Why is China getting tough on cryptocurrencies?

Cryptocurrency prices have fluctuated wildly in recent weeks as China stepped up its crackdown on trading and mining operations.

Bitcoin plunged more than 10% on Monday after Beijing pulled the plug on huge mines in Sichuan province.

China's regulatory assault on the digital currency has led cryptocurrency watchers to seek answers as to why Beijing is now blocking and what it means for the market.

Why the crackdown on cryptocurrencies? 

Beijing craves control, with the financial system now increasingly in its sights. Bitcoin, the world's largest digital currency, and other cryptocurrencies cannot be traced by a country's central bank, which makes them difficult to regulate.

Chinese authorities banned the trade this month to "prevent and control financial risks". Analysts say China fears the proliferation of illicit investments and fundraising.

Cryptographic transactions threaten these controls. "China doesn't have an open capital account and cryptocurrencies evade it, which is anathema to the Chinese authorities," said Jeffrey Halley, an Asia Pacific analyst at currency exchange firm Oanda.

But the crackdown on cryptocurrencies also opens the door for China to introduce its own digital currency, already in the pipeline, allowing the central government to monitor transactions.

While cryptocurrency creation and trading has been illegal in China since 2019, Beijing's latest moves have resulted in its vast network of bitcoin miners shutting down.

What makes China important? 

China's electricity-intensive bitcoin data centers power nearly 80% of global cryptocurrency trade. Access to low-cost power and hardware has enabled Chinese companies to process the vast majority of crypto transactions and generate the tedious hexadecimal numbers needed to mint new currency.

China relies on a particularly polluting type of coal, lignite, to power some of its mining activities.

Cryptocurrency mining is expected to use 0,6 percent of the world's total electricity production in 2021, more than Norway's annual consumption, according to the University of Cambridge's Bitcoin Electricity Consumption Index.

China's restrictions could in part be triggered by the fact that huge energy demands from cryptocurrencies have led to a surge in illicit coal mining, putting Beijing's ambitious climate goals at serious risk.

Several provinces have ordered the closure of mines while the central government plays hammerheads with the dark sector.

Authorities in Sichuan province ordered the closure of 26 mines last week and told power companies not to supply electricity to power plants. The hit in one of the largest mining provinces brought the price of bitcoin to $ 32.309. And what do you think of the restrictions imposed by China? Write us in the comments below.