The global crypto market is shaken by China’s decision to ban cryptocurrencies. China's move, as the world's second largest economy and a heavyweight in global financial system, was audacious as it sought to tighten Beijing's grip over the country's financial markets. This ban, constraining Bitcoin mining, trading and ICOs, has brought up some fundamental questions about the role of government regulation in emerging financial technologies and their future with digital currencies.
China’s cryptocurrency ban for Nepal, a country that is increasingly interested in cryptocurrencies but not convinced yet, is valuable lesson of learning the risks and challenges criteria of decentralized digital currencies. In this blog post, we will dissect why China banned the cryptocurrencies, why it made this decision and what we can take away from China’s experience.
1. China’s Cryptocurrency Ban: A Timeline of Events
But, China’s crackdown on cryptocurrencies has been gradual but firm. Then in 2013, the government first began expressing worries about Bitcoin and other cryptocurrencies, when it forbade banks and other financial institutions to use digital currency for any transactions. The regulations grew sterner over the years, with a whole ban on crypto trading and mining operations by 2021 being imposed in China.
In May, China's central bank reaffirmed that cryptocurrency trading is illegal and early this month, countries started to close cryptocurrency mining operations. Along with it was part of a wider move to curb financial risks and control capital outflows.
2. What’s the reason behind China’s Crypto Ban?
There were various reasons why cryptocurrencies were banned. Understanding these motivations helps shed light on the underlying concerns that led China to take such drastic action:
1. Risk management and Financial Stability
The control of China’s financial system has always been the priority for its government. Since they are decentralized, cryptocurrencies do not come under the jurisdiction of China’s People’s Bank of China (PBoC) nor any other regulatory body. And it was a lack of control that caused concern over financial stability. But the Chinese government was worried that cryptocurrencies would bring about uncontrolled capital outflow, that the value of the yuan would fall and that it would create speculative bubbles that could shatter the economy.
Cryptocurrencies, which China tightly controls its currency and monitors transactions closely, were a threat to China's monetary stability. The government feared losing control of the financial flows by digital currencies which operate out of the traditional financial system.
2. Financial Crime and Illegal Activities
In particular, the use of cryptocurrencies for illegal activities was precisely another key concern which drove China’s ban. 2017 was a year when the Chinese government cracked down around Initial Coin Offerings (ICOs) due to the emerging concern that they would be used to scam investors. 'Anonymous and borderless crypto' meant that cryptocurrencies were no longer an attractive tool for criminals engaged in illicit activities. Given that China has a firm policy of restraining financial transactions and regulating people’s financial behaviors, this was also a big requirement for such a country.
3. Crypto Mining Environmental Impact
Bitcoin and other cryptocurrencies are big energy eaters, and the mining process that consumes colossal amounts of computing power is notorious. First, Chinese mining operations created the world’s largest Bitcoin mining operations, but the expense of environmental concerns created by crypto mining caught the eye. Increasingly, the country's reliance on coal powered electricity to support mining operations was being criticized for its contribution to carbon emissions and pollution.
In May 2021, China started to close down Bitcoin mining operations on its territory, so as to lower its carbon footprint and achieve its environmental goals. Its decision to retire its mining activities and its role in backing the government’s drive to adopt more environmentally friendly energy sources were equally important.
4. The Chinese Yuan Protection and Digital Yuan Promotion
Similarly, China is making great progress in the development of its own central bank digital currency (CBDC), the digital Yuan (eCNY). If a government bans private cryptocurrencies, it opens up the possibility for the same government to launch its own digital currency, one whose ministry controls it and that it encourages people to use. The digital yuan is one way that China is gaining specific control of its monetary system, and the ability to by-pass the problems inherent in truly decentralised digital currencies such as Bitcoin and Ethereum.
China limits cryptocurrency usage so its citizens don't allocate their resources to digital assets outside regulation and towards a decentralized currency, but rather contribute to its government's own centralized digital currency.
3. Lessons for Nepal: Why It Matters
As with any other country, Nepal is currently exploring the world of cryptocurrencies — from, as things stand today, complex and rapidly evolving. The demand for digital currencies such as Bitcoin, Ethereum and stablecoins, and the growing use of the technologies behind the digital ones, - the blockchain, provides opportunities and risks. As Nepal considers its own stance on cryptocurrencies, the following lessons from China’s ban can provide valuable insights:
1. Financial Regulation and Oversight – Purpose
China saw the potential for financial instability as one of the most important reasons behind the crackdown on cryptocurrencies. While Nepal’s smaller and less mature financial system allows relatively little freedom to erode, it must carefully watch out for the many disruptions that widespread cryptocurrency adoption may bring in. While blockchain offers a number of undeniable benefits, such as Financial Inclusion and Transparency, if unregulated, certain cryptocurrencies can pose a risk to Country FIs financial stability.
To do this, Nepal must have clear regulation safeguarding both consumers and businesses while the cryptocurrency market must not operate outside the purview of the central bank. The financial system must be protected, but at the same time innovation must be fostered.
2. Combatting Fraud and Money Laundering .
Cryptocurrencies can be anonymous and therefore can be a nice tool for money laundering or fraud or other illegitimate things. It is important for Nepal to remain alert for new scams and criminalized monetary transactions, occurring through cryptocurrency transactions. To mitigate these risks the Know Your Customer (KYC) and Anti Money Laundering (AML) measures will be critical in establishing a notable framework.
Through learning from China’s experience of bullsh*t ICO scams and fraudulent projects, Nepal can steer its willing citizens from the same orientation and better uphold its financial ecosystem integrity.
3. Cryptocurrency mining and Environmental Considerations:
With overall concern for the environmental impact of cryptocurrency mining growing as a global problem. Nepal is not yet poised to have big scale crypto mining, but should be taken into account when setting crypto regulations due to Nepal’s energy resources and environmental policies. With a growing demand from around the world for crypto mining, Nepal will need to avoid allowing mining activities to damage the environment or overwhelming the national grid.
If developed cost effectively, Nepal could adopt blockchain technology by focusing on sustainable energy solutions in crypto mining like using hydroelectric power.
4. Ensuring the National Currency and Advocacy of Digital Alternatives
Decentralized cryptocurrencies have to be considered by the Nepal Rastra Bank (NRB) for its impact on the Nepali rupee. Digital assets such as Bitcoin may have beneficial properties, but they also create a risk that national currency will be undermined. A government backed digital currency would allow for a safer and more controlled alternative to the digital payment systems and mobile banking solutions that Nepal is already exploring.
In fact, the success of China’s digital yuan project can provide some valuable lessons for Nepal in relation to instituting a central bank digital currency (CBDC). Nepal can position itself to reap benefits from the digital currencies advantages amid protection of its financial integrity while taking proactive steps.
4. Conclusion: A Balanced Approach for Nepal
There were a number of financial, security, environmental and political reasons as to why China banned cryptocurrencies. I have also been careful, however, not to romanticize Nepal’s governance challenges or to exoticize the country’s unique circumstances and cultures by describing China's experience in a way that Nepal just cannot replicate.
In Nepal, a well fashioned and balanced regulation is vital for the country's internet users as it balances financial stability, protects citizens from scams and encourages innovation. However, cryptocurrency adoption is something that the government would have to take great caution when approaching; instead being interested in the potential of blockchain technology and centralized but regulated digital currencies. Striking this balance allows Nepal to reap the rewards of digital finance while minimizing the downsides of cryptocurrencies.
How do you feel about Nepal’s views on cryptocurrencies? Do you think that China’s approach is correct one or do you think that cryptocurrencies should be more openly accepted? What did you think about this? Leave your thoughts in the comments below!