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Market Bytes:
China Crypto Ban
September 24, 2021

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Crypto markets are trading down today following news of yet another crackdown on the industry from China. The People’s Bank of China (PBOC) issued a statement reiterating that all crypto trading activities are illegal in the country, and regulators would be stepping up enforcement activities on businesses and persons facilitating such transactions.


Investors Have Heard This Song Before

Many will recall that this is not the first time China has issued similar guidance seeking to curb the rapidly growing crypto industry. Some past examples include bans on ICOs, mining, and BTC transactions:

Cumulative Bitcoin Returns

While investors have come to expect a selloff following news of another Chinese crypto ban, the market has historically recovered.

China Tech, Education, Real-Estate & Crypto Crackdown

For those solely focused on the headline today, these actions may seem like a validation of the argument critics have made that “governments will kill crypto” if the market gets too big, which has been used by some as justification for avoiding exposure to the asset class.

However, today’s actions towards crypto may tie into broader steps the Chinese government has been taking to regulate other parts of its economy: strengthening its control over the tech, education, and real estate sectors. Given China’s search for greater control across markets, today’s news is likely not a systemic moment for crypto, and more akin to China’s crackdowns on other sectors making up investors’ portfolios.

Fulfilling Crypto’s Primary Use Case

Yet, due to these broader actions taken by regulators, investors have been turning sour on risk appetite for China, as seen by price movement in major indices like the Hang Seng and Shanghai Composite, which both peaked for the year back in early February. To curb slowdown risks, the PBOC has increased liquidity injections into the system through reverse repo agreements.

Historically, greater liquidity in Chinese markets has benefitted both Bitcoin and the larger crypto market. The Chinese government strictly regulates it’s currency market in an effort to avoid capital flight. This has left citizens and investors more exposed to devaluation and property right infringement risks. Crypto has served as a useful tool for those looking to protect themselves from harmful political and monetary policy conditions as well as government overreach.

China CBDC: A Potential Crypto Catalyst?

Along this line, part of the ban may be related to the Chinese government’s ambitions to roll out a Central Bank Digital Currency (CBDC), which many believe would increase their control over their citizens. There are many privacy, freedom, and human rights questions that emerge from CBDCs.

Crypto offers an attractive free alternative economic system for many people who are concerned about these issues. Historically, gold and cash have served as both a less controlled medium of exchange and store of value, but as money becomes increasingly digital, governments have tried to curb the use of digital assets as an alternative to fiat currencies and precious metals.

India may be the best example of how Bitcoin and crypto benefit when governments seek to tightly control their citizens’ free use of money: In 2016, the Indian government “demonetized” large bank notes to cut down on the cash economy. This event was a key factor impacting the 2016-17 crypto bull market rally that saw Bitcoin go from under $1,000 to nearly $20,000.

China’s decision to re-invigorate its efforts to control and eliminate the use of cryptocurrencies in the country, as well as recent actions to regulate Chinese fintech shadow banks like Ant Financial may signal that policymakers are strengthening their push to eliminate alternative forms of money before launching a CBDC. If this spurs a similar situation as what occurred in India in 2016, the result could create a massive boost in crypto demand from the world’s second largest economy.

DeFi & Crypto Market Supervision May Benefit

Binance, Huobi, and Okex are three of the largest off-shore crypto exchanges with a strong presence in the Asian market. The native tokens of each of these exchanges are down ~10-20% on the day, which may indicate the broader market sees potential for trading volumes to move elsewhere.

Decentralized Finance (DeFi) may emerge as one beneficiary of the transition by serving as an alternative for Chinese crypto investors should centralized players be forced out of China.

Regulators have historically cited concerns around the proportion of crypto trading volume on non-U.S.-supervised exchanges. If these large Asian exchanges do lose volume due to the ban, U.S. regulated venues may gain a larger share of global volume.

Should more crypto trading volume move to the U.S., regulators may benefit from increased market surveillance, providing increased market transparency and investor protections in the long run.

Bringing More Crypto Industry Growth Onshore

Past actions towards crypto by China have pushed parts of the economically important industry to other geographies, which have reaped benefits from an increased share of the industry’s value creation and employment opportunities. China’s ban on crypto mining from earlier this year offers a key example of this dynamic: the ban led miners to migrate out of China, increasing U.S. share of crypto mining with pools like Foundry U.S. moving up the charts. This has benefited the U.S. crypto industry by creating jobs for American workers, and giving the country even greater influence over the direction of digital markets.

Today’s actions by China have the potential to further prove the benefits of crypto as a decentralized, immutable tool, providing users with the freedom to protect themselves from potentially harmful governmental policies. In the long run, geographically extending governance over this technology will help distribute many of the already-emerging benefits, democratizing access to financial systems.

Our Research team would be happy to connect on any questions pertaining to this Market Bytes note or anything else pertaining to Grayscale, so please don’t hesitate to reach out by emailing [email protected].

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