In the last week, rumors had been swirling that Chinese regulators would shut down Bitcoin exchanges, and today, several cryptocurrency exchanges including BTCC, ViaBTC, Yunbi, OKCoin and Huobi were reportedly ordered to stop trading by the end of September. This comes just after China’s Internet Finance Association stated on Wednesday that Bitcoin lacks a legal foundation.
China’s withdrawal from Bitcoin trading will have a negative impact on the cryptocurrency, since 23% of Bitcoin trading activity happens in China. Some experts believe that Bitcoin exchanges will re-open once additional regulations are in place, although at this point there is a great deal of uncertainty.
China’s crackdown on Bitcoin trading has also revealed divisions in beliefs surrounding the cryptocurrency. Some believe Bitcoin is truly a legitimate currency, although others assume it is a “fraud” as Jamie Dimon asserted on Tuesday.
Is Bitcoin legitimate?
While the idea of Bitcoin seems like something out of a science fiction novel, the idea of having a stateless currency is actually rooted in the past. The idea first originated with John Maynard Keynes in 1940, who proposed an international currency as a unit of account in order to combat trade imbalances. Today, a stateless currency like Bitcoin can simplify transactions between individuals and firms and remove the role of governments and banks in controlling money.
Some criminals have certainly used the cryptocurrency to engage in fraud. One of the most notorious cases was that of the Silk Road website, which illegally sold drugs, and relied on Bitcoin for exchange transactions. The online black market was shut down, and its founder, Ross William Ulbricht, was arrested in 2013. He was sentenced to life in prison, convicted on crimes including drug trafficking and money laundering.
Illegal activity has plagued all currencies, however. This is why there are laws in place to prevent money laundering and fraud. In fact, Japan has recognized Bitcoin as a legal currency after applying anti-money laundering rules and capital requirements to the cryptocurrency. The latter will help to buffer Bitcoin exchanges against speculative activity. Accounting standards are also being developed for reporting of Bitcoin transactions.
More commonly, Bitcoin has become an important conduit for investment by tech-savvy investors and a means of exchange by forward-thinking businesses. Younger investors view Bitcoin as a store of value that will continue to rise in dollar or RMB terms in the long run. Consumers also use Bitcoin to make everyday purchases. While many companies accepting Bitcoin are smaller and tech-oriented, mainstream businesses have also jumped on the bandwagon. For example, Microsoft, Overstock and Expedia are some big firms that accept Bitcoin.
Helping or hindering China’s financial system?
The Chinese government has a different perspective, however. China’s regulators have worked hard to crack down on money laundering and fraud over the years, and the idea of maintaining another means of perpetuating these criminal activities via Bitcoin is unwelcome.
Even worse than money laundering may be the prospect of keeping open a market often used for speculation, which intermittently plagues Chinese financial markets. For example, speculation in the stock market led to the creation of a large bubble and a corresponding crash in the summer of 2015. China’s rapid financial development, most recently in the realm of shadow banking, has posed an ongoing challenge to regulators, who have striven to quash unapproved practices before major losses can be made.
In other words, China’s reported shutdown of Bitcoin exchanges may be an easy way of coping with financial regulators’ very full agendas.
The move also comes on the heels of a ban on initial coin offerings (ICOs) by blockchain-based technology companies. The People’s Bank of China reportedly views most ICOs to be associated with fraud or illegal fund-raising (link in Chinese), and this is intimately tied to Bitcoin and other cryptocurrencies, which are used to raise funds for ICOs.
China’s many Bitcoin investors will certainly suffer. Shutting down cryptocurrency exchanges means that investors will have to trade Bitcoin over-the-counter, which is more time consuming and not immediate. In addition, the price of Bitcoin has fallen as China’s Bitcoin outlook dims, moving from close to $5,000 on September 1 to about $3,226 on Thursday, September 14.
Although Bitcoin use could have been legitimized and expanded in China, helping expand investment options in the country, its future is now unclear.