China’s Crackdown on Crypto is Beginning to Have Global Repercussions

Bitcoin, without a doubt the world’s most popular cryptocurrency, lost a round in its battle with China. With the government in Beijing continuing with its crackdown on regulations, miners and companies involved in crypto-related transactions took a hit on the chin Monday.

The PBC (People’s Bank of China) released a note on Monday saying that the trading activities associated with virtual currency tend to disrupt the normal order of the financial system. The communique went on to say that the activity may introduce money laundering and the illegal cross-border transfer of assets.

The statement from China’s central bank followed the announcement that the Sichuan Regional Government would shutter two dozen or more suspected crypto-mining operations in the area, an area that is rich in hydroelectric power.

Price Tumbles

Before slightly paring losses, Bitcoin tumbled close to 11 percent in U.S. dollars. Ethereum was down by 13 percent while Dogecoin dropped by 25 percent.

According to experts, these negative moves indicate the influence governments, especially large ones such as China and the United States, hold over the price of Bitcoin and other cryptocurrencies. Investor and mathematician, Nassim Nicholas Taleb recently published a paper that was very critical of crypto enthusiasts. He noted the market tended to underestimate the threat of government power over crypto.

It would seem that regulators are far from finished as they are signaling that further regulations will be imposed on the cybersphere. These regulations may include rules that would hold exchanges, as well as banks, to stricter, “Know your customer” rules as well as regulations that apply to anti-money laundering.

Great Regulation Required

Gary Gensler, the SEC Chairman has discussed the need for greater regulation of crypto exchanges for some time. Gensler believes that many of the thousands of extant cryptos that are being traded are unregistered, and are subject to enforcement action by the Security and Exchange Commission.

Sarah Brennan, an attorney with the firm Harter, Seacrest & Emory, noted that the sale of unregistered securities is posing a major risk for clients. Ms. Brennan noted the lack of clarity on several things. She said she was surprised that the SEC was not bringing action against crypto companies that have raised a great deal of money through the auctioning of their tokens. Although this often violates federal rules, the SEC is closed mouth on their agenda as well as enforcement priorities.

The SEC has recently released a rulemaking agenda for the balance of the year. Rules that might apply to cryptocurrencies seem to have taken a back seat to other priorities, such as new disclosure rules on climate change and the associated risks.

Stablecoin Regulation

The largest threat to the broader crypto market may be Tether, USD Coin, and other stablecoins, according to experts. A stablecoin is a virtual currency of sorts, but endeavors to maintain a peg to a stable asset, such as the U.S. dollar.

Critics of stablecoins suggest they pose significant risks to financial stability. It has been revealed recently that some of these tokens are not backed by actual U.S. currency at all, but they appear to be backed by a basket of much riskier assets. The use of Tether has been banned in N.Y. State.

Tether has since revealed that their currency is not backed one-to-one with U.S. dollar reserves but rather is backed by short-term loans to commercial enterprises. Under the terms of the settlement made with the Attorney General of New York State, Tether, Ltd. Have said that, under the terms of the agreement, are not bound to admit any wrongdoing.

Tether officials say the amount they have agreed to pay the office of the Attorney General should be looked at as a measure of the company’s desire to focus on their business.

The founder of Frim Post Oak Labs, Tim Swanson noted early this year that stablecoins are parasitic by nature as they offer similar services to commercial banks, but outside of the regulations that traditional banks abide by.

Behavior such as this puts the holders of stablecoins at risk. If a run should cause the asset price to collapse, it could threaten financial stability. As three-quarters of Bitcoin trading is conducted using Tether, a collapse could also have a detrimental impact on Bitcoin and other popular cryptocurrency markets.

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Author: Jason Donaldson