China orders banks to stop financing cryptocurrencies as noose tightens around disrupter

The People’s Bank of China has ordered financial institutions to stop providing banking or funding to any activity related to cryptocurrencies, further tightening the noose since its shutdown of crypto exchanges last September sent digital currency enthusiasts fleeing overseas.

“Every bank and branch must carry out self-inspection and rectification, starting from today,” according to a document issued by the central bank on Wednesday. “Service for cryptocurrency trading is strictly prohibited. Effective measures should be adopted to prevent payment channels from being used for cryptocurrency settlement.”

“Banks should enhance their daily transaction monitoring, and the timely shut down of the payment channel once they discover any suspected trading of cryptocurrencies,” the document said, adding that the deadline for disclosing the measures is on January 20. The emphasis was on handling any capital settlement to avoid any financial losses by cryptocurrency investors from escalating into public protests - known as “group events” in China - and preserve social stability, the central bank said.

The People’s Bank of China has taken a particularly harsh stance to crack down on cryptocurrencies like bitcoin - the oldest and most popular variant of cryptocurrency - whose origin was to disintermediate the role of central banks and fiat currencies to arrive at a borderless, costless and anonymous form of exchange. China is home to the world’s largest cryptocurrency mines, with an estimated 111 megawatts of computational power put to work, more than double the mines in the nearest rival Georgia.

Cryptocurrencies aren’t recognised as legal tender in China, and financial institutions are banned from holding them, even if individuals are allowed to own them as hobbies.

The Chinese central bank’s policy ambivalence underscores the challenge facing global central banks and monetary authorities as they grapple with how best to prevent the roller-coaster ride of cryptocurrency prices from disrupting the financial system, or from spilling into public chaos.

France and Germany will propose bitcoin regulations to G20 countries in March, the two European nations revealed in a press conference. Whether this will send more shudders through the market remains to be seen.

Government crackdowns, often meant to protect against excessive speculation, also end up dousing the fire of technological innovation, said Kay Van-Petersen, an analyst at Saxo Bank.

Decentralised systems like capital cannot be killed because “it will flow to where it is appreciated globally,” he said. “So you can choose to be part of that technological innovation or on the other side of the table.”

Chinese cryptocurrency traders, who once dominated 90 per cent of the world’s trading volume of bitcoin, the most popular and oldest form of cryptocurrency, have moved to the underground market, or overseas to Japan. Bitcoin is considered legal tender in Japan.

“Most of the trading is taking place via US dollar now, as some big accounts active in digital currency trading are already on China’s official watch list and payment channel already blocked,” said Zhao Dong, an individual bitcoin investor who spends most of his time in Japan now. “This move by the PBOC is further pushing capital and innovation out of China.”

Still, a person no less than Zhou Xiaochuan, the longest-serving governor in the Chinese central bank, has himself announced that the People’s Bank of China itself is studying the feasibility of developing its own digital currency.

“China will be the first major country to launch a central bank digital currency in 2018,” said Chun Yin Cheung, a partner in PwC China’s risk assurance practice. “Although cryptocurrency exchanges were banned from China in September, the country has always taken a positive attitude toward central bank digital currency and blockchain, actively carrying out relevant research.”

Earlier this month, Beijing instructed provincial governments to “actively guide” companies in their respective regions to exit the cryptocurrency mining industry.

Meanwhile, US investment bank Morgan Stanley announced on Thursday it will followed the lead of rival Goldman Sachs in offering bitcoin futures trading for clients.

Jonathan Pruzan, Morgan Stanley’s chief financial officer, said the bank has been clearing bitcoin futures contracts for institutional clients made on exchanges such as Cboe Global Markets and CME Group, according to Bloomberg News.

Additional reporting by Maggie Zhang in Shanghai.