Despite barring domestic Bitcoin trading over three years ago, analysts say China could still have an adverse effect on the global market for cryptocurrencies with the ongoing rollout of its central bank digital currency (CBDC), the Digital Renminbi.
Beijing first launched a ban on initial coin offerings (ICO’s) and domestic cryptocurrency exchanges in September 2017 with the release of the “Public Notice Concerning the Prevention of Cryptocurrency Issuance Financial Risk” (关于防范代币发行融资风险的公告).
The move brought an abrupt halt to Bitcoin trading in China, which at the time accounted for around 90% of global Bitcoin transactions.
Analysts say China could once again roil the global market for the Bitcoin and other cryptocurrencies, this time with the launch of the Digital Renminbi, official testing of which first commenced in April 2020.
“Once a digital yuan is introduced, that’s going to be one of the biggest risks in crypto,” said Phillip Gillespie, chief executive of crypto market maker and liquidity provider B2C2 Japan, to Bloomsberg.
According to Gillespie the full rollout of the Digital Renminbi could eventually involve authorities further tightening up restrictions on Chinese investors from pursuing cryptocurrency transactions via offshore exchanges.
While Bitcoin exchanges are banned in China itself, Chinese citizens can still access exchanges established abroad that cater specifically to their needs, such as Huobi and OKEx, and use the Tether stablecoin to allocate money to Bitcoin and other cryptocurrencies.
Chinese regulators were highly concerned that a recent 300% run in Bitcoin prices since October would drive a spike in purchases by domestic investors, telling regional authorities to step up scrutiny of the matter.
Gillespie says it’s possible for China to put an outright ban on the use of Tether in order to stymie cryptocurrency trading by Chinese investors completely.
According to Gillespie Tether is providing a “massive amount of fuel for Bitcoin purchases” that is a source of potentially immense disruption, while exchanges that cater to Chinese investors are generating a “tremendous amount of liquidity.”
A report released in August by Chainalysis found that over $18 billion in Tether moved abroad from East Asian addresses during a one-year period, with certain spikes speculated to originate from Chinese investors seeking to dodge official curbs on cross-border capital flows.
JPMorgan Chase analysts said in a recent report that any curbs on the “willingness or ability of domestic and foreign investors to use Tether” would likely lead to “a severe liquidity shock to the broader cryptocurrency market.”