Chinese investors fume over Beijing’s bitcoin crackdown

Cryptocurrency’s backers take a battering as central government orders stop on trading platforms

PUBLISHED : Sunday, 01 October, 2017, 2:24pm
UPDATED : Sunday, 01 October, 2017, 10:18pm

Beijing’s decision to shut down bitcoin trading platforms has left investors scrambling to cut their losses and threatens to deprive the cryptocurrency of a crucial market.

“The authorities don’t understand anything about bitcoin!” fumed Zhang Yanhua, founder of an investment fund that was dead on arrival after Beijing started tightening the screws.

In mid-September the central bank, the People’s Bank of China, told virtual currency trading platforms based in Beijing and Shanghai to cease market operations.

The bank has focused its sights not just on bitcoin but also ethereum and any other electronic units that are exchanged online without being regulated by any country.

They include two Chinese platforms, Okcoin and BTC China, which accounted for 22 per cent of the global volume of bitcoin at the end of August.

The bank’s warning shot has shaken world prices and put a damper on the active community of local investors.

“The chances of a reversal are minimal,” said Zhang Yanhua, who has been scrambling to offload his bitcoin.

Three months ago the 50-year-old had set up a small investment fund dedicated to cryptocurrencies, which met a premature end.

China's bitcoin market alive and well as traders defy crackdown

To acquire virtual currencies, “investment channels [in yuan] are becoming scarcer” and access to platforms using foreign currencies “will become too complicated”, Zhang said.

Others are seeking an alternative way out: private over-the-counter transactions between individuals are taking off on messaging applications.

But Zhang said that was “too risky”.

For his part, Sun Minjie, an investor who says he bought more than US$150,000 worth of bitcoin, intends to hold on to them for the long term.

“I expect nothing from the government ... but the fate of bitcoin does not depend on the Chinese authorities.”

Why has this hardening attitude towards bitcoin come about?

In mid-September, the National Internet Finance Association of China – an offshoot of the central bank – drew up a damning indictment against virtual currencies, accusing them of being “increasingly used as a tool in criminal activities” such as drug trafficking.

Bitcoin has also lured many ordinary Chinese attracted by the incredible surge in prices, a popularity that has generated “pyramid schemes and financial fraud”, said Dong Ximiao, an economist at Peking University.

But the central bank, which at the start of September banned companies from issuing electronic currency units to raise funds, wants to fight “the speculation” around the cryptocurrencies, which “seriously disrupted the financial system”.

Key questions you need answered about bitcoin

“They didn’t ban bitcoin, but banned exchanges from trading for speculative purposes,” said David Yermack, finance professor at New York University.

China “has a long-term concern about capital flight”, which hits the value of the yuan, he said.

“It has a lot to do with problems in the Chinese financial system, that they’re worried about this as a competitive threat in some way,” Yermack said.

The price of bitcoin plummeted in mid-September after the ultimatum to the Chinese platforms, slipping to under US$3,300.

It made a vigorous recovery to around US$4,100 on Friday, though it had traded around US$5,000 a month ago, according to the Bitcoin Price Index.

Another cause for concern is the future of bitcoin mining in China, which the authorities have yet to comment on.

The virtual currency is created through blockchain technology, which publicly records transaction details including the unique alphanumeric strings that identify buyers and sellers

It is very profitable but long, expensive, energy-intensive process requiring powerful servers.

Between 60 and 70 per cent of new bitcoin are mined in China, where the local leader Bitmain has imposing infrastructure.

Is China still keen to develop a sovereign digital currency after ban on bitcoin trading?

Greg Revenu, managing partner of investment bank Bryan, Garnier&Co, said that if the government officially attacked the Chinese “miners”, “this would reduce the volumes produced” and move the mining elsewhere, strengthening the hand of Western players such as BitFury.

“[But] it’s a separate topic from trading platforms,” Revenu said. “And as the spectrum of applications using the blockchain technology widens, China may take another look.”

In fact, blockchain technology – which is reputedly very secure and in principle impossible to tamper with – is already used in food safety, finance and sea freight.

And Beijing does not want to be left behind: despite the crackdown the Chinese ministry of industry announced last week the launch of a research laboratory dedicated to blockchain to “accelerate” its development in the country.