Crouching Tiger, Hidden Intentions: Deciphering Chinese Regulations On Cryptocurrencies

Executive Brief

Predicting the actions of Chinese regulators is difficult at the best of times, but guessing how China will react to cryptocurrencies, seen simultaneously as an investment opportunity and a threat to the country’s highly centralised economy, is even tougher. 2013 and 2014 saw a repeated cycle of rumor, denial, and robust regulatory action in China which undermined investor confidence and decimated Chinese cryptocurrency uptake. However, potential co-operation between China, Japan, and the US implies a brighter future for digital currencies in the country.

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While the Chinese economy might be slowing dramatically, the country’s potential as a growth market for cryptocurrencies continues to increase. With the Yuan’s renowned stability threatened, Chinese investors will seek to diversify their currency and commodity investments. It is in this environment that cryptocurrencies should see a surge in demand, thanks to their inherent value and imperviousness to state intervention. For digital currency investors, however, there is a major problem: the inability or unwillingness of Chinese regulators to give a clear response on cryptocurrencies.

China’s political elite is notably insular, and investors must often base decisions on rumor and dense press releases from the country’s central bank, the People’s Bank of China (PBoC). This is especially true where cryptocurrencies are concerned. The very concept of digital money encourages two highly contradictory instincts among Chinese decision makers: entrepreneurialism and strict economic control. Cryptocurrencies had been increasing in popularity in China until relatively recently, albeit as a speculative investment rather than a medium of exchange. In 2013 more than half of the world’s trade in Bitcoin went through China, with 100,000 coins traded daily on local exchange BTC China, while a Goldman Sachs report suggested that up to eighty percent of all Bitcoin volume was exchanged into and out of Chinese Yuan that year. But this honeymoon period has since ended.

On December 5th of 2013, PBoC released a notice prohibiting third-parties from offering payment services to cryptocurrency exchanges amid fears that digital currencies were being used for illicit purposes. The bank also began classifying cryptocurrencies as ‘digital goods’ rather than legal tender. Two weeks later BTC China, at that time the world’s largest Bitcoin exchange, stopped accepting deposits in Yuan. BTC China did backtrack early in 2014, but the exchange’s chief executive Bobby Lee expressed his concern that the government could modify the regulation of cryptocurrency businesses at any time. Mr Lee was soon proved right.

On March 21st 2014 a financial media account on China’s popular Twitter-alternative Weibo suggested that China would ban cryptocurrency transactions by April 15th that year. PBoC was quick to deny this, and on April 11th Zhou Xiaochuan, the bank’s governor, publically remarked that cryptocurrencies were safe from an outright ban. However, China’s Bitcoin exchanges were quietly being handed notices requiring the closure of their bank accounts by April 15th. While there was no official change in policy, this was nevertheless a major blow for confidence in cryptocurrencies in China.

This lack of clarity and openness from the Chinese regulators is concerning for cryptocurrency investors. However, the future may be brighter. While Mr Zhou has a strong regulatory reflex, demonstrated by his outspoken criticism of laissez faire Western policy during the 2008 financial crisis, he has recently moved to soften some of China’s more severe regulations, presumably hoping this will revive growth in China’s beleaguered economy. Even more reassuring for cryptocurrency businesses is the recent announcement that regulators from China, Japan and the USA would jointly push the 31-state Financial Action Task Force (FATF) for international regulation on digital money. Such co-operation between Chinese and Western regulators may mitigate some of China’s stricter regulatory instincts; at least, that will be the hope of most cryptocurrency investors.

The views expressed by the authors on this site do not necessarily represent the views of DCEBrief or the management team.

Author: Chris Cooper

Chris Cooper is a doctoral researcher in ancient economic history at Merton College in the University of Oxford. His AHRC-funded research examines transaction costs in the ancient world, and the impact of the invention of money. But while Chris specializes in the cultures that created money in the first place, he is equally interested in digital currencies and their impact on modern societies, cultures, trade-flows and laws.

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