China Bans All Cryptocurrency Transactions: What Impact Will This Have on the SEC’s Regulation of Cryptocurrency in the United States?

October 3, 2021

Last week, the Chinese government elected to ban all cryptocurrency transactions, the harshest governmental stance against the use of decentralized currency to date. The prohibition caused the price of bitcoin—the most widely used and most recognizable cryptocurrency currently traded—to plummet, but the impact of the ban will have a much broader impact than the short-term losses suffered by invested traders.

Ten Chinese government agencies opted to end all transactions involving any digital asset issued by nonmonetary organizations in an effort to target blockchain-created currencies like the two largest cryptocurrencies on the market, bitcoin, and ether. The use of these currencies to engage in illegal and immoral activities, such as gambling, purchasing illegal drugs, and money laundering, was the impetus for the ban. The move also follows the Chinese government’s continued distrust of cryptocurrencies, as the government has frequently told large financial institutions in the country to pull any support from crypto exchanges and other virtual currency transactions.

Just a few weeks prior to the Chinese ban, El Salvador became the first country to adopt bitcoin as a legal currency. While the move would have seemingly been a boon for crypto enthusiasts and heavy investors, the country’s roll-out was met with widespread protests and the government-backed bitcoin trading platform failed, leading to a serious dip in bitcoin’s price.

China and El Salvador’s vastly different moves on cryptocurrency are indicative of the volatility of the industry that has plagued investors and regulators alike. Across the globe, countries have been inconsistent in how to approach blockchain technology. The volatility also means the cryptocurrency industry is ripe for regulation here in the United States, and the Securities and Exchange Commission (SEC) has been active in attempting to understand the marketplace and the technology better to protect consumers from the serious financial risks associated with such a nascent global enterprise.

In the ever-changing world of cryptocurrency—where a few tweets from a popular figure can send the price of a single coin to the moon—China’s ban may have little impact on what the SEC decides to do to regulate the crypto marketplace. But the Chinese’s decision is relevant, as it gives the SEC more global backing to enact the bold regulation it seemingly desires.

Just a week prior to China’s decision, SEC Chairman Gary Gensler argued cryptocurrencies do not have long-term viability while simultaneously echoing the agency’s enduring concerns about leaving the industry unregulated. Cryptocurrency is an extremely risky investment because of high speculation and artificial pricing, and Gensler has been adamant in trying to regulate the industry since his appointment to Chairman. Just this past year, for example, the SEC instigated action against Grayscale Investments, a large digital-currency asset manager, about an investment in a cryptocurrency that the SEC deems should be categorized as a security that should have been registered with the agency before its sale to Grayscale. While the SEC and Gensler maintain that crypto exchange platforms register with the SEC to avoid offering unregistered securities that would violate federal law, cryptocurrency currently is not considered a security, and operates in a regulatory grey area under the now 90-year-old statutes that govern federal securities.

In the ever-changing world of cryptocurrency—where a few tweets from a popular figure can send the price of a single coin to the moon—China’s ban may have little impact on what the SEC decides to do to regulate the crypto marketplace. But the Chinese’s decision is relevant, as it gives the SEC more global backing to enact the bold regulation it seemingly desires. One of the largest financial markets in the world has now declared a pesky financial instrument illegal, leaving the SEC in a prime position to make drastic changes to the United States’ policy on virtual currency.

The SEC has significant challenges to cryptocurrency regulation. The unregulated, anti-government aspect of cryptocurrency is one of its chief draws to early investors, and has been central to its explosion in popular culture over the past few years. The elimination of banks and other third parties in the use of the currency also drives investor attitudes, and heavy SEC regulation would eradicate this benefit. Additionally, while the technology is emerging, it is underdeveloped, and crypto developers tend to operate in the shadows, making it difficult to find out “who” to target with regulations. Gensler has especially targeted more consolidated entities, like decentralized finance (DeFi) platforms, which, despite their name, function with a centralized structure.

Right now, the SEC has been cracking down on the industry by preventing Initial Coin Offerings because of fraudulent transactions and subpoenaing crypto exchanges to verify their financial reserves. While a piecemeal approach, the Chinese ban can provide a regulatory framework for the SEC to work toward a more investor-friendly, risk-adverse cryptocurrency market in the United States.

All of this may be moot in just a few days—cryptocurrency is a volatile industry, and no one can predict what the markets may do next. The SEC may already have a regulation plan in place, or may only be blustering about its desire to stiffly regulate the market. China’s ban, however, gives the SEC public backing to enact sweeping regulations of the cryptocurrency market to better product investors.

John Dean

John attended the University of North Carolina at Chapel Hill for college, double majoring in History and Political Science. In law school, John is involved as a staff member for the North Carolina Journal of Law & Technology.

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