aren’t linked to a centralized banking authority — first appeared in China around 2008. Chinese banks began to prohibit the use of digital currencies in 2013 and stepped up regulations after 2016.

So, although bans on crypto currencies by Chinese authorities or similar actions do not put any stumbling blocks for digital currency traders in India, they — on the other hand — give good buying opportunities to investors.