According to the People's Bank of China (PBOC), the authorities have been investigating bitcoin's potential for money laundering, market manipulation, and unauthorized financing.
Recently, Beijing has made moves to crack down on any currency that could be flowing out of China illegally. The yuan has shown signs of weakening, inciting many Chinese citizens to purchase foreign currencies. At the same time, bitcoin has reached record values. Among the factors cited as contributing to rising bitcoin values is the relentless demand from China.
The PBOC has stated that spot checks were necessary to ensure that exchanges are properly implementing policies regarding anti-money laundering. China has been working to put the brakes on the practice of using bitcoin as a way around rules, which put a cap on the amount of money that Chinese citizens can send out of the country. Currently, that amount is limited to US $50,000 annually.1
Chinese regulators believe that a decline in the value of the yuan could be due to the rising value and popularity of bitcoin. At the moment, bitcoin bought in yuan accounts for a vast majority of all bitcoin trading activity.
Mainland Chinese have become quite clever at working their way around any rules that their country attempts to put in place to limit bitcoin activity. For instance, many Chinese citizens have taken to purchasing bitcoin locally and then send the digital currency abroad to be cashed out, or used for making property investments in popular places such as Vancouver, Canada.
Despite the concern the Chinese government obviously has, it may yet to clamp down as hard as it could on bitcoin. This is quite interesting, given that the Chinese government has a penchant for retaining control. One reason for this is that China has been working diligently to be recognized by other countries as a leader in economics and technology. The potential fallout from confiscating, or outright banning bitcoin, might be too much. Besides, a bitcoin-type currency may just be the future whether the authorities like it or not. They have no choice but to embrace it.
There has also been some speculation that China may be neglecting to take such a hardline approach to bitcoin because it may be developing its own digital currency. The PBOC announced last year that it was considering launching its own similar currency.
Even though China has appeared to be somewhat laxer than expected in regards to bitcoin, the country is not simply rolling over. The Chinese central bank has been blunt in warnings to Bitcoin Exchanges stating that they are risking possible closure if any regulations are violated. Specifically, the Bitcoin Exchanges have been warned not to participate in margin lending. Furthermore, the Bitcoin Exchanges have been put on notice regarding money laundering.
Two Bitcoin Exchanges, Huobi and OkCoin, have announced that they would cease bitcoin withdrawals completely.2 Other exchanges have not been quite as strict. For instance, BTCC announced that withdrawals would be subject to a 72-hour review. Chinese Bitcoin Exchanges have also announced that moving forward, oversight of customer sources of funds and identities would be strengthened, while anti money-laundering systems would be upgraded.
Three of the country's main Bitcoin Exchanges have not only ceased allowing margin lending while increasing security protocols for user identities but also introduced trading fees. Consequently, automated trades are no longer as attractive as they once were. Those high-speed trades once comprised the vast majority of exchange business. The lack of trading fees offered a competitive advantage to foreign rivals.
Will China ever actually outright ban bitcoin? Perhaps, but it could prove to be more challenging to do so than many people might think. When it was created, bitcoin was intended to be both decentralized as well as resilient to challenges. As a result, it would actually be difficult for any country, China included, to ban bitcoin outright.
With that said, what a country like China could do is make it increasingly difficult to purchase the digital currency while also going after the Bitcoin Exchanges. What China cannot do is ban transactions, or mining, or actually confiscate funds. There is simply no way that China can institute a ban on cash transactions made in bitcoin. Even if China did attempt to ban an online Bitcoin Exchange, it's quite likely that the exchanges would simply move to another country. When it comes right down to it, as long as there is money to be made, there will likely always be a way to continue buying and selling bitcoin, even in China.
Be prepared for a wild ride in the coming months!
1) CNN Money. China limits overseas cash withdrawals for its citizens
2) CNBC. China's OkCoin, Huobi exchanges to stop bitcoin withdrawals