Frequent regulatory actions, what impact do they have on the cryptocurrency market?

This article is from 01 Blockchain, original title: "The Cryptocurrency Market Under Regulatory Pressure," author: Sui Qilin.

In the past month, the cryptocurrency market has faced stringent regulations, with the state taking strong measures against the virtual currency market. First, there was a joint announcement from the three major financial industry associations, followed by the Financial Stability and Development Committee proposing to crack down on Bitcoin mining and trading activities, along with several local governments in the southwest issuing measures to resolutely combat virtual currency "mining" activities. These successive developments indicate that the regulatory intensity on the domestic virtual currency market is reaching new heights.

Affected by regulations and various factors, mainstream cryptocurrency prices have continued to fluctuate dramatically, with Bitcoin plummeting over 35% in the past month and Ethereum's price volatility nearing 40%.

The State Takes Action, Regulation Has Arrived

On May 18, the China Internet Finance Association, the China Banking Association, and the China Payment and Clearing Association jointly issued an announcement on "Preventing Risks of Virtual Currency Trading and Speculation," stating that virtual currencies do not possess monetary attributes. As early as 2013, in the "Notice on Preventing Bitcoin Risks," Bitcoin was identified as a specific virtual commodity, lacking the legal status equivalent to currency and should not be circulated as currency in the market. Additionally, the announcement emphasized that relevant institutions must not engage in businesses related to virtual currencies, and financial institutions and payment institutions must not price products and services in virtual currencies or engage in related businesses directly or indirectly. Clearly, even though several institutions abroad, including Tesla, had previously announced support for using Bitcoin for payments, such actions are currently unfeasible domestically. The announcement also reminded consumers to enhance their risk awareness and urged them to invest cautiously.

The overall landscape of the virtual currency market has basically taken shape, with many well-known projects in the industry chain having undergone several rounds of rigorous selection. However, for most ordinary investors, the virtual currency market remains in its early development stage, with speculative attributes in virtual currency trading significantly outweighing investment attributes. The market frenzy driven by animal coins has further amplified this enthusiasm, attracting some "newbies" who previously had no understanding or investment experience in virtual currencies, lured by the wealth effects of rumored hundredfold and thousandfold coins, and blindly participating in related investment activities. This has further expanded the financial risks associated with virtual currency exchanges, creating a tendency for widespread issues. In this situation, it is essential to remind consumers to strengthen their risk prevention awareness. This is also the original intention of the announcement, to prevent overheating speculation in cryptocurrencies.

On the same day that the three ministries issued their announcement, the Inner Mongolia Autonomous Region Development and Reform Commission released an announcement on establishing a reporting platform for virtual currency "mining" enterprises, comprehensively cleaning up and shutting down virtual currency "mining" projects, fully leveraging the role of public supervision and accepting complaints regarding issues with virtual currency "mining" enterprises.

Inner Mongolia is an important energy base in China, with its power plants primarily relying on coal, many of which are built near coal mines, resulting in lower electricity costs. Therefore, the low electricity prices have attracted a large number of "miners" to mine there. The reason Inner Mongolia became the first place to ban Bitcoin "mining" is related to the deployment requirements of the "Several Guarantee Measures to Ensure the Completion of the '14th Five-Year Plan' Energy Consumption Dual Control Target" in Inner Mongolia, which needs to achieve energy consumption dual control targets and promote low-carbon development.

On May 21, the State Council Financial Stability Development Committee held its 51st meeting, continuing to emphasize the resolute prevention and control of financial risks, "cracking down on Bitcoin mining and trading activities, and firmly preventing individual risks from spreading to the social field." This was the first time the State Council explicitly proposed to crack down on Bitcoin mining and trading. If the announcements from the three major associations were seen as a call, then this meeting of the Financial Committee sent a strong signal of enhanced regulation and resolute prevention of risk diffusion.

And this is not the end. On May 25, to further clean up virtual currency "mining" activities and strengthen punitive measures, Inner Mongolia promptly released the "Eight Measures to Firmly Crack Down on and Punish Virtual Currency 'Mining' Activities (Draft for Comments)."

