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DAILY NEWS ANALYSIS

  • 25 September, 2021

  • 15 Min Read

Cryptocurrency and China

China’s central bank said all financial transactions involving cryptocurrencies are illegal, sounding the death knell for the digital trade in China after a crackdown on the volatile currencies.

What is Blockchain Technology?

  • Blockchains are a new data structure that is secure, cryptography-based, and distributed across a network. The technology supports cryptocurrencies such as Bitcoin, and the transfer of any data or digital asset.
  • Spearheaded by Bitcoin, blockchains achieve consensus among distributed nodes, allowing the transfer of digital goods without the need for centralized authorisation of transactions.
  • The technology allows transactions to be simultaneously anonymous and secure, peer-to-peer, instant and frictionless.
  • It does this by distributing trust from powerful intermediaries to a large global network, which through mass collaboration, clever code and cryptography, enables a tamper-proof public ledger of every transaction that’s ever happened on the network.
  • A block is the “current” part of a blockchain which records some or all of the recent transactions, and once completed, goes into the blockchain as permanent database. Each time a block gets completed, a new block is generated. Blocks are linked to each other (like a chain) in proper linear, chronological order with every block containing a hash of the previous block.
  • Benefits of blockchain technology:
    1. As a public ledger system, it records and validate each and every transaction made, which makes it secure and reliable.
    2. All the transactions made are authorized by miners, which makes the transactions immutable and prevent it from the threat of hacking.
    3. Blockchain technology discards the need of any third-party or central authority for peer-to-peer transactions.
    4. It allows decentralization of the technology.

What is Bitcoin?

  • Bitcoin is a type of digital currency that enables instant payments to anyone.
  • Bitcoin was introduced in 2009.
  • Bitcoin is based on an open-source protocol and is not issued by any central authority.
  • Bitcoin is a peer-to-peer currency.
  • Bitcoin is the first decentralised digital currency.
  • The price of the world’s most prominent cryptocurrency Bitcoin has more than halved in the last two months after hitting a peak in mid-April.
  • The second-most valuable cryptocurrency, Ether, has seen a similar fall from its peak last month.
  • China’s crackdown against cryptocurrencies, which are those that aren’t sanctioned by a centralised authority and are secured by cryptography, is said to have a lot to do with the crashing of the value of cryptocurrencies.

What has China done?

  • In recent weeks, China has reportedly cracked down on crypto mining operations.
  • The country has over the years accounted for a large percentage of the total crypto mining activity that takes place.
  • In purpose, Bitcoin miners play a similar role to gold miners — they bring new Bitcoins into circulation.
  • They get these as a reward for validating transactions, which require the successful computation of a mathematical puzzle.
  • And these computations have become ever-increasingly complex, and therefore energy-intensive in recent years.
  • Huge mining operations are now inevitable if one is to mine Bitcoins.
  • Access to cheap electricity has made mining lucrative in China.
  • According to the Cambridge Bitcoin Electricity Consumption Index, China accounted for nearly two-thirds of the total computational power last year. Xinjiang and Sichuan provinces accounted for nearly half of this.
  • Now, provincial governments one by one have acted against these mining operations. The latest to do so is Sichuan, which was a hydroelectric-based crypto mining hub.
  • But that’s not all. A few days back, the People's Bank of China directed banks and payment firms to pull the plug on cryptocurrency trading.
  • Actually, there is little change in the policy as far as China is concerned. It first imposed restrictions on cryptocurrencies way back in 2013. It then barred financial institutions from handling Bitcoin.
  • Four years later, it barred what are called initial coin offerings, under which firms raise money by selling their own new cryptocurrencies. This is largely an unregulated market.

What China wants?

  • An inter-ministerial committee report in India two years ago noted that in 2017, the government of China also banned trading between RMB (China’s currency renminbi) and cryptocurrencies.
  • It said, “Before the ban, RMB made up 90% of Bitcoin trades worldwide. In under a year, the trades between RMB and Bitcoin had fallen to under 1% of the world total.”
  • The report also noted that China had decided to prohibit mining within its jurisdiction.
  • While the miners had stopped their activities for some time, the steep increase in the price of Bitcoin had brought many back into action.
  • The fact that cryptocurrencies bypass official institutions has been a reason for unease in many governments.
  • Not just that. The anonymity that it offers aids in the flourishing of dark trades online. While many countries have opted to regulate the world of cryptocurrencies, China has taken the strictest of measures over the years.
  • According to observers, the latest set of measures are to strengthen its monetary hold and also project its new official digital currency.
  • An AFP report said, “China launched tests for a digital yuan in March. Its aim is to allow Beijing to conduct transactions in its own currency around the world, reducing dependency on the dollar which remains dominant internationally.”

Way Forward: European Example EU is working on Anti Money Laundering Directive AMLD. All cryptocurrencies and wallet will have to do KYC norms and register with local authority. India should follow EU example.

Source: TH


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