"Most Draconian Measures Ever": China Expands Bitcoin Crackdown Beyond Exchange Trading

Last week bitcoin plunged over 40% from all time highs hit as recently as three weeks ago on news that China had ordered local exchanges to halt trading in the cryptocurrency. Since then, defying naysayers yet again, bitcoin staged a remarkable comeback, rising from under $3000 to $4000 in the last few days of trading, but China appears to be nowhere near done, and as the WSJ reports this morning, Beijing is moving toward a "broad clampdown on bitcoin trading, testing the resilience of the virtual currency as well as the idea its decentralized nature protects it from government interference" in what the paper dubs the "most draconian measures any government has taken to control bitcoin."

According to the WSJ, regulators have decided on a "comprehensive ban on channels for the buying or selling of the virtual currency in China" that goes beyond plans to shut commercial bitcoin exchanges. The still unofficial policy was communicated to several industry executives at a closed-door meeting in Beijing on Friday, "according to people who were at the meeting."

The move is notable because until last week, many China bitcoin entrepreneurs thought authorities might shut down only commercial trading activity while tolerating peer-to-peer, or over-the-counter, bitcoin platforms, which enable buyers and sellers to find each other and trade directly. However, it now appears that this was only the beginning as two years after we first warned that bitcoin will be used largely to circumvent Chinese capital controls (and said it would soar as a result when its price was just $230), the government has decided to put a complete end to the use cryptocurrencies as a means of offshoring "hot money." Word of a more serious tightening spread after the meeting and at least one Chinese platform last week announced it would halt one-on-one trading services per official instructions.

Incidentally, this is what we predicted back in September 2015 when bitcoin was trading about 20x lower:

... if a few hundred million Chinese decide that the time has come to use bitcoin as the capital controls bypassing currency of choice, and decide to invest even a tiny fraction of the $22 trillion in Chinese deposits,  bitcoin (whose total market cap at last check was just over $3 billion), sit back and watch as we witness the second coming of the bitcoin bubble, one which could make the previous all time highs in the digital currency, seems like a low print.

In retrospect, we were right and it took China years to figure this out, and now - in a long belated reaction - the WSJ describes the Chinese plan as "some of the most draconian measures any government has taken to control bitcoin."

Some more details:

The crackdown on the bitcoin ecosystem represents Beijing’s possibly biggest effort so far to limit expansion of a system to rival the yuan. In a previous crackdown, in 2009, the central bank banned the use of tokens valued at billions of dollars created in China’s massive online-gaming networks for real-world purchases. A quasiregulatory body called the National Internet Finance Association of China (NIFA) warned investors about virtual currency trading in a statement last week and said that bitcoin platforms lack “legal basis” to operate in the country.

Confirming that Beijing is focused on bitcoin as a source of capital ouflow, WSJ quotes Li Lihui, a NIFA official, who told a technology conference in Shanghai on Friday that the goal of China’s monetary regulation is to ensure that “the source and destination of every piece of money can be tracked.”

So what is next in line for bitcoin in China?

A broader clampdown will likely include blocking mainland access to websites of foreign bitcoin exchanges such as Coinbase in the U.S. and Bitfinex in Hong Kong, say people familiar with the matter.

 

A lack of clarity from regulators has fueled worries about how far the government will go. One uncertainty, for example, is whether the ban will affect bitcoin deals made over social-messaging apps such as WeChat . People in the industry say a wave of bitcoin users in recent days migrated from WeChat to the encrypted messaging service Telegram.

 

Industry advocates hail bitcoin for allowing users to transact with each other without the involvement of a central authority. In reality, users access the market for virtual currencies via services and businesses that are centralized in real locations and therefore are susceptible to third parties. Any attempt by China to interfere broadly in the bitcoin network would test that notion further.

Blocking overseas exchange sites would add them to a long list of websites Beijing considers too sensitive, including Google and Facebook.

Of course, Chna's crackdown is a double edged sword: after all bitcoin was created precisely with the contingency of a government crackdown in mind, and as such should bitcoin prove resilient to Beijing's actions it will only make it that much more valuable, sending its price even higher. Furthermore, China would be effectively shutting itself out of a growing global market and potentially, lagging in blockchain development.

