China's Financial Stability and Development Committee said at its 51st meeting held on May 21st that regulations on financial platforms and activities will be strengthened, including bitcoin mining and transactions.
The Volatile Bitcoin
The value of bitcoin has been extremely volatile.
Cryptocurrency backer Elon Musk had a sudden change of opinion on May 13th as he announced on social media that Tesla will stop supporting bitcoin in purchasing the company's cars. According to Musk, the decision was made because bitcoin mining and transactions produce significant carbon emissions and will contribute to climate change. Musk's announcement subsequently brought bitcoin's value down from USD$55,000 to USD$46,000.
On May 19th, bitcoin's value fell from USD$38,000 to USD$30,000 in less than 40 minutes. In contrast, bitcoin's value peaked at USD$64,000 in April. The plunge of bitcoin's value also had an impact on other cryptocurrencies. Ethers, for instance, plunged by 46% to USD$1,750 in value. Dogecoin, on the other hand, shrunk by 55% in value to USD$0.22.
Within 24 hours, around 775,700 investors lost over USD$1 trillion. The total market value of cryptocurrency slumped to around USD$1.7 trillion, which was the lowest since March this year.
In 2009, bitcoin was barely noticed by investors since its value, or some call it exchange rate, was very low. Even in mid-2012, bitcoin's value was less than USD$10. It was not until late 2013 that bitcoin's value started to rise at a rocket speed. Its value skyrocketed from two digits to four digits. After the pandemic, bitcoin's value rose even higher to USD$60,000 due to the risk-averse tendency in the market.
Chinese authority cracks down on bitcoin mining and transactions
The Financial Stability and Development Committee held its 51st meeting on May 21st, in which the committee set the priorities in the development of the financial sector. The meeting was hosted by Liu He, Chinese economist and politician, a current member of the Politburo of the Chinese Communist Party and one of the Vice Premiers of the People's Republic of China.
The meeting concluded that the financial system in China must prioritize stability, stating that reasonable liquidity should be achieved through the use of monetary policies and that financial risks should be resolved and avoided to drive the healthy development of the economy and finance.
The committee had set the following policy directions:
- Further, serving the real economy. Measures should be taken to ensure the viability of enterprises and employment. Support should be provided to small businesses, the development of villages, the manufacturing industry, technological innovations and green development.
- Resolve and avoid financial risks. Regulations on financial platforms should be enhanced. Bitcoin mining and transactions should be restricted to ensure individual risks not spread to the public sphere. The stable operation of the financial market, including stocks, bonds and currency exchange market, should be upheld. Strict enforcement should be taken to crack down on illegal financial activities and harsh punishments should be taken against financial crimes.
- Continue to deepen reform and opening up. Market reforms of interest rate and the exchange rate should be deepened to make sure RMB’s exchange rate remains at a reasonable rate. Reforms of the capital market should be accelerated to drive the high quality development of the bond market.
State media warns about bubbles in the cryptocurrency market
A number of financial institutions and governments have warned against bitcoins, saying that bitcoin does not have inherent value such as that of the gold standard, nor does it have sovereign credit like a legitimate currency, China’s state media CCTV commented on May 21st. Moreover, bitcoin also lacks the support of actual economic activities, CCTV said.
Cryptocurrencies are commodities in nature. Their value is based on how much people think they are worth. Though considered as digital gold, bitcoin is essentially opportunistic instead of an investment tool to avoid risks due to its inherent value, volatility and lack of government backing.
The lack of proper regulation also makes bitcoin a great tool for illegal transactions, money laundering, drug deals, arms smuggling and gambling. This shows bitcoin’s unique value as well as its unregulated nature.
Some cryptocurrencies' exaggerated promotion has artificially inflated their market value, Yu Jianing, rotating president of China Communications Industry Association Blockchain Specialized Committee said. Governments across the globe have been tightening up regulations on cryptocurrencies, Yu added. In addition, since the use of cryptocurrencies can be completely anonymous and cross-border, criminals have been using cryptocurrencies for transactions in recent years. This has made cryptocurrencies a new tool for criminals to launder their money. It is logical to conclude that regulations on cryptocurrencies will be increasingly detailed and strict in the future.
China's National Internet Finance Association, China Banking Association and Payment & Clearing Association of China jointly announced on May 18th that all relevant organizations are prohibited from providing services involving cryptocurrency. They also warned that consumers should be alerted about the potential risks of investing in cryptocurrency.
On the same day, the Energy Consumption Control Response Office of China’s autonomous region of Inner Mongolia issued an announcement on cryptocurrency mining, requiring all mining projects to be suspended and encouraging the public to report mining projects.
Foreign regulators move to regulate the cryptocurrency market
The U.S. Treasury Department announced on May 21st that it will require any transfer involving cryptocurrency worth USD$10,000 or more to be reported to the IRS, Bloomberg reported. According to the Treasury Department's report, similar to the requirement for cash transactions, transactions involving cryptocurrency worth USD$10,000 or more should be reported to the IRS.
"Cryptocurrency already poses a significant detection problem by facilitating illegal activity broadly including tax evasion," the Treasury Department said in a release. The Treasury Department’s release came as part of a broader announcement on the Biden administration’s efforts to crackdown on tax evasion and promote better compliance, CNBC reported.
According to the estimates from the U.S. Treasury Department, the difference between taxes owed to the U.S. government and those actually paid totaled nearly USD$600 billion in 2019.
Affected by the new development, bitcoin’s value dropped from USD$42,000 to around USD$39,000. Bitcoin’s value subsequently rose back to approximately USD$40,000.
Nobel prize-winning economist Paul Krugman had warned about the potential danger of cryptocurrency. According to Krugman, bitcoin functions like a cult, which can always find new believers to ensure its viability.
"BTC isn't a new innovation; it's been around since 2009, and in all that time nobody seems to have found any good legal use for it," wrote Krugman in a string of comments he posted about bitcoin on Twitter.
"I've given up predicting imminent demise," Krugman continued. "There always seems to be a new crop of believers. Maybe just think of it as a cult that can survive indefinitely."