China and Bitcoins: A Complicated Relationship
Cryptocurrency, a form of digital currency using cryptography, is on the rise due to its two main characteristics: anonymity and independence from central regulation. For Chinese governing authorities, however, those two elements are to be avoided at all costs. Despite the rapid proliferation of bitcoin mining and exchanges in China, it should come as no surprise that the government is beginning to crack down on this exchange method.
On September 4th, 2017, The People’s Bank of China (PBoC) released a statement dismissing the validity of digital currency and demanding the termination of all ICOs (initial coin offerings) or fund-raising for new currencies in digital forms. While this campaign is targeting centralized companies that use digital currencies, the decrease in the availability of digital fund-raising opportunities discourages customers to accrue digital assets. Following the announcement, BTC China, the largest digital currency exchange nationwide, stated that it will cease all trading by the end of month. Only a few hours following this news, the value of Bitcoin plunged 10% to US$3500.
Other popular cryptocurrencies also took a plunge following China’s cryptoban and are still recovering their market value. Before September 2017, Ethereum, the preferred platform for ICOs, was valued at $385 USD. After this announcement, however its value immediately fell to below $200 USD. Another smart-contract platform, Neo, was particularly affected by the ban and dropped below $15 USD, having stood at $45 USD only a month earlier. Several other alternative currencies on the market have each lost a minimum of 33% from their peak market cap.
The staggering impact that the Chinese announcement has had on the cryptocurrency industry hints at the immense success that this trading platform has experienced in China. Ever since cryptocurrencies gained in popularity, investors in China have contributed up to 2.6 billion RMB, or $397 million USD, worth of cryptocurrencies through initial coin offerings. The overwhelming popularity of this platform can be attributed to the lack of restrictions on this form of currency, compared to those on the trading of conventional currencies. Moreover, the inflow of bitcoins relies on bitcoin mining–an increasingly popular business for Chinese workers. As the two main operational costs of bitcoin mining–electricity and hardware–are abundant in China, these conditions allow for the industry to be cost-efficient within the China. The business opportunities in cryptocurrency in China, combined with the engrossing interest and investment in bitcoins from general public, indicate the active involvement of cryptocurrency in Chinese people’s lives.
What is the Chinese government’s take on this increasing relevancy of cryptocurrency to the current national outlook? As articulated in an official statement from PBoC, the government is concerned by the number of consumers using this platform to circumvent tough government restrictions, to shift assets overseas, and to launder money. Songcheng, an advisor to the PBoC, stated that Bitcoin easily encourages money laundering and tax evasion due to its anonymous nature. The former Governor of the PBoc, Li Lihui, has also discredited the legitimacy of digital currency by highlighting that it lacks sovereign endorsement and, therefore, legality.
Despite this sentiment, cryptocurrency has not faded from relevancy in China. The policy set up by the government seeks to prevent exchanges among investors using public agencies. However, investors are shifting towards local and decentralized brokers and trading agencies have continued offering their services in USD as opposed to RMB. In fact, China is technically not capable of preventing its citizens from owning and trading cryptocurrency due to its anonymity.
As the interest in cryptocurrency increases worldwide, multiple governments have taken actions to temporarily take a stop on this form of currency before examining and creating effective regulations to ensure the security and its incorporation in the current trading system. From an insider’s view in China’s case, Hu Bing, a researcher at the Institute of Finance and Banking (a Chinese government-supported academic research organization) claimed that the government’s ban on ICO is only temporary, until they create a licensing program to allow ICOs in an controlled environment where raising capitals can be under regulation. In cases where cryptocurrency capital raising is controlled, effective programs are already implemented by some government organizations. For instance, BitLicense program of New York State Department of Financial Services (NYSDF), requires companies to obtain a license from the state in order to operate with bitcoins. In light of comments from the government official and experts’ speculations, China’s crypto-ban campaign can very well be interpreted as a pause before regulations of operations, rather than a full stop.
Nonetheless, China’s hardline stance on cryptocurrency has sounded warning bells worldwide. In eyes of the trading world, China set a clear stance on their attitude towards cryptocurrency by this ban. A trend has been emerging where multiple countries have imposed policies or campaigns against centralized companies using digital currencies. Vietnam’s central bank, State Bank of Vietnam has declared digital currency as illegal. Other leading financial figures have since began to criticize Bitcoin, and analysts have predicted that the currency will experience a price collapse. However, it is certain that these bans have little effect in individuals and their common transactions. As bitcoin prices rebound in the coming weeks, we have yet to see whether the Chinese crackdown and pundits’ anxious foreboding will seriously damage the cryptocurrency industry.
Edited by Kathryn Schmidt