As we pointed out last week, as recently as last year, China accounted for the bulk of global bitcoin trading activity, but its share has dropped dramatically since the government started attempting to cool the market. China now accounts for less than 15% of bitcoin trading volume.


For now, Chinese authorities haven’t made public their stance on virtual currency trading, however it is coming.

A document passed around at Friday’s meeting and reviewed by The Wall Street Journal instructs Beijing-based exchanges to unwind their operations and provide information on bank accounts used for clients’ deposits by Wednesday.

Then there is the question of mining: "while China’s sway in bitcoin trading volumes has faded, the country remains a major creator of new bitcoin through a process called mining. Chinese bitcoin miners operate a vast collection of computers for the purpose in remote areas like northwestern Xinjiang, where they can access electricity for cheap."

Until now, Chinese miners considered themselves immune from Beijing’s evolving stance on bitcoin trading. One entrepreneur said miners are now worried about authorities moving to limit their operations. “Using VPNs as a workaround will be difficult,” he said, referring to virtual private networks that allow users to circumvent China’s so-called Great Firewall.

 

Chinese miners loom large in the global bitcoin mining network, also serving an important role in the upkeep of the bitcoin ledger. Potential interference in how they connect to and use the internet could disrupt, at least temporarily, both the creation of new bitcoin and the speed at which global bitcoin transactions are confirmed, say people in the industry.

There is a slight possibility the draconian measures are just a political gimmick ahead of next month's critical communist party Congress. The stepped-up tightening by regulators comes as China’s top leaders have been vocal about battling money laundering, in advance of an important leadership transition this fall. Last week, China’s State Council released guidelines aimed at better coordination between regulators to address the transfer of capital for illicit purposes.

Then again, maybe China just wants to take the BIS' advice and launch its own official, PBOC-backed digital currency which it can track, tax and "adjust" as it sees fit, a step which India is currently contemplating.

Meanwhile, keep an eye on the price of bitcoin. If the news of today's expanded Chinese crackdown fails to send the price of cryptos lower, the market may have "priced in" China's aggressive intervention. In which case, the next move may be higher, and substantially so.

Comments

Laowei Gweilo Five Star Mon, 09/18/2017 - 08:38 Permalink

hey I'm sure since Bitcoin isn't really reliant on Chinese speculation and laundering it'll be just fine :Dre: " it took China years to figure this out"oh China knew all along; politburo knew all along. they wanted get their money out, too loland don't understimate 'Oh China is just 15% of trading volume' .... China is also just 15% of Vancouver real estate volume, but just 1-2 big spenders amidst 10-15 poor locals is still enough to massively skew prices.even if China is just 15% of Bitcoin, they probably place nearly half of the tangible 'value' on Bitcoin (e.g. money laundering) because you can be sure as heck most of the other 85% of Bitcoin traders are just investing or speculating.

In reply to by Five Star

Buckaroo Banzai mangosandsativas Mon, 09/18/2017 - 12:42 Permalink

George Webb enjoys LARPing as Jewish, but from what I can tell he's 1/4 Jew at most, maybe even as little as 1/8 or 1/16 Jew. Despite his posturing, he's basically just a generic white Silicon Valley BernieBro who believes that the Deep State is run by a criminal elite that includes Whites, Jews, and wealthy sandniggers. He's right about that, although he hasn't come to grips with how dangerously anti-white the Jew influence has in that cabal.

It's well understood that Jews have divided themselves into two camps: Zionists (i.e., nationalist Jews) and Communists (i.e., internationalist Jews). He's pro-Zionist. Of course, either way you slice it, neither camp is good for whites, but George simply isn't woke to the JQ so he's stuck with a defective worldview.

But, he's woke about everything else, and he uncovers a huge amount of valuable info about Deep State,which makes him worth following, and quite useful, at least as far as he goes.

In reply to by mangosandsativas

TheGardener Laowei Gweilo Mon, 09/18/2017 - 10:21 Permalink

Flight capital or money laundering are not one and  the same thing, even though you could be right on what local Chinese are up to with your figure of 15 % trading volume , emerging markets capital flows have almost always been skewed by capital flight versus FDI  (foreign direct investment) to the tune of a 100% error of supposed flows.Third world entrepreneurs wary of their governments re-invested flight money under the disguiseof FDI . Simple as that. Who would confiscate the assets of an D.C . based anonymous LLC ?FDI was good for the world, don`t you know?Now back to the real current laundering carousell , I`m with you and listening ! 

