Asia Business Centre (Asia Business Centre (AsiaBC) [HK+SG Bank Account Opening / Company Formation / Company Secretary / Accounting & Tax])

Cryptocurrency Crackdown : The Rise & Fall of Bitcoin in China

In September, China central government ruled that the residents of the world’s most populous country were banned to trade any kind of cryptocurrencies, namely cryptos, on exchange platforms and to raise fund by undertaking initial coin offering (ICO). As Bitcoin is the biggest cryptocurrency in terms of capitalization, Bitcoin hit a hump on its road silk road to China.

China’s clampdown of cryptos was happened in all of a sudden, all of the coin trading platforms were forced ceasing their exchange business immediately, driving the Chinese investors to list their tokens elsewhere, including Hong Kong, a city-state of China with separate legal and financial system from China.

Before jumping in the topic, here is a refresher of cryptocurrency:

  • Cryptos are digital currency, it’s intangible. Human eyes can see this exists in computer codes and the console interface to access their account.
  • Cryptos are decentralized currency. Unlike fiat money issued by the central banks of governments, crypt is not controlled any government, so the maximum volume on market is capped at a designated volume, and the value is determined by the market demand and supply.
  • Blockchain technology is the backbone of cryptos. A blockchain is the public ledger of all transactions of a crypto, it is a chain of transaction record “blocks” linked and secured by cryptograhy.

The great speculation of Cryptos in China

Back in 2015, Chinese government enforced stringent capital controls on its residents, capping the limited of money withdrawal outside the country to slow down capital outflow. Alongside with slowdown of Chinese economic growth and the slump of stock market this year, investors saw cryptos, especially Bitcoin, as a platform to move money out of China.

Chinese investors believed in the potential of Bitcoin in China while general public growed greater interest in Bitcoin following news of massive investments from big firms. Bitcoin was in the limelight and started its explosive growth, the Chinese posed strong buying pressure of Bitcoin in China pushing the Bitcoin price substantially higher in China than that of outside markets.

Crowd-funding scandal in China

Speculation of cryptos was furious in China, fuelling the surge of Bitcoin price to US$ 1000 to a coin in the beginning of 2017. However, the pressure to push Chinese government to stop the growth of cryptos was the wave of massive initial coin offerings (ICOs) completed in the first seven months of 2017.

Similar to the concept initial public offerings of shares of newly listed companies, ICO is a practice of fund-raising from the public through issuing new cryptos, named tokens, which are valuable to investors as they are exchangeable for more established cryptos like bitcoins, which can in turn be bartered for cash.

According to the Beijing Internet Finance Association, as many as 65 ICO funding were completed in China in just the first seven months of 2017, raising an estimated 2.6 billion yuan (US$398 million).

These fundraising ICOs were completely conducted online. These digital coin issuers always advertised their new project on a crypto forum. Most of them had prepared white papers, websites, and online forums for the public as a way of building confidence.

As all the ICO projects were unregulated and crypto were not legal tender and unregulated in China, ICOs offered an window for unscrupulous investors to exploit the public. On 4 September, the People’s Bank of China, the chinese central bank, claimed that over 90 percent of ICO projects were flaudent.

The People’s Bank of China has banned ICOs outright, calling them illegal and fraudulent. Although the authority does not make it illegal for individuals to hold crypto, but it bans financial institutions from holding or transacting in them.

Undoubtedly, the Chinese authorities suppressed unregulated ICOs for fear that a meltdown of this unregulated market could spill over to social and financial instability. So long as the Chinese government has figured out a viable administration to cryptos economy, enthusiasts of cryptos in China should be anxious to cryptos price in long term.