By Samuel Indyk
Investing.com – The price of Bitcoin pared earlier gains and dropped below $34,000 after a Beijing office of China’s central bank announced it had ordered the closure of a Chinese software maker over cryptocurrency trading.
Reuters reported that the authorities had ordered Beijing Qudao Cultural Development to suspend its operations. The Beijing financial supervision administration and a department of the People’s Bank of China also said its website had been deactivated.
The latest news comes amid a wider crackdown on cryptocurrency activities in China, which has seen mining activity halted in a number of provinces and been one of the drivers behind the weakness in cryptocurrency prices in recent months.
China had been the heart of Bitcoin mining, with some estimates suggesting around 70% of global mining took place there. However, since China began clamping down on the industry in May, more than 50% of the hashrate (the collective computing power used to mine Bitcoin) has dropped off the network, according to Blockchain.com.
Over the weekend, Bitcoin’s algorithm changed to adjust to the lower hashrate, effectively making it easier to mine Bitcoin for those still in operation. Due to the fall in the hashrate, the new code - which updates every two weeks - made it 28.3% easier to mine Bitcoin.
Why has China clamped down on cryptocurrencies?
One of the reasons for China’s more aggressive crackdown on the industry is the negative environmental impact from Bitcoin and cryptocurrency mining. With much of China’s grid powered by coal, there were reports that the mining infrastructure had stoked a surge in illicit coal extraction.
The environmental impact was also highlighted by Tesla CEO Elon Musk in May. Musk said Tesla (NASDAQ:TSLA) would stop accepting Bitcoin as payment due to the high levels of energy usage needed to run the network.
A second reason China is reportedly clamping down is because the People’s Bank of China (PBOC) is well on the way to developing its own Central Bank Digital Currency (CBDC). Some analysts have suggested China’s cryptocurrency crackdown is a precursor to the launch of its CBDC as the country doesn’t want any competition when it launches its digital yuan, potentially by the end of the year.
“Of the major central banks, the PBOC is leading the way, because the transition to mobile payment is further advanced in China and – to the consternation of China’s leadership – control of most day-to-day payments is now in the hands of two private firms,” said Capital Economics in a research note.
“While China will probably be the first major central bank to launch, the PBOC is still moving carefully, wanting to ensure that the new system integrates well into the existing financial system and doesn’t create new risks,” the consultancy added.
At 13:34BST, Bitcoin was trading around $34,180, having briefly traded above $35,000 earlier in the trading day.