How one big bang sent China to the fringes of the bitcoin universe

International trading in virtual currencies has bounced back from Beijing’s ban on local trading

PUBLISHED : Saturday, 14 October, 2017, 12:30pm
UPDATED : Saturday, 14 October, 2017, 12:30pm

For a while there China seemed to be a major centre in the cryptocurrency universe. It had dozens of bitcoin exchanges, including 17 in Shanghai, that were platforms for initial coin offerings (ICOs) and virtual currency trading.

Then the Chinese government announced in early September that it was banning ICOs, a crowdfunding approach widely used by cryptocurrency and blockchain start-ups. It also said trading in bitcoin would cease on exchanges in China by the end of this month to limit risks to investors.

Transactions evaporated and prices plunged, eroding China’s share of the global bitcoin marketplace.

While players in China continue to fear for the future of cryptocurrencies in the country, investors elsewhere have shrugged off Beijing’s ban and sent bitcoin prices back to the highs of early September just before the clampdown – underscoring China’s waning influence in the area.

“For now, China as a market for crypto-tokens is out of the picture,” Thomas Glucksmann, from Hong Kong-based exchange Gatecoin, said.

Chinese investors fume over Beijing’s bitcoin crackdown

Some Chinese exchanges said they were considering setting up shop overseas but Glucksmann said foreign ICOs and exchanges would find it difficult to solicit interest from the mainland.

“[That’s] because China is blocking access to websites of foreign exchanges. And foreign ICO founders want to avoid any backlash from regulators in China especially if the environment in China becomes more welcoming in the future,” he said.

While the authorities have put a ban on trading, Chinese individuals are still free to own or “mine” cryptocurrencies.

According to data from virtual currency software platform, China accounts for about 70 per cent of the world’s bitcoin mining power – computer server farms that tap into cheap electricity to solve the complex mathematical problems that underpin bitcoin.

Garrick Hileman, a research fellow from the Cambridge Centre for Alternative Finance in Britain, said the authorities were careful not to kill off mining, the “goose that lays the golden egg”.

“Mining is the key infrastructure asset in China, not the exchanges, not the liquidity,” Hileman said.

“This is quite significant and it may speak to the future trajectory of Chinese regulation.”

China’s bitcoin miners in limbo after Beijing shuts down exchanges

In the meantime, some Chinese “miners” could be forced into bankruptcy as they struggle to cash out their virtual coins into yuan to pay their bills. Without exchanges, miners could be forced to turn to shadowy swaps over social messaging apps or other marketplaces.

“The result would be a more geographically distributed mining industry where the hashing [or processing] power is not concentrated among a handful of firms in China,” Glucksmann said.

However, the jury is still out on the broader future of cryptocurrencies.

This week, Kenneth Rogoff, former chief economist at the International Monetary Fund, dismissed the bitcoin rally as a bubble and forecast it to crash.

Then last week, IMF managing director Christine Lagarde said it would be unwise to dismiss virtual currencies, and encouraged central bankers to being open to “fresh ideas and new demands as economies evolve”.

Hileman said there is equal opposing forces at play in the debate.

“A lot of people are taking some comfort in some of these developments and shrugging off the negative ones. Possibly the correct interpretation is the positive news has outweighed the negative so far,” he said.

Why has China declared war on bitcoin and digital currencies?

In a report last month, Hileman and his co-authors said about a fifth of the central banks they surveyed planned to deploy blockchain applications – record systems that keep track of virtual currency transactions – within the next two years.

Still, there are concerns among Chinese researchers that the crackdown would scare off interest in blockchain technology and lead to a brain drain.

Some officials from the People’s Bank of China have insisted the ban won’t dent research in the area.

But one Chinese specialist heading up a blockchain lab and a related start-up in Beijing wasn’t so sure.

“It’s like when you throw water from a bathtub, you also throw away a baby inside it. Now they say they want to bring the baby back. That’s just impossible unless we see the more investment from the government,” he said.