In reply to by Laowei Gweilo

HenryHall tmosley Mon, 09/18/2017 - 08:37 Permalink

> This is what happens when you put commies in charge. The people of China would do much better to ...No-one put the communists in charge of China. They took charge by force.And the poorest Chinese people (bottom 10% of society if you like) are much better off now than they were in October 1949 when the communists took over. Unlike the poorest 10% of people of many other countries who are now worse off (typically homeless nowadays) than they were in 1949.

In reply to by tmosley

tmosley HenryHall Mon, 09/18/2017 - 08:50 Permalink

>Unlike the poorest 10% of people of many other countries who are now worse offCompletely retarded. The poorest 10% didn't have electricity, indoor plumbing, home appliances, internet, etc in 1949. They were at real risk of starving to death.We live in an era of abundance thanks to CAPITALISM, you stupid fuck. Chinese peasants still risk starvation and are fucking illiterate. Shit in the streets.

In reply to by HenryHall

fx tmosley Mon, 09/18/2017 - 09:20 Permalink

Haha, the Chinese are closing the barn after lots of horses left already.But it confirms my suspicion that something BIG is in the making over there. The 19th party congress may pave the way for some serious measures that otherwise would prompt a new wave of capital flight. Let's be serious here, bitcoin, with a 60-80 bn $ market cap is not yet a really broad, liquid channel to get money out of China. Most people who own bitcoin do not trade it, so the amount available to buy and sell repeatedly for capital flight transactions is pretty limited. But maybe Bejing fears that the spring could turn into a yang-tse style river if they don't stop it right here right now. I start to smell some short Yuan opportunity with a time horizon of the coming 12 months - maybe Bass is onto something, after all...

In reply to by tmosley

HenryHall tmosley Mon, 09/18/2017 - 11:15 Permalink

>> We live in an era of abundance thanks to CAPITALISM, you stupid fuck. Chinese peasants still risk starvation and are fucking illiterate. Shit in the streets.Try comparing like with like.China under communism versus India under capitalism.USA changes to look more like India than India changes to look more like USA.

In reply to by tmosley

expatch HenryHall Mon, 09/18/2017 - 09:28 Permalink

Cautious estimate...I'd say its more like the poorest 80%, and just in the last 20 years. Just a generation ago, people's parents didn't dream of owning cars, or traveling abroad, or getting rich off real estate, or trading in PMs, and on and on. By all visible measures, the average Chinese doesn't see the down side of communism.

In reply to by HenryHall

HenryHall expatch Mon, 09/18/2017 - 11:22 Permalink

About 100,000 people were homeless in the USA in 1949.Nowadays about 1,500,000 people are homeless at some point during each year. That is between 0.5% and 1% of the population. In 1949 the figure was relatively tiny.How is being homeless "living in a wealthy society"?It was only 2% to 3% in the depths of the depression when Hoovervilles were commonplace. We are getting there again.

In reply to by expatch

Buckaroo Banzai HenryHall Mon, 09/18/2017 - 12:49 Permalink

"No-one put the communists in charge of China. They took charge by force."

You're fucking delusional. They got plenty of (((outside help))).

"And the poorest Chinese people (bottom 10% of society if you like) are much better off now than they were in October 1949 when the communists took over. Unlike the poorest 10% of people of many other countries who are now worse off (typically homeless nowadays) than they were in 1949."

Oh, really? How would you know this, exactly? Is there a parallel earth somewhere on a different timeline that we can compare and contrast with? Frankly, the Chinese peasant class was pretty miserable until Deng started adopting western Technocracy in the 80s and figured out how to graft it to Chinese communism. And frankly who knows where they'd be if they hadn't managed to buy off the Clintons.

In reply to by HenryHall

Innominate tmosley Mon, 09/18/2017 - 10:18 Permalink

This is what cryptocurrency haters miss. Distributed ledgers will do to banks what the internal combustion engine did to horses, and the concept of distributed ledgers is out and not going back into Pandora's box. It doesn't matter if it's 5 years, 25 years or a century hence, the banking industry is a dead man walking.

