Shadow of the Chinese Bear

Sunday 13 April 2014

China has banned bitcoin. Again. Except, of course, it hasn’t. It’s just banning some bank payments to exchanges. Sort of. Except, it hasn’t, not entirely. Yet. We’ll know more on April 15th, when the ban comes into full effect. Or then again, we might not.

A large Chinese-shaped cloud currently sits over bitcoin. Exactly what the famous ‘ban’ means is unclear. For every piece of hardBitcoin in China by BitScan information, a dozen rumours circulate. None of this uncertainty does bitcoin any good, because markets hate uncertainty, and – like it or not – the health of many parties in the ecosystem depends on the value of the bitcoins they earn. This is already 60 percent lower than four months ago. Miners are finding their profits squeezed. Public confidence, already shaken by MtGox and a series of other fiascos, is falling further.

The thing is, China could clear everything up with a single, clear statement. But they haven’t, and so the uncertainty persists. And it turns out that this, whilst infuriating for the rest of us, is kind of the point.

Back in December...
At the end of last year, the People’s Bank of China (China’s enormous and powerful central bank) released a statement to this effect: ‘Financial institutes are not allowed to offer services related to bitcoin, including registration, trade, clearance and settlement.’

The meaning of this was rather unclear, since it could be interpreted in a number of ways, with varying severity. Banks themselves are not allowed to deal in bitcoins. But what about providing banking services for those who do – does this count? This and other questions were left open.

The Chinese authorities dislike bitcoin; they have deemed it a ‘currency without meaning’. One person from the Chinese financial world stated at the time, ‘It represents an unofficial leakage to the current monetary system and trades globally. It is difficult to regulate and could be used for money laundering.’ Money laundering aside, it circumvents China’s strict capital controls and represents an area of financial activity almost outside of the state’s considerable influence. Almost...

When the statement was released in December, there was a sharp dip in the market, which promptly recovered. Nothing further happened at the time, though the knowledge that it might has been hanging over bitcoin enthusiasts in China and over the world ever since.

A Chinese look at China
That time came last week, when the PBoC put some meat on the bones of its December announcement. Why the wait? Well, one Chinese businessman and bitcoin enthusiast, Zhang Weiwu, says it’s simple. The PBoC didn’t know what to do with bitcoin. It was obviously a potential threat to the Yuan. Chinese speculators were throwing vast sums of money at it on unregulated exchanges that charged no fees, whilst understanding very little about it. It’s decentralised money, outside of state control. But now PBoC do have a better idea, they are doing something about it.

At the end of March Caixin, a Chinese news outlet, reported that PBoC had ordered banks and third party payment companies to stop working with a number of exchanges. The deadline given was April 15. Not all exchanges were affected immediately; at that point, two weeks back, it seems that the smaller ones were hit hardest. Whilst all were impacted by the ban on third party payment companies (which can be used to fund accounts anonymously), some exchanges were able to continue by accepting direct bank deposits – at least, for the time being. Some exchanges had to close immediately, with at least one (BTCIG.com) going offline, ostensibly taking its customers’ deposits with it. But Huobi, one of China’s largest exchanges, continued to operate, for the time being. They did take the step of voluntarily stopping third party payments, without being instructed to do so by PBoC. BTC China released an open letter maintaining that they had not received instruction from PBoC, and that they were not sure what the future held. Both Huobi and BTC China have recently said certain domestic banks will be closing their trading accounts.

What does all this mean?

Well, it’s not good for bitcoin in China, if that wasn’t already obvious. Exactly what the state of bitcoin trading can be without traditional exchanges is uncertain. And quite what will happen on or by April 15 isn’t entirely clear either. If they are not allowed to accept bank deposits from Chinese banks, some exchanges will probably end up in Hong Kong – though whether that will be as attractive to most Chinese is unlikely.

But to gain a real insight into what the PBoC is doing, you have to understand the way the Chinese government does things. As Zhang says, Regulation isn’t everything in China. Loyalty is. Understand the intention behind the obscure ruling and you might just escape punishment. That explains Huobi’s pre-emptive move when other, smaller exchanges have already been forced out of business. That move can be interpreted as follows, as Zhang writes: ‘With 4 of the 15 named exchanges out of business in one day, I should expect to be forced close our bank account soon. Perhaps there is still a chance that our master will change his mind? After all, the fallen exchanges are small ones. Maybe I will be allowed to live – a lesson will suffice. I should ingratiate myself with PBoC – and it’s now or never! I will stop receiving third party payments as our lord intended, and I must do so before he bothers to give the order. If I obey, there is no need for punishment...’

The original announcement can be seen as a power play, then. ‘Advise’ the exchanges, and let them ‘read the tea leaves’ as to what that really means. China is acting paternalistically, to protect its citizens from the consequences of their own actions. It didn’t quite work out that way, so now the exchanges are receiving direct instruction. What hope is left is slim, at best.

Banned or not?
China hasn’t banned bitcoin: even the Chinese government isn’t that powerful. But they can stop exchanges from interacting with the official banking system, preventing customers from moving bitcoins into fiat. Since that’s the very purpose of an exchange, it doesn’t bode well. There’s a very good chance that after April 15, the vast majority of Chinese will be unable to trade bitcoins in any meaningful sense.

If MtGox taught us something, it was that greed is irrationally hopeful. People kept sending their money to Gox right up to the last minute, even though it was clear something was very wrong, hoping to buy cheap coins. The writing is on the wall for the Chinese exchanges, but trading will likely continue right up to the wire.

Of course, it’s just possible that the 15th will come and go and Huobi and other larger exchanges will be allowed to continue operating, albeit with reduced funding and withdrawal options. But even if that was the case, the knowledge that they were operating under the Sword of Damocles and might be hamstrung at any point would not inspire confidence.

Best get it over with and find out where we really stand. Roll on April 15.

For some more background on this, take a look at Zhang Weiwu’s thread on the Chinese situation on bitcointalk. More recently Zhang also wrote an intriguing article about this for bitcoin.de, which you can read here. Most of the article is behind a paywall, but it’s well worth the small fee for the insight into how Chinese policy tends to work. Bitcoin.de have also allowed us to reproduce part of the article here.

 

Brandon Hurst


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