Bitcoin falls as China declares cryptocurrency activity illegal and vows to clamp down

Bitcoin, the world's largest cryptocurrency, dropped on Friday, falling to $41,000 as China intensified a crackdown on cryptocurrency trading, calling it an “illegal” activity.

Bitcoin was down more than 5 per cent on Friday to $41,368 at 3.23pm UAE time. Ethereum, the second largest cryptocurrency, was down 9.40 per cent to $2,784.

China, the world’s second largest economy, vowed to root out “illegal” activity in the trading of bitcoin and other virtual currencies as it renewed its tough talk on cryptocurrencies.

The government will "resolutely clamp down on virtual currency speculation, and related financial activities and misbehaviour in order to safeguard people's properties and maintain economic, financial and social order," Reuters reported citing a statement from the People's Bank of China (PBOC).

PBOC said cryptocurrencies must not circulate in markets as traditional currencies and that overseas exchanges are barred from providing services to mainland investors via the internet.

The PBOC also barred financial institutions, payment companies and internet firms from facilitating cryptocurrency trading.

It’s not the first time China has got tough on cryptocurrencies. Earlier this year, Beijing announced a crackdown on crypto mining, the energy-intensive process that verifies transactions and mints new units of currency.

The news is not “unusual” and Beijing has always had a very tough stance towards cryptos, Naeem Aslam, chief market analyst at Ava Trade, told The National.

There is clear evidence of capital flight from China, due to massive chaos taking place because of Evergrande and “China wants to tighten up the screws further for capital flight and one of the major vehicles which are used for capital flight is cryptos and China wants to make sure that it has a full control of Chinese Yuan and hence sent this very strong message to the market,” he said.

The Bank for International Settlements (BIS), the global body for central banks in a report in June called cryptocurrencies speculative assets that in many instances enable criminal activity and "work against the public good”.

"It is clear that cryptocurrencies are speculative assets rather than money, and in many cases are used to facilitate money laundering, ransomware attacks and other financial crimes," the BIS said.

Bitcoin in particular has “few redeeming public interest attributes when also considering its wasteful energy footprint,” it said.

Central banks around the world have been reluctant to endorse cryptocurrencies because of their speculative nature, lack of value and regulatory oversight. The Central Bank of the UAE also does not recognise cryptocurrencies as a legal tender.

“China ruling crypto transactions illegal would be disastrous for the cryptocurrency sector,” George Monaghan, an analyst at GlobalData company said. “Being excluded from the world’s largest market is terrible for any product, and this is the strongest demonstration yet of China’s anti-crypto sentiment.”

The next few weeks are expected to be “rough for crypto markets that were already on edge after the SEC’s (US Securities and Exchange Commission) recent comments, but only actual legislation will have a long-term effect”.