China’s central bank recently called on several major banks and payment institutions, such as Alipay, ordering them to crack down on Cryptocurrency trading in the country and telling financial institutions to increase the ratio of their foreign exchange deposits to freeze more dollars.

According to numerous media reports, the People’s Bank of China (PBOC) has ordered Alipay, the Industrial and Commercial Bank of China, the Agricultural Bank of China, the China Construction Bank, and the Postal Savings Bank of China, among others, to “block payment services for any client accounts thought to be involved in Cryptocurrency transactions.” The request went even further, with the PBOC asking the parties to cease other vital services such as account opening, registration, and trading for any Cryptocurrency-related activities.

The PBOC said in a statement, “Cryptocurrency transactions and speculative activities have disrupted the normal economic and financial order. They increase the risks of crimes such as illegal cross-border transfers of assets and money laundering, which severely infringe upon the property safety of the general public.” The PBOC also told financial institutions that they would need to increase the ratio of their foreign exchange deposits, thereby forcing them to freeze more dollars.

According to the Financial Times, “the regulator called on financial groups to identify and block all transfers to accounts held by Cryptocurrency exchanges and other offshore middlemen as well as to invest in technology to ferret out any transactions linked to ‘Cryptocurrency speculation.'” Furthermore, Alipay said they would be setting up systems to monitor websites with a view to blacklisting online stores that engage in virtual currency transactions. According to Leo Weese, co-founder of the Hong Kong Bitcoin Association, “Bitcoin trading in China will continue but become less liquid, and spreads will increase. People will limit themselves to trading with their friends and trusted friends-of-friends,” he said.

PBOC instructs financial institutions to increase the ratio of foreign exchange deposits

China’s Central Bank requested that financial institutions retain more foreign exchange in reserve, a move intended to stabilize the Yuan following its three-year high against the dollar. As such, the FX reserve requirement ratio has been increased from 5% to 7%. This makes it more expensive for banks to keep dollars. As things stand, Chinese banks hold around $1 trillion in foreign currency deposits, some of which are unconverted export receipts and investment flows. Analysts said the rise would force banks to freeze more of those dollars, slowing the Yuan’s pace of appreciation by deterring dollar inflows in the longer term.

At the beginning of June 2021, little changed with the Chinese Yuan against the U.S. Dollar after the People’s Bank of China set its daily midpoint at 6.3811 versus the greenback. That marked the second straight day of weaker fixings, reversing six straight trading days of stronger fixings since May 24, according to data from Wind Information. A stronger Yuan makes Chinese goods relatively more expensive to buyers overseas and has spurred concerns about the competitiveness of Chinese exports – a major contributor to national economic growth.

It remains to be seen what the future of Cryptocurrency will be in China and how it will affect investors in digital currency. For the time being, there’s no question that the moves by the Chinese Communist Government to block Crypto-related transactions in the country will have a knock-on effect on many investors, even if the move is considered by many commentators to be temporary and not something long-term.

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