On May 26, the National Development and Reform Commission issued the "Implementation Plan for the National Integrated Big Data Center Collaborative Innovation System Computing Power Hub," stating that it aims to layout national computing power hub nodes and implement the "East Data West Computing" project, supporting large-scale computing power scheduling and forming a new type of computing power network pattern guided by data flow. The proposal of the "East Data West Computing" project is highly strategic, leading, and innovative, significantly advancing the construction of digital infrastructure, implementing carbon peak and carbon neutrality requirements, and coordinating the development of eastern and western regions.

On May 27, the Sichuan Regulatory Office of the National Energy Administration issued a notice about convening a seminar to investigate the situation regarding virtual currency "mining." The notice stated that, according to the requirements of the National Energy Administration, to fully understand the situation related to virtual currency "mining" in Sichuan, a seminar will be organized on June 2.

From this round of policies, it can be seen that the halt of mining is not only due to the lack of recognition of virtual currencies by current laws but also because of their enormous energy consumption characteristics, which contradict carbon neutrality policies. Therefore, the rectification of the mining industry is imperative. While the state is vigorously regulating mining activities, it is also actively promoting the construction of digital infrastructure, with the "East Data West Computing" project playing an important supporting role in achieving green development and coordinated development of the digital economy in eastern and western regions. The implementation of this project will create a new pattern of integrated infrastructure that is rationally laid out and environmentally friendly across the country.

Why is the State Taking Strong Measures?

From an environmental perspective, at the 75th United Nations General Assembly, the Chinese government stated: "China will increase its national contributions, adopt more vigorous policies and measures, and strive to peak carbon dioxide emissions before 2030, aiming for carbon neutrality before 2060." Under the common initiative of global environmental protection, this is a significant strategic decision made based on the responsibility to promote the building of a community with a shared future for mankind and the inherent requirements for achieving sustainable development.

Clearly, against the backdrop of carbon neutrality, the energy-intensive industry of cryptocurrency mining has become an obstacle to achieving this goal. According to data from the Cambridge Centre for Alternative Finance, as of May 19, 2021, the annual electricity consumption for global Bitcoin "mining" was approximately 133.68 TWh. What does this number mean? Sweden's total electricity consumption in 2020 was only about 131.8 TWh.

Source: FINANCIAL TIMES

Moreover, mining not only consumes a large amount of electricity but, if Bitcoin is mined using thermal power, it will also exacerbate carbon dioxide emissions. Domestic virtual currency mining sites are mainly distributed in Inner Mongolia, Xinjiang, and western Sichuan, with Inner Mongolia and Xinjiang relying more on thermal power, while Sichuan mainly uses hydropower. Thermal power generation converts thermal energy into electrical energy by burning coal or other fossil fuels, and during the combustion of coal, carbon dioxide is emitted, leading to environmental issues. In the long run, this is not conducive to the sustainable development of the blockchain industry, and certainly hinders carbon neutrality efforts.

Additionally, the current distribution of energy in China is uneven between the east and west. Areas with dense populations and developed economies (such as Beijing-Tianjin-Hebei, the Yangtze River Delta, the Guangdong-Hong Kong-Macao Greater Bay Area, and Chengdu-Chongqing) face energy shortages, while western regions and economically underdeveloped areas are energy-rich. Inner Mongolia bears the responsibility of transmitting electricity to the Beijing-Tianjin-Hebei grid and is an important area for sending electricity from the west to the east. Furthermore, the rapid development of 5G, the industrial Internet of Things, and smart cities will also generate considerable energy consumption demands. If Bitcoin "mining" is allowed to run rampant in Inner Mongolia, it will affect the power balance in Inner Mongolia and the strategy of sending electricity from the west to the east to some extent.

For Sichuan, which mainly uses hydropower, the energy structure is primarily based on hydropower, and Sichuan's terrain is steep with significant river drop-offs. The power generation from nearby small hydropower stations cannot be sent to the grid, and during the flood season, there is a significant amount of surplus water, leading to actual energy wastage in Sichuan. Therefore, utilizing waste energy by mining with hydropower does not pollute the environment and helps consume the surplus electricity during the flood season. While mining during the flood season is beneficial, there will not be as much electricity available during the normal and dry seasons, so how to address this issue will likely be discussed at the seminar on June 2.