In reply to by tmosley

Utopia Planitia Innominate Mon, 09/18/2017 - 10:54 Permalink

"Distributed ledgers" is one of the reasons the entire current krypto is a piece of garbage. Have you spent even 3 seconds thinking about that concept? Or have you spent even 5 minutes building/operating/maintaining a system designed like that? If you had you would know it is inherently a tremendously bad idea. It would be hard to think of an idea that is worse.  Oh, unless you don't care what happens to your data (i.e., your money).There are ways to do this right.  The current design is not it.  Talk about jumping on a dead horse...

In reply to by Innominate

HungryPorkChop tmosley Mon, 09/18/2017 - 10:18 Permalink

China just showed itself as an experimental proxy similar to India outlawing all large paper bills. China announces almost at the same time they'll start accepting gold for oil trades. Me thinks..China is big trouble right now and going rogue on currency warz trying to keep the dam from bursting.  Behind the scenes my bet is the U.S., Europe, Japan and U.K. are about to teach China a lesson for not keeping that fat dumpy boy in N. Korea under control.  We shall see and until then stay thirsty my friends. 

In reply to by tmosley

TheGardener tmosley Mon, 09/18/2017 - 10:37 Permalink

Chinese commies in charge would and delivered just this blow to your fantasies . Commies in charge though would not have relieved you of your pain :  The little serf you are playing, not even worthy of a Beckmesser and him snouting from behind in a heck in an well know state off desperation and opera.

In reply to by tmosley

JustUsChickensHere FreeShitter Mon, 09/18/2017 - 08:52 Permalink

Stop reading Rickards?  Oh no - he gives insight into thebaker mindset. That does not mean his predictions are right (10k gold)... And here is a simple quote from that article that is exactly wrong - though the reason is subtle.>If I earn Bitcoins… what do I do with the Bitcoins? There is nothing to invest in.The easy way to show why this is wrong, is to substitute 'Gold' for the word 'Bitcoins' in the sentence.... in both Gold and Bitcoin, they are not debt instruments. They are counter party free assets in themselves. You do not need to 'invest' in something else to protect the value. USD by comparison is a pledge to pay something or complete a trade (with the Fed as counterpary risk).. so of course to remove that counterpary risk, you need to trade USD into something that is an asset (land, machinery etc)... I do have trouble with the idea that government bonds are an asset. Really?But at any rate, Rickards should understand this, but maybe he does not want to.  

In reply to by FreeShitter

fx JustUsChickensHere Mon, 09/18/2017 - 09:19 Permalink

Rickards is an embarrassing clown who wants to sell expensive advice that does nobody any good. The guy can hardly get anything right. Braggs about his C!A past all the time and how much he advised several governments on currency matters. WTF, I don't care what someone may have done decades ago, especially when there is not a single evidence regarding the quality of his work.Rickards compensates for lack of knowledge with outlandish predictions. Most of the time they are built upon a pile of quicksand containing flawed conclusions and outright false assumptions and interpretations.The money wasted on his newsletters is small potatoes compared to the money you will lose when following this crook's advice.

In reply to by JustUsChickensHere

TheGardener JustUsChickensHere Mon, 09/18/2017 - 11:01 Permalink

"The easy way to show why this is wrong, is to substitute 'Gold' for the word 'Bitcoins' in the sentence" .That`s what I thought all the while composing my take on bitcoins and the nasty downside.But that concerns just the volatility , based on scarcity , and that has nothing to do with gold on the bright side.Gold is not correlated to virtual currencies yet and the attempt to be consumed in the same sentiments are aplenty in this forum.Money is dead . All we talk about is convertible successors thereof, like the still circulating but almost always hated peso americano .What to replace it : big money man have big plans and you better watch out !    

In reply to by JustUsChickensHere

Rhetorical Five Star Mon, 09/18/2017 - 09:20 Permalink

State authorities are late. Decentralized exchanges IE kyber KNC are already in the works and have already begun to be tested in real world use. Pretty soon they wont be able to shut them down without taking out the internet.Crypto prices were already recovering yesterday though we may see another bottom before the next moon. Buy up boys follow dimons lead and buy hand over fist we about to fly.

In reply to by Five Star