The PBOC announcement on bitcoin, 2017
The latest news about the People’s Bank of China’s investigation of Chinese bitcoin exchanges came out just as I was finishing my first article on “How Chinese is Bitcoin?”. Rather than rewrite my article around this (it stands on its own, regardless of events), I have made a separate update here.
What’s happening?
China’s mighty sway over the price — or at least the market’s perception of it — was made clear as a single PBOC announcement can completely panic the market (again), knocking over 30% off bitcoin’s market cap in a week.
However, looking at the announcement more closely, it’s far from the end of the world. The outcome of the subsequent inspections will not be known for weeks, perhaps months. But so far, China’s regulators have only:
- Reiterated the need for strict adherence to KYC and AML laws,
- Warned exchanges to stamp out fake volume,
- Advised against “offline marketing”.
(1) is a requirement for any financial business in China. (2) could actually strengthen the trading industry. Chinese bitcoin exchanges, operating in a regulatory void with little transparency, have been getting away with some questionable activity. We’re still yet to find out what is meant by (3), but some believe this is related to OTC capital flight — if so, not particularly surprising!
Exchanges have so far failed to take advantage of bitcoin technology to improve transparency and self-regulate. Some immediate oversight over trading activities and custodianship of trader funds may help reduce (but not eliminate) exchange counter-party risk.
Could China finally truly “ban bitcoin”?
The cost of mis-regulating this is high. China is leading the world in bitcoin right now. As discussed in my How Chinese is Bitcoin series, it wields significant influence over this transformative technology. But crush the industry under heavy regulation and they lose that.
Worse, the market would be pushed underground and splintered into a million tiny pieces — using platforms like Bitsquare, Localbitcoins, and Opendime. There it would be even harder to regulate, and more importantly, tax.
For now, there is no reason to expect that China will come down hard. E-commerce, ride-sharing, and P2P lending have all been allowed to flourish under flexible regulation which is friendly to startups. The result is China now leads the world in these fields.
Follow me on Medium to get an update on the next part in the series — discussing China’s role in the mining industry! ⛏⛏⛏
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