Why does China ban Bitcoin?

China's cryptocurrency crackdown demonstrates its commitment to financial stability, currency control, and combatting money laundering, while also paving the way for its own Central Bank Digital Currency (CBDC).

Sep 27, 2024 at 05:06 pm

1. Crackdown on Cryptocurrencies

In 2017, the Chinese government initiated a crackdown on cryptocurrency trading and mining to curb financial instability and prevent money laundering. Beijing issued a ban on initial coin offerings (ICOs), which were used to raise funds for new cryptocurrencies.

2. Currency Control

China's central bank, the People's Bank of China (PBOC), maintains strict control over the country's currency exchange to stabilize its value. Cryptocurrencies, such as Bitcoin, operate independently of any central authority. By banning Bitcoin, China can maintain its monetary policy and prevent the outflow of capital.

3. Financial Stability Concerns

The PBOC expressed concerns that Bitcoin's volatile nature and lack of regulation posed risks to the Chinese financial system. The cryptocurrency market was seen as a potential source of instability and financial crimes.

4. Money Laundering Prevention

Anonymous transactions facilitated by Bitcoin raised concerns about its use for money laundering and terrorist financing. By criminalizing Bitcoin, China aims to combat financial crimes and protect its economy.

5. Central Bank Digital Currency (CBDC)

China is developing its own CBDC, the Digital Currency Electronic Payment (DCEP). The potential launch of the DCEP has motivated the government to eliminate competition from other cryptocurrencies, such as Bitcoin.

Impact of the Ban

1. Market Volatility: The Chinese ban in 2017 triggered a significant decline in the Bitcoin price, causing widespread anxiety in the cryptocurrency market.
2. Mining Industry Collapse: China was the global leader in Bitcoin mining. The ban led to the collapse of China's mining industry, shifting mining operations to other countries.
3. Increased Regulation Globally: China's ban raised international concerns about the risks associated with cryptocurrencies. It has contributed to increased regulatory scrutiny of cryptocurrencies worldwide.
4. Boost to CBDCs: China's ban on Bitcoin and its pursuit of a CBDC have accelerated global interest in central bank-backed digital currencies.