The People’s Bank of China (PBOC) banned cryptocurrency trading signaling its determination to crack down on the industry. But despite the earth-shattering announcement, the Evergrande real estate turmoil, and their typical volatility, cryptocurrencies closed the last week of September with falls smaller than expected.
So, how are cryptocurrencies weathering the storm and what will the long-term effect be?
U.S. and EU Regulation
China’s latest tough directive –which immediately sent bitcoin down as much as 6% to $ 42,216– comes at a time when global markets are increasingly concerned about a debt crisis involving real estate developer China Evergrande Group.
Experts analyzing the impact of this initiative in other jurisdictions like the U.S. and Europe conclude that, initially, similar measures are not to be expected, particularly in the countries of the OECD.
Although this is the most restrictive package of measures established so far by China concerning cryptocurrencies, it is also true that it is one of several constricting moves undertaken by the Asian giant against these assets.
“Restrictions and prohibitions were already imposed in its day in relation to the issuance of crypto assets via ICO, or more recently on the mining of cryptocurrencies, without this having an impact on other countries,” expert Xavier Foz asserts.
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“Obviously, these measures will have a short-term impact on the price of cryptocurrencies that –besides the likely bankruptcy of the Evergrande real estate company– are ceasing to be the safe haven value investors initially believed.”
Cryptocurrencies are, in fact, increasingly correlated with the oscillations of the traditional financial markets.
Looking At Regulation
There are other elements that contribute to the case of cryptocurrencies riding the ban storm and the Evergrande scandal. Despite its aggressive crypto policies, China has not prohibited its nationals from having digital currencies.
Foz emphasizes that China, the U.S., and Europe have different regulatory agendas in relation to the blockchain industry sector and crypto assets.
While China is trying to deter private businesses from trading cryptocurrencies –pioneering the creation of a CBDC (central bank digital currency) with the digital yuan– Europe and the U.S. base their regulatory policy on another paradigm.
The Securities Exchange Commission (SEC) in the U.S. “views cryptocurrencies as securities, and will apply existing securities laws to digital assets,” as reported by NASDAQ. Europe is working on MICA (Market in Crypto-Assets), an “innovation-friendly” regulatory framework for financial services, to take advantage of the crypto asset opportunities while addressing the risks they may pose.
In this context, MICA explicitly recognizes that crypto assets are one of the largest applications of blockchain technology in finance.
So, both U.S. and European efforts linger around providing crypto assets with legal certainty without bypassing the protection of both consumers and investors, and the assurance of financial stability and market integrity.
More Long-Term Stability
The crypto ban announced in China is not the first of its kind, and most certainly will not be the last. According to Louis Schoeman, Managing Director of Forex Suggest, the network and price of digital assets like bitcoin have quickly recovered in a way that has exceeded anyone’s expectations.
“Among the short-term impacts of moderately weakening bitcoin demand and the rising concern that crypto trading by many Chinese entities has plummeted to record levels, China’s grip on the cryptocurrency ecosystem is fading,” he says.
In fact, adding more blocks of transactions is easier when the network has less computing power. Schoeman asserts that even though bitcoin mining profit initially dropped due to the fall in price, “once enough miners left the network, profitability returned to stable levels.”
Announcements like that of China do not always mean the market is doomed, as regulation will also mean more mass implementation of crypto and blockchain. “This will, in time, lead to more stable crypto markets long-term,” Schoeman says.
About the Author:
Cristian Bustos is senior editor for ValueWalk.com. Previously, he was the news correspondent in Germany for Colombian radio broadcast Blu Radio, where he covered the 2017 German federal election and the 2017 G20 Hamburg summit. He was also public relations consultant to EY and HAYS, and has covered a wide range of topics including business, finance, and international relations, as well as verticals such as automotive, aerospace and renewable energy. Email him at [email protected].