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China cracking down on cryptocurrencies

Context:

  • China has broadened a crackdown on its massive cryptocurrency mining industry with a ban on mines in a key southwestern province.
  • Values of prominent cryptocurrencies are crashing and China’s crackdown against crypto-currencies, which are those that aren’t sanctioned by a centralised authority and are secured by cryptography, is said to have a lot to do with the crashing of the value of crypto-currencies.

Relevance:

GS-III: Science and Technology (Blockchain technology), GS-II: International Relations

Dimensions of the Article:

  1. Understanding “Mining” of bitcoin
  2. What has China done in the “Crackdown on Cryptocurrencies”?
  3. Why is China doing this?

Click here to learn what are cryptocurrencies?

Understanding “Mining” of bitcoin

  • Bitcoin mining is the process of creating new bitcoin by solving a computational puzzle.
  • Bitcoin mining is necessary to maintain the ledger of transactions upon which bitcoin is based.
  • In purpose, Bitcoin miners play a similar role to gold miners; they bring new Bitcoins into circulation.
  • They get these as a reward for validating transactions, which require the successful computation of a mathematical puzzle. And these computations have become ever-increasingly complex, and therefore energy-intensive in recent years.
  • The result of bitcoin mining is twofold. First, when computers solve these complex math problems on the bitcoin network, they produce new bitcoin (not unlike when a mining operation extracts gold from the ground). And second, by solving computational math problems, bitcoin miners make the bitcoin payment network trustworthy and secure by verifying its transaction information.

What has China done in the “Crackdown on Cryptocurrencies”?

  • In June 2021, China has reportedly cracked down on crypto mining operations. The country has over the years accounted for a large percentage of the total crypto mining activity that takes place.
  • Access to cheap electricity has made mining lucrative in China and China accounted for nearly two-thirds of the total computational power in 2020.
  • Now, provincial governments one by one have acted against these mining operations. The latest to do so is Sichuan, which was a hydroelectric-based crypto mining hub.
  • A few days back, the People’s Bank of China directed banks and payment firms to put a stop to crypto-currency trading.

Why is China doing this?

  • The fact that cryptocurrencies bypass official institutions has been a reason for unease in many governments.
  • The anonymity that it offers aids in the flourishing of dark trades online.
  • While many countries have opted to regulate the world of crypto-currencies, China has taken the strictest of measures over the years. According to observers, the latest set of measures are to strengthen its monetary hold and also project its new official digital currency.
  • China first imposed restrictions on cryptocurrencies way back in 2013 and then it then barred financial institutions from handling Bitcoin.
  • In 2017, China barred what are called initial coin offerings, under which firms raise money by selling their own new cryptocurrencies. This is largely an unregulated market.
  • An inter-ministerial committee report in India two years ago, in fact, noted that in 2017 the government of China also banned trading between RMB (China’s currency renminbi) and crypto-currencies.

Click Here to read more – Recently in news: El Salvador makes bitcoin legal tender

-Source: The Hindu

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