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.