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Synopsis: Bitcoin has fallen below $30,000 for the first time in more than five months. This is because of China’s crackdown against cryptocurrencies which are not sanctioned by China.
What has China done?
- China has asked banks and online payment firms not to offer any crypto-related services, such as account openings, registration, trading, clearing, settlement and insurance reiterating the 2017 ban.
- Moreover, China has also asked Banks and payment companies to step up monitoring of money flows involved in cryptocurrency trading and coordinate more closely in identifying such risks.
Why has China taken action against cryptocurrencies?
- To crackdown on Crypto Mining: China accounted for around 65% of global Bitcoin mining operations in 2020 with Sichuan province rated as its second largest producer.
- Role of Bitcoin Miners: Bitcoin miners play a similar role to gold miners — they bring new Bitcoins into circulation. They get these as a reward for validating transactions which require the successful computation of a mathematical puzzle. And these computations have become ever-increasingly complex and therefore energy-intensive in recent years. Huge mining operations are inevitable if one is to mine Bitcoins.
- To stop access to cheap electricity: Access to cheap electricity has made mining lucrative in China. In 2020, China accounted for two-thirds of the total computational power last year.
- To stop Illegal activities: Cryptocurrencies bypasses official institutions and the anonymity that it offers makes it a flourishing business for illegal activities.
- To avoid Financial Risk: Bitcoin and other cryptocurrencies cannot be traced by a country’s central bank making them difficult to regulate. Hence, China has acted on cryptocurrencies to prevent and control financial risks.
- To launch its own Digital Currency: China is planning to introduce its own digital currency. Its aim is to allow China to conduct transactions in its own currency around the world reducing dependency on the dollar which remains dominant internationally.
Source: The Hindu