Bitcoin's Chinese Squeeze

Bitcoin's Chinese Squeeze

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As China seeks to stem its capital outflows and counter the Yuan’s falling exchange rate, bitcoin has once again come under official scrutiny. The People’s Bank of China (PBOC) met with representatives from leading exchanges BTCC, OKCoin and Huobi urging their compliance with the country’s financial rules and regulations. Additionally, PBOC also demanded an end to margin trading, and a flat 0.2% trading fee was applied across the board. Trading volumes proceeded to crash by up to 90% nationwide, and the bitcosphere was abuzz with rumours of a crackdown, or outright ban. So what happens now? Well, as usual there are two sides to the (bit) coin. Let’s take a closer look.

Bitcoin is “not a currency”

In a slightly paradoxical statement, while leaning on exchanges to abide by the financial rulebook, the People’s Bank simultaneously issued a clear statement that “Bitcoin is not a currency and should not be viewed as such.” Er… okay. If you’re talking about fiat currency, it’s possible to see it their way. And from an investment point of view, it’s easy to argue that bitcoin is just another commodity like as gold or oil, subject to the gravity of supply, demand and global economic turbulence. But to state it outright is to deliberately ignore the core idea that is bitcoin: a decentralised currency. Maybe refusing to recognise that is the only way to reconcile it with the dogma of centralisation that runs throughout the Chinese state.

Less controversially, the bank also called for exchanges to observe proper compliance with anti-corruption, information sharing and anti-money laundering practices, as well as imposing a ban on loan-based trading, part of a wider strategy to stabilise the national economy.

Ulterior motives?

Like so many other central banks riding the global storms, the People’s Bank is in the process of developing and processing their own blockchain-based currency. Keen to be seen as world leaders in the FinTech sector, is it possible that China’s renewed interest in bitcoin has other, more hidden agendas? Perhaps imposing restraints or loose ‘regulation’ on bitcoin is a highly effective way to stress-test an analogue to their own product in the field? Since the bulk of bitcoin activity happens within their borders, it makes sense for the PBOC to make it a kind of FinTech guinea pig, complete with real users, and reaction to global market forces.

Legitimacy via regulation

So while some are saying that this Regulation Lite is just a taste of proper regulation to come, I’m going to hedge my bets. Actual regulation of bitcoin is likely to have the unavoidable side effect of legitimisation – a real boon for bitcoin. But what country wants to legitimise a currency without a central control mechanism? China? I don’t think so. Now, I’m willing to eat my tin foil hat if the future proves me wrong, but the PBOC is not about to endorse bitcoin, wittingly or otherwise. What they have proven though, is their ability to seriously impact value and activity across our network, just by having a couple of meetings. Fortunately, the drama was brief, and we all went quickly back to business (nearly) as normal: metrics are good, but the future – as always – is so uncertain.

This article represents the personal opinion of the author and is not a recommendation to buy or sell Bitcoins.