The Chinese authorities continue to tighten their policy in relation to cryptocurrencies and the activities of mining centers in the country.
What are the prospects for regulating the cryptocurrency market and what scenarios can states go through in regulating cryptoassets? Yuri Mazur, head of the data analysis department at CEX.IO Broker, talks about this.
Despite the fact that China has long positioned itself as a country that is quite loyal to cryptocurrencies, the PRC tried to avoid official statements about the possibility of accepting digital assets as a means of payment on a par with the yuan. At the same time, the Celestial Empire scrupulously studied the potential of cryptocurrencies and the ability of digital assets to replace real money. The result of the research was the digital yuan, the piloting of which is now in fact at the final stage.
It was at this time that the PRC began to tighten its policy towards independent cryptocurrencies. This behavior of the Chinese authorities is directly related to the implementation of their own cryptocurrency project – the digital yuan. At the same time, China, thanks to its initial relatively loyal policy, managed to capture a significant share of the world’s mining capacities – for a long time it accounted for more than 50% of the world’s bitcoin production in the world. It is a leverage that has allowed digital gold prices to drop in a short period of time.
The dependence of the cryptocurrency market on the dynamics of bitcoin remains one of the weak points for investors, therefore, following BTC, other crypto assets also came under pressure. Thus, China initiated a chain reaction that created conditions for reducing the leadership of independent cryptocurrencies and at the same time played to increase interest in digital currencies of central banks (CBDC).
By the way, China intends to introduce the digital yuan into circulation as early as 2022, just during the Olympic Games in Beijing. Today we see several scenarios for the development of events around cryptocurrencies in various countries.
1. Hard rejection of cryptocurrencies
This scenario, in fact, is the way China went – a complete ban on alternative digital finance other than CBDC. Russia and Kazakhstan can follow the same trajectory.
In this case, with all the loyalty of central banks to the digital industry, all assets that can somehow threaten the monopoly of regulators on the issue of money should be removed from the legal field. In the Russian Federation, even within the framework of the regulatory sandbox, out of three crypto projects, only one was approved.
2. Creation of a competitive digital environment
The second scenario is the creation of rules for the regulation of cryptoassets. The cryptocurrency market is becoming a complete analogue of the market for stocks, bonds and futures. This is the path of Europe, although here it is worth making a remark that the EU authorities have not yet decided how to deal with digital currencies.
However, according to the ECB’s June report, the European regulator sees independent cryptocurrencies as a threat to the financial stability of the Eurozone. To mitigate this risk, the Bank considers it necessary to develop CBDC and regulate digital assets.
3. Absorption of promising digital assets by the regulator
The third possible way is to buy out the infrastructure of the most promising cryptocurrencies or cooperate with crypto startups to create a base for its own CBDC, while the cryptocurrency market will be quite free.
This is a possible path for the United States, as the country has delayed with its own digital currency, and in order to catch up, it is much easier for it to buy an existing digital asset with all the infrastructure and technological solutions. At the same time, other digital assets will remain free, at least the regulation will not be as strict as in the first and second scenarios.
XRP may be a possible contender for the ransom, and here the SEC’s claim against Ripple, as paradoxical as it may sound, may be just part of the negotiation process.
4. Acceptance of cryptocurrencies
The fourth scenario is the adoption of cryptocurrencies as an official means of payment, following the example of El Salvador. It is possible that the countries of Latin America will be more inclined to such a development of events; nevertheless, it should be borne in mind that in this case there will be difficulties with the creation of financial infrastructure and the recognition by other countries of such a means of payment. El Salvador faced this problem.
Therefore, most countries will most likely adhere to the second scenario, that is, tight regulation and gradual integration of digital assets into traditional finance.
Have China’s Measures Affected Cryptocurrencies?
After China’s actions, we see that the cryptocurrency market has begun to adapt. Mining has become a vulnerability for bitcoin, but ether has proven to be more resilient due to the decrease in dependence on mining due to the transition to the PoS consensus next year. Thus, digital assets exhibit a high level of flexibility and the ability to adapt to aggressive environments.
China’s actions were extremely unpleasant for investors, but at the same time they strengthened the crypto market. Perhaps, on the horizon of several years, Bitcoin will lose its leadership not only in terms of growth rates, but also in terms of market capitalization of ETH. But investors should not worry too much about this, since this is free and fair competition, and the cryptocurrency that has shown greater stability and flexibility is often more popular, moreover, the prospects for the development of coins can differ significantly.
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