Trading of digital cryptocurrency is legal in some countries, but now it has been banned in China. On September 4, several regulatory authorities, including the People's Bank of China (PBC), jointly issued a document on the prevention of risks related to initial coin offerings (ICOs), demanding the closure of cryptocurrency exchanges. Punishment will befall those who refuse to cease ICO activities and those guilty of illicit activities subsequently discovered in ICOs that have already taken place.
By September 17, China's three major Bitcoin exchanges—BTCChina, OkCoin and Huobi—had all announced they would cease trading by September 30 and immediately halted new users' registration.
Bitcoin exchanges had existed in China for eight years, keeping pace with the international market. According to Bitcoin Average, an independent pricing website, Chinese exchanges accounted for 62 percent of global bitcoin trading in 2013, and the price per coin had already jumped from a few dozen yuan in 2009 to hundreds of yuan. In response to the bitcoin mania, five ministerial-level departments including the PBC issued a joint document on preventing bitcoin-related risks on December 5, 2013. However, this did not cool the bitcoin market. Statistics from the National Committee of Experts on Internet Financial Security Technology (NCEIFST) show that the volume of bitcoin trading in China reached 4.5 trillion yuan ($680 billion) in 2016, accounting for over 90 percent of the world's total. The price had reached an all-time-high of over 30,000 yuan ($4,534) per coin.
Why has the Chinese Government ordered the shutdown of cryptocurrency exchanges when trading is so vigorous? A lot of investors don't understand the move, and some have even expressed dissatisfaction.
The decision is based on careful investigation and research and aims to prevent financial risks. As a virtual currency, illegal activities associated with bitcoin have already disrupted China's financial environment so much that regulators can no longer tolerate them.
Bitcoin is still new. China is cautious about innovations, refraining from forbidding them at the outset, as new things need time to mature. But, whereas new things like online shopping and mobile payment have, after years of development, injected vigor into the Chinese economy, bitcoin trading had fueled troubles like money laundering and illegal financing.
An NCEIFST report shows that bitcoin lacks an explicit value base and there was enormous speculative trading. Investors blindly follow others and join the hype. Some websites openly accepted bitcoin as a means of payment for gambling and illegal foreign exchange trading.
The number of criminal cases related to bitcoin had also been on the rise. In a typical example, a person purchased bitcoins worth 2 million yuan ($302,000) through the OkCoin platform and subsequently withdrew the whole amount to help swindlers with money laundering.
When a particular innovation undergoing development does more harm than good, the time has come to prevent it from further damages. This is why China has banned bitcoin trading.
More importantly, although the Chinese Government has not outlawed bitcoin, its existence has no legal basis.
Bitcoin in China actually functioned as a token. According to the Law on the People's Bank of China, China's legal tender is the renminbi, and no organization or individual is allowed to print or issue tokens for circulation in place of the renminbi. Obviously, the trading of bitcoin has violated this rule.
In addition, foreign exchange trading is subject to monitoring by regulatory authorities, according to the Regulations on Foreign Exchange Administration. But bitcoin-based foreign exchange services were not effectively monitored, which made the digital currency a popular means of money laundering.
Some bitcoin exchanges claimed that their business was based on relevant laws on "virtual currency." But the ministries of commerce and culture issued a notice in 2009 that explicitly stipulates that virtual currencies can only be used to purchase virtual services provided by issuers; using them in payment or exchange for other products or services is forbidden.
As bitcoin does China no good and also lacks a legal basis, the government has good reasons to ban its trading.
Copyedited by Chris Surtees
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