China sends another warning on cryptocurrency risks amid ‘wild fluctuations’

State-backed financial associations have warned their members to stay clear of any financing activities related to popular cryptocurrencies
Statement comes amid recent price volatility and as Beijing seeks to draw a distinction with its own sovereign digital currency

Digital currencies

Coco Fengin Beijing

Published: 9:00am, 19 May 2021

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Three Chinese state-backed financial associations have jointly issued a warning about the risks stemming from volatile cryptocurrencies, in the latest step by Chinese authorities to tamp down on speculative trading and draw a clear distinction with the central bank’s own digital currency.

The National Internet Finance Association of China, a state-backed association of Chinese internet firms providing financial services, the China Banking Association on behalf of the country’s banks, as well as the Payment and Clearing Association of China, on Tuesday warned their members to stay clear of any financing activities related to popular cryptocurrencies.

They stated that any activity related to the exchange of fiat money for cryptocurrencies, providing intermediary services to facilitate trading, or conducting token-based derivatives trading, could be charged as a criminal offence in China. The warning, which was republished by the People’s Bank of China (PBOC), the country’s central bank, underlines Beijing’s caution when it comes to the financial risks and money laundering concerns raised by cryptocurrencies.

Cryptocurrency price volatility has also been exacerbated recently by comments made by US billionaire and entrepreneur Elon Musk, who bought US$1.5 billion of bitcoin in February before saying purchases of his Tesla cars using bitcoin had been suspended due to concerns over the increasing use of fossil fuels in bitcoin mining.

Cryptocurrency price volatility has been exacerbated recently by comments made by US billionaire and entrepreneur Elon Musk. Photo: Getty Images

The outspoken entrepreneur had been credited with pushing up the value of cryptocurrencies, including bitcoin and dogecoin, in recent months.

Bitcoin fell 1.2 per cent to US$42,771 in recent trading, extending the 3.4 per cent decline overnight when the statement was first published. The largest digital token’s value has fallen by more than a third since its record high in mid April.

“The prices of cryptocurrencies have fluctuated wildly recently,” according to the warning from the Chinese associations, which did not specify a single cryptocurrency, referring to all private digital money in general. “Speculation has returned, which seriously damages people’s asset safety and disrupts normal economic and financial order.”

The statement effectively reiterates Beijing’s existing ban on financial institutions and payment service providers from being involved in any financing activities related to cryptocurrencies.

China’s banks and payment institutions have been ordered not to accept bitcoin and other digital coins as a price unit. Trading, clearing and settlement services for digital currencies, are also banned, and digital currencies cannot be used in investment trusts.

The warning also stated that cryptocurrencies should not be classified as money. “They should not and shall not be circulated on the market as a currency,” it said. The statement says cryptocurrencies are “not supported by intrinsic value,” and their prices are “easily manipulated”.

The Chinese government has always taken a firm line on cryptocurrencies. It banned Chinese banks from dealing in bitcoin in late 2013 when its price was less than US$1,000, a fraction of today’s value.

Beijing has also banned all forms of capital-raising via issuing tokens in 2017, forcing many Chinese cryptocurrency investors to park their investments overseas.

The statement adds to the chorus of voices against the token by major investors from Berkshire Hathaway‘s chairman Warren Buffett to Microsoft’s founder Bill Gates, and the former Fed chairwoman Janet Yellen. Even Tesla’s chief executive Elon Musk, arguably the man whose tweets are most closely correlated with bitcoin’s recent surge, has turned against the cryptocurrency - citing concerns about carbon emissions from mining tokens - after having invested and benefitted from bitcoin.

However, while Beijing has banned cryptocurrency trading, it has tolerated bitcoin mining and private holdings – a more lenient stance than emerging market rivals such as India. The latest warnings did not make any reference to the legality of bitcoin mining.

China is home to most of the world‘s cryptocurrency mines, with an estimated 70 per cent of the world’s bitcoin-related calculations deriving from IP addresses based in China, according to a recent report by Bloomberg.

Cryptocurrencies have continued to gain global popularity though, with bitcoin increasingly seen as a viable store of money, like gold. Goldman Sachs executed its first cryptocurrency trades and launched a bitcoin desk earlier this month, while Morgan Stanley’s bitcoin-only private funds have proven extremely popular among its wealthy clients.

PBOC officials have recently signalled a tolerance for treating cryptocurrencies as assets, not actual currencies.

For some Chinese investors, the latest warning on cryptocurrencies is a welcome development.

“The warning is necessary, timely, significant and helpful, given the recent fluctuation of cryptocurrency assets, such as dogecoin and shiba coins,” said Jeffrey Ren, a cryptocurrency asset investor. Ren noted that the latest warning does not go beyond the policy stance already outlined by the central bank.

This article appeared in the South China Morning Post print edition as: Beijing sounds warning on risks of cryptocurrencies