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The Tell: Why China crypto crackdown sparked a bitcoin crash — and could feed a backlash

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A move by Chinese regulators early Wednesday to restrict crypto activity may have helped spark a broad selloff for digital assets. But the crackdown, which appears aimed at bolstering the country’s own digital yuan efforts, could backfire, says one analyst.

“Although China represents as much as 75% of all bitcoin mining, the Chinese government is clearly averse to seeing bitcoins rise in popularity as medium of exchange,” said Boris Schlossberg, managing director at BK Asset Management, in a note. “Instead, Chinese authorities are keen to see their own digital currency in the form of the yuan become the primary unit of account in the Chinese economy.”

The People’s Bank of China announced that financial services companies and payment services were banned from pricing or conducting business in virtual currencies, news reports said.

That was one factor widely blamed for a selloff that saw bitcoin
BTCUSD,
-1.30%
,
the world’s most popular digital currency, drop toward $30,000 at its low on Wednesday, before rebounding back toward $38,000. It’s still nursing a loss of more than 10% over the last 24 hours and is well off its all-time high above $60,000 scored earlier this year. Other popular digital assets, including ether
ETHUSD,
+1.99%

and parody crypto dogecoin
DOGEUSD,
0.01

also fell sharply.

Read: What crypto analysts say investors should do as bitcoin market hit by ‘extreme fear’

The drop was part of a broad selloff for assets viewed as risky, including equities. The Dow Jones Industrial Average
DJIA,
-0.48%
,
the S&P 500
SPX,
-0.29%

and the Nasdaq Composite
COMP,
-0.03%

all finished lower but well off the worst levels of the day.

The digital yuan is controlled by China’s central bank, providing the government with a heightened ability to monitor economic activity and its people, The Wall Street Journal noted. China is also positioning the digital yuan for international use, which some analysts see as a potential, but very long-term, challenge to the U.S. dollar’s longstanding dominance.

See: Why China’s digital yuan is ‘largest threat to the West’ in past 30 or 40 years, according to Kyle Bass

Also read: U.S. companies, not the government, have most to fear from China’s digital yuan, analysts say

The digital yuan, unlike popular cryptos, won’t offer users anonymity.

Schlossberg said the digital yuan, being both programmable and trackable, gives the Chinese government enormous control over the economy. He said it would allow Chinese policy makers to know every consumer choice, and give them the power to directly affect spending behavior by making the currency able to be expired at a certain date, for example.

But that attempt to gain such power over the economy will also work to drive demand for crypto in the future, Schlossberg argued, and will likely help ensure that the current pullback turns out to be a correction rather than a crash in crypto.

“The greater the effort by Chinese authorities to ban crypto on the mainland, the greater the desire by Chinese nationals will be to export part of their net worth into an anonymous store of value,” he said.

That doesn’t mean, however, that crypto would be immune to a “political purge,” he said.

“For example, if Chinese authorities were to enforce jail terms on anyone holding assets in crypto or even a very steep tax, the desire for the asset could wane,” he wrote. “But for now, the cat and mouse game between Chinese policy makers and Chinese citizens suggests that the demand for crypto will remain and any pullback in the asset will bring out buyers.”

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