Cryptocurrencies tumble in value after China makes them illegal

The People’s bank of China declared all cryptocurrencies illegal Friday.

“Virtual currency derivative transactions are all illegal financial activities and are strictly prohibited,” the bank said on its website.

In its announcement, China said cryptocurrencies like Bitcoin and Ethereum disrupt the financial system. China noted the use of cryptocurrencies in money-laundering schemes and other crimes as well.

Banks in China were originally banned from handling cryptocurrencies in 2013. Another reminder in 2021 may reflect concerns from Chinese officials that cryptocurrency mining and trading might still be going on, potentially exposing the state-run financial system to risks.

In 2019, China accounted for around three-quarters of all the electricity used for the mining of cryptocurrencies. That’s by far the most in the world, according to the Cambridge Bitcoin Electricity Consumption index.

By this April, China’s share had fallen back to 46 percent. That is still significantly higher than the No. 2 country, the United States, which sits at less than 17 percent.

The fallout from the announcement was swift. The price of Bitcoin fell more than 9 percent, to $41,085, in the hours after the announcement. Ethereum dropped almost 10 percent from $3,100 to around $2,800.

Not all countries are dealing with cryptocurrencies the way China is. Earlier this month, El Salvador made Bitcoin legal tender.

The use of Bitcoin is not mandatory in El Salvador. However, the country’s finance minister announced in June the country would allocate $120 million to establish as many as 4 million starter Bitcoin accounts, or “wallets”.

Meanwhile, regulators in other countries have warned cryptocurrencies need greater oversight. Gary Gensler, the chairman of the U.S. Securities and Exchange Commission, has said investors need more protection in the cryptocurrency market, which he called “rife with fraud, scams and abuse”. Gensler compared it to the “Wild West.”

The SEC has won dozens of cases against crypto fraudsters. However, Gensler says Congress needs to give the commission more authority and funding to adequately regulate the market.