Date
28 May 2018
Political intervention has always been the biggest risk for Bitcoin since it was created in 2009. Photo: Reuters
Political intervention has always been the biggest risk for Bitcoin since it was created in 2009. Photo: Reuters

Bitcoin’s Achilles’ heel: Regulation worries

Bitcoin’s price slumped 15 percent within one hour on Tuesday, after Reuters reported that China’s central bank vice governor Pan Gongsheng said in an internal meeting that authorities should ban centralized trading of virtual currencies and prohibit individuals and businesses from providing related services. (It fell as much as 25 percent on Wednesday.)

The Chinese government would continue to clamp down on cryptocurrency trading and prevent the build-up of risks in the market, Pan said, describing virtual currencies as “pseudo-financial innovations”.

Pan outlined three ways to step up the crackdown on virtual currencies. First, national and local authorities should shut down venues that provide centralized trading of virtual currencies.

In fact, the Chinese government has already ordered the closure of all domestic cryptocurrency trading exchanges in September last year. But it is said that some small operators continued to provide transaction services to investors.

Second, Pan said, mobile apps and digital wallets related to cryptocurrencies should also be banned.

Third, local governments should use power tariffs, land use, tax and environmental protection policies to crack down on bitcoin mining.

In fact, one of the biggest missions of cryptocurrency is deregulation, which means challenging the role regulators play in currency issuance, foreign exchange control and trading oversight.

As such, the Chinese government is not expected to just sit there and do nothing about it. If Pan’s words are turned into policy action, bitcoin trading activities will be completely paralyzed in China.

Political intervention has always been the biggest risk for Bitcoin since it was created in 2009.

Nevertheless, China has yet to block the one-on-one trading of bitcoins. Chinese investors are still able to access foreign platforms and carry out direct trading. Also, they can make payments for cars or properties using bitcoin as long as the seller agrees. The authorities have yet to label these activities as illegal.

If one day, Chinese authorities officially block all bitcoin activities, that would greatly dampen the value of the virtual currency as China accounts for over 15 percent of the global GDP.

Investors should watch out for any policy shift on bitcoins, from China and other countries.

This article appeared in the Hong Kong Economic Journal on Jan 17

Translation by Julie Zhu with additional reporting

[Chinese version 中文版]

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RT/CG

Hong Kong Economic Journal columnist

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