Are China's authorities powerless against bitcoin?

4 May, 2017

Since bitcoin was first introduced nine years ago, China has emerged as one of the biggest markets for the cryptocurrency. It is estimated that well over 70 percent of all bitcoin mining power is in China.

As of January 2017, more than 90 percent of the daily trade for bitcoin was being made in Chinese Yuan. Subsequently, Chinese bitcoin exchanges, like BTC China, Huobi, and OKCoin, all have a tremendous influence over the bitcoin's price globally. The Chinese government has been making moves to better regulate the trading of bitcoin. However, given the nature of bitcoin and its prevalence in China, will China's authorities ultimately be powerless to crack down on the cryptocurrency?

The Lure of Bitcoin Investment in China

The demand for bitcoin in China is already high, and it continues to grow. Bitcoin allows individuals to invest in a currency that is virtually untraceable and, therefore, free from government regulation. As government regulation of financial markets is so stringent in China, there is an entire class of Chinese investors looking to put their money in something free of the government's pervasive control. Bitcoin is an easy and obvious thing to invest in. As a result, demand for the cryptocurrency is incredibly high across China. Investors are buying up bitcoin as fast as it can be mined, and there are reportedly a number of savvy Chinese traders reaping hundreds of thousands - if not millions - every year by exploiting the volatile fluctuations in bitcoin value.1

While bitcoin still isn't a tremendously high priority for the Chinese government - the People's Bank of China (PBOC) still doesn't even consider it to be a real currency - there are signs to indicate that this may be slowly changing. The government has been making increasing moves to crack down on the use of bitcoin in the country. It has been reported that the government is scrutinizing the role of bitcoin in the country in order to determine what measures officials need to take to better regulate the trading of it.2

Beijing is reportedly increasingly worried about the possibility that bitcoin could be used to facilitate capital flight in the Chinese economy. Chinese investors can, for example, buy bitcoin on Chinese exchanges but then sell them elsewhere, thereby allowing them to work around the official limits the government places on conversions into foreign currencies. Many people have argued that bitcoin's poor liquidity, in conjunction with the challenging and expensive nature of these kinds of transactions, makes the fear of mass capital flight unfounded. Nevertheless, it is clear that bitcoin has aroused Beijing's suspicion - at least to some extent.

PBOC's Moves to Regulate Bitcoin

The Chinese government has previously attempted to crack down on the illicit trading of bitcoin but has so far had little success. In February, the government cautioned that there would be serious consequences for trading platforms not adhering to stringent money-laundering regulations. Two of the biggest exchanges in China, OKCoin and Huobi, moved to ban all bitcoin withdrawals for a period of one month in response while they updated their systems to ensure compliance with all applicable rules and regulations. OKCoin, for example, reportedly substantially beefed up its anti-money laundering and know-your-customer requirements.

The Chinese government's attempts to better regulate bitcoin have had a significant effectively on bitcoin value, but these attempts at regulation haven't had any kind of lasting impact. While the value of bitcoin did fall by one-third as a result of the temporary ban on bitcoin withdrawals in February, the value of bitcoin ultimately re-surged in March once the ban was lifted, peaking in March at $1,290. Since then, the currency has only continued to gain value. This is in part to due to a dramatic increase in the number of investors engaging in over the counter trading, in which investors directly buy and sell from one another on bitcoin exchanges.

So, will the Chinese authorities ultimately be able to crack down on the use of bitcoin? The reality of the situation is that it won't be an easy feat to better control the use of bitcoin in China. With that said, China's authorities aren't totally powerless against bitcoin and any dramatic move by the government - for example, if it were to find one of the major exchanges in violation of government regulations and shut it down - could have an enormous effect on bitcoin value globally. Ultimately, only time will tell how Beijing opts to proceed.


1) The Guardian. Meet the millennials making big money riding China's bitcoin wave

2) ABC. Beijing's moves to reign in bitcoin aren't deterring China's new crypto-currency kings