In addition to environmental concerns, the recent frenzy in the cryptocurrency market has caused some overheating, and there is a significant bubble. Influenced by market speculation, a large number of ordinary investors have participated in cryptocurrency market investments, mostly as a form of speculation. A large influx of funds into Bitcoin trading can weaken support for the real economy, increasing the possibility of financial risk diffusion. More importantly, Bitcoin is a specific virtual commodity without real value support and does not have the same legal status as currency, so Bitcoin investment and trading are not protected. Therefore, increasing regulatory efforts is precisely to cool down the overheated market.

What Impact Will This Have on the Cryptocurrency Industry?

After the Financial Committee meeting, the cryptocurrency market bubble faced a significant blow. Bitcoin prices have been declining, with the price hitting a low of $31,815.67 on May 23. As of 2:45 AM Beijing time on June 8, Bitcoin's price rebounded to $35,544.78, with a decline of 0.97% in the past 24 hours. On the same day, May 23, other cryptocurrencies also collectively crashed. Ethereum fell from over $2,400 to a low of $1,739.03. XRP dropped by about 12.94%, and Dogecoin fell by over 10%.

This round of policies not only has a huge impact on cryptocurrency prices but also affects enterprises related to mining. Relatively speaking, this series of policies has a greater impact on leading and large mining farms and pools, with many leading mining farms accelerating their overseas mining site layouts, primarily in Central Asia and North America, while some small mining farms or individual miners are not significantly affected.

In addition to the withdrawal and closure of mining farms, several mining machine service platforms have announced the blocking of IPs from mainland China. On May 23, Huobi, which has a mining pool, suspended providing mining machines and derivative services to users in mainland China, and suspended hosting services for users who had purchased BTC mining machines. On May 26, the cloud mining platform Bit Deer blocked all IPs from mainland China and stated that it would ensure the platform does not provide services to residents in mainland China. The physical mining platform Mars Cloud Mining also announced that it would block access from mainland China starting at 8:00 PM Beijing time on May 26.

Global Attitudes Towards Cryptocurrency

Not only China, but countries around the world have recently been strengthening regulations on the cryptocurrency market.

United States:

On May 19, Sherrod Brown, chairman of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, published an open letter proposing that the Office of the Comptroller of the Currency (OCC) stop issuing bank trust licenses to cryptocurrency institutions and re-examine several licenses issued by the previous administration. On May 20, the OCC, the Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC) are considering establishing a "cross-agency sprint team" for the regulation of virtual currencies.

Turkey:

On May 1, an official decree was published in the Official Gazette, listing cryptocurrency asset companies in Turkey as institutions required to comply with anti-money laundering and terrorism financing regulations. This decision took effect immediately upon publication, making it easier for financial regulatory agencies to investigate cryptocurrency assets. On May 7, Turkey's Finance Minister Lütfi Elvan announced that cryptocurrency exchanges in the country must report any transactions exceeding 10,000 Turkish lira (approximately $1,200) to the Financial Crimes Investigation Board (MASAK). Elvan pointed out that MASAK would be granted the power to audit and supervise cryptocurrency exchanges.

Iran:

On May 7, the Central Bank of Iran prohibited trading cryptocurrencies mined abroad. Local media reported that this move was aimed at preventing domestic capital flight, which could be due to the depreciation of the national currency, the rial.

Most countries are strengthening regulations on the cryptocurrency industry, but some countries have a more encouraging attitude. For example, in India, on May 31, the Reserve Bank of India stated that India does not prohibit cryptocurrency trading, "Investing in cryptocurrencies has always been 100% legal in India, and the central bank's new announcement clearly confirms the right to trade with cryptocurrency companies." Avinash Shekhar, co-CEO of ZebPay, India's oldest cryptocurrency exchange, stated that the Reserve Bank of India's statement will attract more Indian investors to purchase virtual currencies.