Under China's Bitcoin Ban, Companies Forced to Restructure

Alibaba ends cryptocurrency-related sales on its platforms. What will happen to the world's biggest market for cryptocurrency mining equipment?
Sep. 28, 2021 22:17
Under China's Bitcoin Ban, Companies Forced to Restructure

(CapitalWatch, Sept. 28, New York) After fintech, education, EVs, and gaming sectors, Beijing has screwed the caps on the cryptocurrency segment. This week, China's crackdown on cryptocurrency led Alibaba Group Holding (NYSE: BABA; HKEX: 9988) to end sales of mining equipment on its e-commerce platforms. And many companies, whose operations involve the digital token, are forced to restructure even as the rest of the world is increasingly accepting bitcoin.

In an attempt to prevent any further beating from Beijing, China's top e-commerce giant has issued a ban on the sales of "virtual currency miners" and "virtual currencies." These are hardware and software for obtaining digital currency, as well as crypto-related tutorials and strategies. The "blockchain miners" categories will be closed, the company said in the notice on Monday.

Alibaba gave retailers until Oct. 8 to end related sales and said the ban relates not only to domestic sales, but will be applicable "to any country of sale." It also warned of penalties should retailers try to circumvent the rule.

The move follows the release by the People's Bank of China of official measures in eradicating cryptocurrency use in the nation. Alibaba's announcement cites a number of other authorities, including the Ministry of Industry and Information Technology and China Securities Regulatory Commission in promoting the new measures. In short, any transaction involving cryptocurrencies is now illegal, and so is mining. The law applies to offshore exchanges serving Chinese customers.

Part of Xi's Broad Suppression of Big Techs

China's crackdown on digital currencies intensified earlier this year, tumbling Bitcoin and other crypto prices, even as the country has released its own digital yuan for testing use. The New York Times quoted an economist and senior fellow at the Cato Institute, George Selgin, saying the move is part of Beijing's plan to turn users away from the massively popular mobile wallets Alipay, owned by Alibaba, and WeChat Pay, operated by Tencent Holdings (HKEX: 0700; OTC: TCEHY).

That means, the ban is part of the broader clampdown on China's top independent tech giants, which involves reducing their public influence through anti-monopoly measures such as forced divestitures, invalidating certain mergers and acquisitions, and taking small stakes and board seats in the companies.

Also, this is a way to transfer massive amounts of user data from private tech companies to the government. "The most obvious implication is that the state will have more opportunities to monitor citizens' economic activity," Selgin told the NYT.

Stocks Hurting

Alibaba is just one of the numerous Chinese tech companies affected by the crypto crackdown. Trading platforms Futu Holdings Ltd. (Nasdaq: FUTU) and Up Fintech Holding Ltd. (Nasdaq: TIGR), which recently delved into cryptocurrency, have earlier restricted related services in mainland China – and they may have to change their offshore operations as well.

Consider Futu's stock – the fast-growing brokerage platform is one of the few Chinese firms that escaped a loss in market value this year, but since exceeding $180 per share at the peak in June, FUTU shares are down to $88.86 apiece today. The smaller brokerage Up Fintech has watched its stock slide from near $30 in late June to $10.63 per share on Tuesday.

As to the hardware makers, there is Canaan Inc. (Nasdaq: CAN). In fact, as far back during its listing in the U.S. in late 2019, the company positioned itself as a designer of AI chips, though the majority of its revenues were generated from the sales of bitcoin mining equipment and computing power. In August, Canaan said it is entering "a new growth cycle" and has bought a stake in the chipmaking unit of Pixelworks Inc. (Nasdaq: PXLW) – but it also reported another contract for delivering bitcoin mining machines to Australia's Mawson Infrastructure Group Inc. (OTC: MIGI). Over the past few days, when new measures were released, shares in Canaan retracted about 24% to $5.67 per share.

Another mining equipment maker – in fact, once said to be the world's largest – Bitmain Technologies Ltd. – has also been focusing on ASIC chip production in addition to its main business. Bitmain has made attempts to become publicly traded in a highly-valued IPO, but let its application slide amid uncertainty over the bitcoin market and possibly the regulatory environment as well.

Another China stock somewhat related to cryptocurrency is Xunlei Ltd. (Nasdaq: XNET), a trouble-ridden cloud computing and blockchain company whose ex-CEO Lei Chen was allegedly involved in embezzlement last year and fled the country. Back in 2018, Xunlei transferred its LinkToken operations overseas, though the company said overseas users will still be able to purchase the digital tokens through Xunlei's OneThing Cloud blockchain product. Over the past few days, shares in XNET slid 6% to today's $2.80 apiece.

Further, AGM Group Holdings Inc. (Nasdaq: AGMH), which previously restructured into as a designer of microchips from a trading platform, recently announced its expansion in crypto mining equipment manufacturing and ASIC chip research. In June, the company shook up its management team by hiring a new chief strategy officer and a co-CEO to lead in the new business. This week, AGM announced a deal to supply $100 million worth of mining machines to Shenzhen Highsharp Electronics Ltd. AGMH stock closed at $8.95 on Tuesday, nearly 45% down year-to-date.

Lastly, Ebang International Holdings Inc. (Nasdaq: EBON) makes mining machines, sells them, and mines digital currency. It also launched a crypto exchange platform, Ebonex, earlier this year. The company's stock has been hit hard this year by short-seller allegations of fraud, which it had denied. So far, EBON shares are down 73% year-to-date, trading near $2 apiece.

On Tuesday, BTC was at $41,863.60, according to Coinbase, at a recovery since Beijing's ban last week. Ethereum was worth $2,870.04, and Litecoin was at $144.24.

And yet, in spite of China, some surveyors predict the $100,000 for Bitcoin. Forbes reports the U.S. Securities and Exchange Commission could greenlight a highly-anticipated bitcoin exchange-traded fund as soon as next month.