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China declares cryptocurrency trading illegal, beefs up mining crackdown

China's central bank on Friday declared all transactions involving cryptocurrencies such as bitcoin illegal and stepped up a crackdown on illegal mining of them in the country.

Beijing is trying to ratchet down risk in all sectors of the country's massive economy

A pedestrian walks past signage for cryptocurrencies including ethereum bitcoin outside a cryptocurrency trader in the city. Beijing is cracking down on trading and mining of digital currencies. (Paul Yeung/Bloomberg)

China's central bank on Friday declared all transactions involving cryptocurrencies such as bitcoin illegal and stepped up a crackdown on illegal mining of them in the country.

Chinese banks have been forbidden from handling cryptocurrencies since 2013, but it still existed at the margins, and the country was one of the world's largest producers of bitcoin. The crackdown on crypto is part of a broader push by Beijing to ratchet down risk in the country's economy, specifically the technology sector and in real estate.

"Virtual currency derivative transactions are all illegal financial activities and are strictly prohibited," the People's Bank of China said on its website.

China has cracked down on cryptocurrency before, causing major mining facilities to move to other jurisdictions, including Canada.

But watchers say this time around is in the strongest language yet. 

"China has been known to go to extremes, with either very assertive statements and prosecutions to complete radio silence," said George Zarya, CEO of Bequant crypto exchange in London, England.

"This time the point was made very clear that China will not support cryptocurrency market development as it goes against its policies of tightening up control over capital flow and big tech."

Friday's notice alleges that bitcoin, ethereum and other digital currencies disrupt the financial system and are used in money-laundering and other crimes. Production of cryptocurencies such at bitcoin is done by computers solving increasingly complicated mathematical problems, a task that consumes vast amounts of energy.

China argues that cryptocurrencies cannot be treated the same way as fiat currencies such as dollars, euros and francs are — and eliminating them is necessary to reduce risk and, through the crackdown on crypto mining, meet the country's carbon-reduction goals, Scotiabank economist Derek Holt said in a note to clients.

Bitcoin, the world's largest cryptocurrency, lost more than seven per cent of its value to just over $41,000 each.

Smaller coins, which typically rise and fall in tandem with bitcoin, also tumbled. Ether fell 10 per cent while XRP was down a similar amount.

"There's a degree of panic in the air," said Joseph Edwards, head of research at cryptocurrency broker Enigma Securities in London.

Promoters of cryptocurrencies say they allow anonymity and flexibility, but Chinese regulators worry they might weaken the ruling Communist Party's control over the financial system and say they might help to conceal criminal activity.

The People's Bank of China is developing an electronic version of the country's yuan for cashless transactions that can be tracked and controlled by Beijing.

With files from Reuters and The Associated Press

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