China has banned all crypto transactions in the country. Here is what it means and why experts say bitcoin will bounce back.

Hong kong bitcoin
A sign is installed at first bitcoin retail store open in Hong Kong in 2014. Lam Yik Fei/Getty Images
  • China’s declaration that crypto-transactions are illegal drove down bitcoin and other digital currencies Friday.
  • China, however, didn’t ban possession of digital currencies, which likely prevented deeper losses.
  • The central bank warned of criminal investigations into people suspected of buying and trading cryptocurrencies.
  • See more stories on Insider’s business page.

China took its most forceful action so far against cryptocurrencies by saying crypto-transactions are illegal. But Beijing stopped short of prohibiting possession, shielding bitcoin from long-term price pressure amid an ongoing crackdown, analysts said.

The People’s Bank of China said bitcoin, ether and tether “are not legal and should not and cannot be used as currency in the market,” according to a translated version of its statement. The PBOC said virtual currencies don’t have the same legal standing as fiat currency because they’re issued by non-monetary authorities and use encryption technology.

But the government didn’t ban possession of cryptocurrencies, a move that “would have dealt a massive blow to the entire crypto space,” said Ed Moya, senior market analyst at Oanda, in a Friday note. “A banning of crypto possession probably would have sent everything crypto 20% lower,” he said.

Bitcoin fell as much as 9% initially to near $US41,000 ($AU56,161). But bitcoin, ether and tether came off their intraday lows by midday Friday.

China has waged a years-long campaign again virtual currencies dating back to 2013, when it banned banks from handling bitcoin transactions. In 2017, it also ordered local cryptocurrency exchanges to cease operations, forcing people in China to use off-shore exchanges. Earlier this year, Beijing cracked down on financial institutions from offering crypto services as well as bitcoin mining.

Now China is going even further, targeting individuals, not just businesses, and closing off ways to get around earlier limits.

On Friday, the PBOC warned that people suspected of a range of activities such as buying and selling cryptocurrencies and offering pricing information will face criminal investigation. It also took aim at overseas, online virtual currency exchanges serving Chinese residents, saying they are conducting business illegally.

Amid the crackdown, China has cited environmental concerns related to mining as well as worries about digital assets being used in financial crimes and sparking financial instability.

But as China bans crypto activities, it has been working on its own digital yuan, with the project’s roots tracing back to 2014 and testing with commercial institutions beginning in 2017.

Why the latest ban isn’t that bad

But there was one big sign that investors would eventually set aside China’s latest announcement, Jake Wujastyk, chief market analyst at TrendSpider, told Insider on Friday.

“If you look at the low of bitcoin on September 20 [around $US36,900 ($AU50,545)], we didn’t even hit that low” on Friday, he said. Bitcoin “should have broken to new lows and it didn’t – at least not yet,” said Wujastyk. “Right now [the news] is moving the market but over the longer term, it’s not going to make a huge difference… China has been cracking down on a lot of things lately.”

China in recent months has been imposing restrictions and rule changes on companies ranging from technology makers to education services providers. It’s part of a campaign to reform business and social practices and prevent what it sees as security risks from large companies listing securities in the US. President Xi Jinping has also touted a “common prosperity” campaign, targeting China’s widening wealth disparities.

Friday’s move, “seems to us to be a reaction to what news [China] had earlier this week with Evergrande,” Chris Kline, COO and co-founder of Bitcoin IRA, told Insider. He was referring to the potential collapse of China’s second-largest property developer that’s facing default on $US309 ($AU423) billion in liabilities.

“What happened with Evergrande has put shame on the state-controlled economy. I would expect to see more clamping down and regulatory action. Obviously, bitcoin was the first target,” said Kline, whose fintech platform allows clients to invest in cryptocurrencies using retirement funds. Overall, the crypto-transactions announcement is “not surprising or shocking to us,” he said.