China, home to the world’s biggest community of bitcoin miners, is cracking down on cryptocurrency activity — more so than most other major economies. From a halt to virtual currency trading on domestic exchanges to banning initial coin offerings, regulators have taken a proactive role in shaping the stratospheric rise of bitcoin and its peers. The country’s moves come as President Xi Jinping targets financial risk in the economy following a decade of booms and busts in everything from stocks to real estate. The result: China’s once-dominant role in the world of cryptocurrencies is shrinking.
1. What exactly is China doing?
First it banned initial coin offerings, or ICOs — the equivalent of initial public offerings for new virtual currencies — in September. Then it called on local exchanges to stop trading in cryptocurrencies. In January, authorities outlined proposals to discourage bitcoin mining — the energy-intensive computing process that makes transactions with the digital currency possible. Then Beijing-based Renren Inc. was said to cancel a planned overseas ICO after authorities moved to stop Chinese companies listed abroad skirting its domestic ban on such offerings.
2. Is bitcoin trading allowed in China?
Bitcoin and its peers can still be traded, but only in over-the-counter markets, a slower process that some analysts say increases credit risk.
3. Why is China cracking down?
There’s been no explicit explanation, but cleansing risk from financial markets has been the government’s mantra for more than two years now. Last year saw regulators clamp down on everything from excessive borrowing to equity speculation and in October, at the Communist Party Congress, leaders again pledged to make controlling risk a top priority. Among the main concerns is the booming shadow banking sector, a potential source of unregulated loans to speculators in whatever the latest craze happens to be. Mark McFarland, chief economist at Union Bancaire Privee SA HK in Hong Kong, said the clampdown moves “suggest a longer term process of tightening scrutiny of activities that aren’t in the normal sort of monetary realm.”
4. Is China anti-cryptocurrency?
Hardly. The People’s Bank of China has run trials of its own prototype cryptocurrency, taking it a step closer to being the first major central bank to issue digital money. China’s vision, however, seems to be based more on taking full control of such transactions in contrast to the libertarian aspirations of bitcoin.
5. What’s the impact of China’s actions?
The moves are reshaping the bitcoin mining industry. Miners initially flocked to China because of its inexpensive power, local chipmaking factories and cheap labor — now they may have to look elsewhere. Bitmain, which runs China’s two largest bitcoin-mining collectives, is setting up regional headquarters in Singapore and now has mining operations in the U.S. and Canada. BTC.Top, the No. 3 mining pool, is also opening a facility in Canada. Chinese bitcoin exchanges and wallet services are also leaving, setting up over-the-counter shops in Hong Kong or looking at operating out of Singapore or South Korea.
6. What about cryptocurrency prices?
Beyond knee-jerk reactions, prices seemed to have shrugged off news of increased Chinese regulation. That’s partly because cryptocurrencies can be easily traded elsewhere, but some analysts say the rising tide of regulation is starting to weigh on digital currencies.
7. Where else are regulators clamping down?
Notably South Korea, home of the most frenzied cryptocurrency trading. The country is inspecting some banks in a crackdown on related money laundering and has said it will allow cryptocurrency trading only on qualified exchanges. Officials are also reviewing a possible capital gains tax on crypto-trading in South Korea, where demand is so great that prices are often quoted significantly higher than elsewhere. The U.S. Securities and Exchange Commission late last year started clamping down on some digital token sales.
The Reference Shelf
— With assistance by Lulu Yilun Chen