By Elise Hansen
Law360 (September 24, 2021, 8:21 PM EDT) — China declared all cryptocurrency transactions in the country illegal Friday, marking its harshest crackdown yet on the burgeoning industry.
Ten government entities on Friday called for an end to transactions using “virtual currency,” defined as assets that exist in digital form and are issued by nonmonetary authorities. Virtual currencies use encryption technology and various forms of distributed technology such as blockchain, the statement said, specifically citing the two largest cryptocurrencies, bitcoin and ether.
The agencies said the rise of virtual currencies was “disrupting economic and financial order” by supporting illegal activities such as gambling, money laundering and illegal fundraising, according to a translation of the statement.
The statement emphasized that businesses related to virtual currencies, including those that provide pricing services, are illegal, and that Chinese residents should not use overseas cryptocurrency exchanges.
The government entities behind the statement included China’s central bank, The People’s Bank of China; the Securities Regulatory Commission; and the General Administration of Market Supervision. The memo, dated Sept. 15, was posted on the central bank’s website Friday.
China banned cryptocurrency exchanges from the country in 2017, and in June, the central bank told the country’s leading financial institutions to cease all support for cryptocurrency transactions. Louis Lehot, a partner at Foley & Lardner LLP, said he sees Friday’s statement as another step toward ensuring the state’s leadership role in the economy.
“It is the crescendo of years of actions,” Lehot told Law360. “The other regulatory actions [the Chinese government] has taken to date are part of a coordinated effort to reassert the state as the primary actor in the economy.”
The move also coincides with a push for the country’s own centralized digital currency, Shui Li, an associate at Robins Kaplan LLP, noted.
“The recent crackdown on [virtual currency] transactions is not surprising because China has been promoting its centralized digital currency, the digital yuan, and cryptocurrency transactions are decentralizing by nature,” Li told Law360.
Friday’s statement tasked provincial governments with using “online monitoring” and investigations to prevent business activities related to virtual currencies. Financial institutions and non-banks are barred from providing services for any business activities related to virtual currencies, and internet companies may not provide services such as marketing promotions for the industry, the statement said.
The government also doubled down on its disapproval of cryptocurrency “mining” activities Friday, publishing a call for provincial and local governments to identify and help wind down existing mining projects as well as prevent the outgrowth of new operations.
Mining refers to a process used to verify cryptocurrency transactions. China’s crackdown on those operations earlier this year has already prompted an exodus of mining operations to other countries, including the U.S.
In a Sept. 3 memo posted on the National Development and Reform Commission’s website Friday, the commission warned that local governments should ensure that mining facilities aren’t being camouflaged as data centers and said they can monitor electricity consumption for abnormal use.
Mining operations also can’t receive tax breaks, and it’s “strictly forbidden” for financial institutions and nonbank financiers to provide financial support, the statement said. Friday’s statement cited the crypto mining’s relatively high energy consumption, saying the activity’s carbon emissions are high while its contribution to the economy is low.
The statement was co-signed by the central bank and 10 other government entities including energy, taxation, finance and market supervision agencies.
China’s approach stands in stark contrast to that of El Salvador, which recognized bitcoin as legal tender earlier this year.
Most countries so far have fallen somewhere between these two extremes when it comes to cryptocurrency regulation, Li said, although China’s approach could illustrate the path forward for jurisdictions looking to take a similar approach.
“I think China’s regulations will certainly provide a framework for countries that are already considering banning cryptocurrency,” Li said. “In the end, it comes down to whether we believe cryptocurrency has a legitimate use, and that is an ongoing debate.”
–Additional reporting by Caleb Drickey. Editing by Gemma Horowitz.
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