Three major Chinese financial institutions have issued a statement which makes it clear that the People’s Republic is determined to crack down on the use of cryptocurrency. Although the directive mostly reiterates existing regulations it still delivered a blow to the virtual currency market, which dropped 2.5% (or $50bn) immediately after the announcement.

A joint statement by the National Internet Finance Association of China, the China Banking Association and the Payment and Clearing Association of China – and posted by the People’s Bank of China (PBOC) – on Tuesday warns explicitly against the “hype and dangers of cryptocurrency.”

The directive states that “virtual currency is a specific virtual commodity that is not issued by monetary authorities and has no monetary properties. It is not a real currency and should not and cannot be used as legal tender on the market”.

The statement urges members of the three organisations, including banks and online payment platforms, not to offer customers any services involving cryptocurrency: such as currency exchanges, registration, trading, clearing, and settlement.

Additionally, institutions were prohibited from providing cryptocurrency saving, trust or pledging services and issuing financial products related to cryptocurrencies. Crypto-related information services, insurance and derivatives trading were also denounced.

Moreover, firms were urged to step up monitoring of money flows involved in cryptocurrency trading.

The document also calls on consumers to increase their risk awareness, stating that “recently, virtual currency prices have soared and plummeted, and virtual currency trading speculation has ricocheted, which has seriously infringed the safety of the people’s property and disrupted the normal economic financial order”.

Recently, Chinese authorities have become increasingly wary of the nascent cryptocurrency market. In an effort to gain control over the digital payment industry, the government plans to roll out a state-backed digital currency – the e-Yuan.

According to GlobalData’s research, China’s digital currency will form an integral part of the government’s effort to assert its dominance globally and rival the US Dollar as the reserve currency.

The new directive, therefore, falls in line with the country’s existing strategy concerning currency regulation and merely reiterates existing laws. Significantly, the joint statement is not legally binding.

Doubling down on old regulations

In 2013, the Chinese government initially defined bitcoin as a virtual commodity and said individuals were allowed to freely participate in its online trade. However, later that year, financial regulators, including the PBOC, banned banks and payment companies from providing bitcoin-related services.

In September 2017, the country banned Initial Coin Offerings (ICOs) in a bid to tighten control on financial transactions. The ICO rules also banned cryptocurrency trading platforms from converting legal tender into cryptocurrencies and vice versa.

The joint statement fortifies these existing laws and patches up previous loopholes. There are still various trading platforms in China, such as OKEx, Huobi and Binance, to which users can link their bank cards or e-wallets such as WeChat pay or Alipay to buy or sell virtual currencies.

The directive highlights that this is illegal under existing law. According to 36Kr, immediately after the statement was published, one of the platforms mentioned above announced that it would terminate its cryptocurrency services. It is expected that others will soon follow suit.

Sa Xiao, a partner at the Beijing law firm Dacheng, told Kechuangban Daily: “although the announcement has no legal effect, it has important reference significance and reiterates China’s regulatory attitude towards virtual currencies.”

He added that “the associations’ announcement will be cited as ‘industry practice’. Therefore, it can be foreseen that virtual currency litigation cases will be affected by this announcement in the future.”

Bitcoin is having a bad week

According to Forbes, the value of the world’s cryptocurrencies dropped about $50bn, or 2.5% immediately after the announcement, pushing the week’s staggering losses to roughly $500bn from a Wednesday high above $2.5tn.

This comes as a double blow for Bitcoin. Just last week, the cryptocurrency crashed after famous electric vehicle manufacturer Tesla reversed its decision to accept Bitcoin as a payment method for its cars. Following the U-turn, the value of Bitcoin fell by 12%.