Tightening cryptocurrency regulation will effectively rein risks
Published: Jun 23, 2021 08:23 PM
Illustration: Tang Tengfei/GT

Illustration: Tang Tengfei/GT

Amid China's nationwide regulation campaign against cryptocurrency mining and trading in recent weeks, the price of bitcoin and other cryptocurrencies have seen a new round of volatility, providing global investors another lesson about the financial risk in virtual currencies.

The price of Bitcoin once tumbled below the key $30,000 level this week, according to CoinDesk, which marked bitcoin's lowest price since January. The sharp fall also dragged down the prices of other cryptocurrencies.

China's intensifying regulation on cryptocurrencies began from a meeting of the State Council's Financial Stability and Development Committee on May 21. The meeting signaled that a further crackdown on bitcoin mining and trading activities as part of efforts to fend off financial risks. 

Subsequently, major bitcoin mining regions such as Southwest China's Sichuan Provinc had ordered their own rectifying measures to crypto mining companies. 

China's central bank recently held talks with a number of Chinese banks and payment institutions with regard to cryptocurrency trading speculation, asking them to screen the capital accounts of cryptocurrency exchanges and over-the-counter dealers and cut relevant payment links, according to media reports.

BTCChina, China's first and longest-running cryptocurrency exchange, was reportedly set to exit the cryptocurrency trading business. The company's share of Singaporean cryptocurrency exchange ZG.COM was sold to an oversea encryption foundation.

China has grown into "ground zero" for cryptocurrency mining and trading over recent years, but the negative influence brought by over speculation has become painfully apparent. Up to three-quarters of the world's supply of bitcoin has reportedly been produced in China, but the mining process devours electricity. Nearly half of bitcoin trading takes place in China, but the none-transparent cash flow has imposed substantial risks to economic and financial stability.

During its nascent stage, only a small number of people in China were involved in Bitcoin trading, this has been followed by an unhealthy wave of speculation attracting an increasing number of individual investors who are much more vulnerable to market risks. While rare cases of investors' success stories have been blown out of proportion, more cases of investors suffering losses up to millions of yuan have not received broad coverage.

As more capital and social resources are attracted to the unsafe speculation, it is bound to have a great negative impact on the real economy, therefore it is imperative to strengthen the regulation of cryptocurrency speculation now. 

The meeting of the State Council in last month has pointed out the aim of more targeted regulation: to resolutely prevent the transfer of individual risks to the society. As further regulation continues, the result will become clear soon: financial risks will be efficiently put under control and the capacity of the financial sector to serve the real economy will be further strengthened.

The author is director of the green digital development research center of the Shanghai Academy of Social Sciences.